Review of Reliance Power IPO: Finance Trading Times

Review of Reliance Power IPO

The much awaited “Reliance Power IPO” is all set to hit the markets on 15th January.

How good is this IPO? Should I invest in Reliance Power IPO? What are the basics to look for while investing in the Reliance Power IPO?

Before we get into the details, let’s look at some of the latest news items.

More than 1 lakh Demat Accounts will be opened in next 3 days just for the Reliance Power IPO. People stood in the queue for hours in various brokerage firms to get the accounts opened for their family members. Just for getting a demat account so that they can apply for the maximum possible number of shares in the Reliance Power IPO.

Grey Market Trading: is going on for this IPO. Against the offer price band of somewhere around 400 to 450 Rs. per share, the current grey market price is trading at a whooping 900 Rs. or so (as per the news) – almost double that of the offer price.

What do the above news items tell us?
First thing – the IPO is eagerly awaited. And it will be heavily subscribed. No doubt about that. But what it means to we, individual investors? It will mean less allotment and hence hopeless returns than what we expect. The mathematics of IPO share allotment and probability calculations are covered in this article.

If we go by the grey market trading prices, then the Reliance Power Company at the grey market rate of 900 Rs. will be valued at something like 2 lakh crores. Current valuations suggest that even if the company manages to double the proposed power production, then also it will take atleast 3-5 years for the company to justify the price of 900 Rs. a share or a 2 lakh crore valuation. That too everything goes well with double the proposed production. So from the valuations perspective and the grey market trading prices, the issue does not look very attractive even in the long horizon of 3 to 5 years. May be the company discovers something really great and that turns out to be a great profit making business, otherwise the grey market prices are not justified.

However, we need to understand that the grey market prices are the once that are setting the returns expectations. If one can get out of this expectations business, then it may be justified. Still due to the euphoria, the less allotment of shares will mean no significant profits.

As covered in the article, Stock Picking: Good Company v/s Bad Company, I had quoted the example of TCS IPO. That IPO also had grey market trading. Against the offer price of around 775, the grey market price was trading at 1200. However, on the listing day, the closing price of TCS was just 998. What happened?
No one knows. Even though the grey market trading was going on at 1200, the close price was 998, well below 20% of the grey market trading price. Later, in a few months, it went down further.

Some day or the other, the market comes to its senses. For TCS, it came to sense on the very first day – later even more. What can happen with Reliance IPO, only time will tell. Both Reliance and Tata are well trusted houses in India, so definitely the craze that went on for TCS IPO, much more than that will be for Reliance Power IPO.

Now the problem does not stop there. Let us not forget what happened with the IndiaBulls IPO and the follow up. IndiaBulls shares were offered at 16 Rs. However, it started climbing like crazy and went up like a rocket. Seeing that performance, Other brokerage firms like IL&FS, who were initially planning to launch their shares at a mediocre rate, doubled or even quadrupled their IPO price. The list includes IL&FS, Religare and recently concluded Motilal Oswal issue.

If this Reliance IPO is successful, then JP Associates and other power companies are also in the line. They will become very demanding for their IPO, which might ultimately trigger a high price for the entire power sector.

Ultimately, what can be done here? To invest or not? Well, I have always been of the “Randomness Opinion”, and the probability value calculations tell me that my money is better safe in the bank Fixed deposit savings account. One may take a chance, lucky if you are allotted, unlucky if no or less allocations. All the best!
Table of Contents
Tabular Details of Reliance Power IPO Part Payments
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8 Comments: Post your Comments

Yusuf said...(on 9 January 2008 at 08:32 )  

Very informative article. Thanks

Andy K said...(on 10 January 2008 at 20:04 )  

Hi Shobhit
If one apply with second option i.e. part payment@115 /per share then for complete 100k bidding only 25k approx is to be payable. considering that no one will get complete allotment for 100k, least number of shares may be alloted to those who bid for complete 100k quota. Suppose if one gets 10 shares then also not bad as only 25k is blocked for 20 days and if as per gray market, listing price goes to 900 then 100% profit on 10 Shares can be booked@900. approx Rs 4200 can be booked on 10 Shares.

regards
Andy

Anonymous said...(on 10 January 2008 at 20:09 )  

Why do you always see the hole in Donut first?. Can you not see the Donut around the hole at very first moment?

Regards
Raj

Vishal Raina said...(on 11 January 2008 at 03:48 )  

Hi Raj,

If you want only the donut, then you should be certain about the donut.
IPO is no certainty.
Tehere are 100's of site that will tell u about the donut only, but we also need to know about the hole.
Shobhit has beautifully covered all the aspects of high pricing and high application of the IPO including the effect of it in the entire power sector.

Thanks,
Vishal Raina

Andy K said...(on 11 January 2008 at 06:54 )  

Hi Raj
If you are NOT OK with the views of the author, then appriciate the efforts he is taking and quit quietly. why to comment on which is not applicable to you (nut)?

Thx
Andy

reliance power ipo said...(on 12 January 2008 at 05:07 )  

Nice Aarticle,

Vishal Raina said...(on 13 January 2008 at 19:12 )  

Hi Andy,

Actually, the beauty of this site is that nobody would ever QUIT this site. All the Vishal's, all the Andy's, all the Siddhartha's and all the Raj's will keep coming back. Because they realize that the things in this blog are true.
They are not certain of anyting..yet they will shout at the top of the voice to criticize.

I dont think Shobhit will worry about these things. Keep enlightening us Shobhit.

Thanks a lot.

Regards,
Vishal

Bhupesh said...(on 16 January 2008 at 09:19 )  

Any authentic information :
Situation : If I apply with second option i.e. part payment@115 /per share then for complete 100k bidding only 25k approx is to be payable. let' assume retail categeory get over subscribed by 5 times.
Suppose if every one gets 1/5th of applied shares .. Whould I get partially paid share and some money refunded or I will get fully paid share?

Wish you all happy and fruitful trading and investing activities with safety! = = = Post a Comment

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