Reliance Power slumps on debut; IPO appetite dulled

• IBTimes RSS
• Print
• E-Mail
• digg
• Del.icio.us

The poor start for a share that had initially been expected to double was a further setback for India's record pipeline of IPOs this year. Two offerings, including a $1.6 billion one from Emaar MGF Land, were shelved last week after a tepid response triggered by the global credit crunch and U.S. recession worries.

"It will definitely hit investor sentiment in other IPOs as new entrants in the market will think several times before pricing their offer aggressively," said D.D. Sharma, vice president at Anand Rathi Securities.

Reliance Power, controlled by billionaire Anil Ambani, sold out within a minute last month when it opened its record IPO to finance the building of power plants across India.

The offer for around a tenth of the company was priced at Rs.450 ($11.4) a share, the top of range, and the $3 billion raised made it the world's biggest offering so far in 2008, according to Thomson Financial.

Analysts first expected Reliance to touch Rs.900 when it began trading, but stock market turmoil lowered investor risk appetite and analysts subsequently said a start of Rs.75-150 above the IPO price was more realistic.

But after rising briefly to Rs.599.90, the shares dropped to a low of Rs.355.05 and closed down 17.2 percent at Rs.372.50. The benchmark index ended nearly 5 percent lower.

Reliance Power was the top traded stock on the Bombay exchange with nearly 64 million shares changing hands.

Shares in Reliance Energy, which holds 45 percent of Reliance Power, fell as much as 22 percent and ended 19.4 percent lower at Rs.1,582.30.

Chairman Anil Ambani rang the bell at the Bombay Stock Exchange for the start of trade on Monday, saying: "I'm confident our long-term investors will reap rich rewards by investing in the company."

AGGRESSIVE PRICING

The issue, managed by Kotak Mahindra Capital Co, UBS, ABN AMRO, Deutsche Equities, Enam Securities, ICICI Securities, JM Financial and JPMorgan, had been helped by the Ambani family name.

There are no forecasts for the company as it does not have any operational assets, but plans to set up about 28,000 megawatts of power projects.

The utility saw its IPO subscribed 73 times, even though analysts said it was unlikely to report strong profits for five years. The Rs.450 offer price valued it at $30 billion.

But since the offer closed, market conditions have deteriorated and the benchmark index has lost about 22 percent from an all-time high of 21,206.77 hit on Jan. 10.

Analysts said Reliance Power had been overpriced relative to India's top power producer NTPC Ltd, which is valued at more than $42 billion and trades at more than 21 times forward earnings.

"In this kind of a market you are better off investing in companies based on their earnings potential than in those whose valuations depend on their future stock movements," said Nilesh Jasani, head of research at Credit Suisse.

ALARM BELLS

Warning signs came last week when Wockhardt Hospitals Ltd and then Emaar MGF, the Indian joint venture of Dubai's Emaar Properties, pulled their IPOs due to poor response and worries the shares would fall on their debuts.

Until then, India had a record IPO pipeline of $15.8 billion for 2008, according to Thomson Financial. Government-run State Bank of India plans a $4.2 billion rights issue soon.

But Reliance Power's reception may make companies think twice.

Reliance Communications, another Anil Ambani firm, is planning an IPO for its telecom towers unit, Reliance Infratel Ltd, which media reports and bankers say aims to raise $1-1.5 billion.

"If the equity financing route is closed for a few quarters it will have an impact on both the markets and the economic fundamentals," Jasani at Credit Suisse said.

Founded by Dhirubhai Ambani, the Reliance group of companies were divided between the late Ambani's sons in 2005: Anil, who has interests in telecoms, financials, media and power; and elder brother Mukesh, who controls India's top listed firm, oil and petrochemicals giant Reliance Industries Ltd.