RPower’s Successful OFS – Should You Buy The Stock Now?

In order to comply with the SEBI's regulation to increase public shareholding in companies, the promoters of Reliance Power (RPower) offloaded 5.42% stake in the company on Dec 19, 2012. The Offer For Sale (OFS) was subscribed 1.6x as this flagship company of the Anil Dhirubhai Ambani Group (ADAG) went in for a share auction. As per its notice to the stock exchanges, the company raised a total Rs 1500 crore. With this, the promoter shareholding has come down to 75%.

The details of subscription per category are not available at this time. Our call to the company spokesperson to find out more about the subscription details went unanswered.

RPower had come with a mega IPO of Rs 11563 crore in 2008, which was termed as the biggest IPO in India (until Coal India came out with a Rs 15000 crore issue in 2010). Though the RPower IPO was a hit at that time, it failed to garner any returns for investors as the scrip tanked 17% on its debut. The company tried to compensate investors' losses by providing 3 bonus shares for every 5 shares held. Despite that, the shareholders were left without much to speak of.

RPower’s shares have now tanked 64% from its adjusted IPO price of Rs 269 for retail investors. Institutional investors have also lost more than 65% from the adjusted IPO price of Rs 281. In such a scenario, one would be left wondering as to who exactly has subscribed to the OFS of the company and whether one should buy the stock at a CMP of RS 96.

A report by Business Standard clearly suggests that the OFS was fully subscribed by institutional investors. The report also said that very few stock brokers had issued advisory to the retail investors, and hence, one can only guess whether the latter participated in the auction. Wounds of the 2008 IPO would have remained fresh in the investors’ minds, as this is for the first time that RPower has raised money from stock markets after that debacle.

Who would possibly have subscribed to this OFS remains an open question, as most brokerage houses are still not bullish on the stock. From our sources, we understand that most institutional research analysts have initiated a 'sell' call on the company. The target price is also set in the range of Rs 80-100. From what we found, only 2-3 recommendations have a target price in excess of Rs 140.

The company, which intended to set up 24000 MW of power capacity, has faced a lot of hurdles on the regulatory and execution front. Currently, its Krishnapatnam UMPP (3960 MW) is facing financial troubles, while the Sasan UMPP (3960 MW) is in the news due to coal diversion. Besides, RPower’s 2400 MW gas-based Samalkot project is facing the risk of gas unavailability. Its 7480 MW gas-based project in Uttar Pradesh is also facing several issues. With so many projects lurching in doubt, the company’s ambitious capacity addition target seems formidable now.

After the positive response to its OFS, the management of RPower may have gained some confidence that some investors still find some value in the counter. However, it definitely needs to introspect on what has happened so far. Even if the company completes its projects, its gigantic debt of over Rs 23000 crore will eat away its profits.

As for investors, we had clearly advised avoiding the scrip earlier. We still hold firm to the belief that buying the scrip is far from a good idea.