When Anil D. Ambani Group (ADAG) launched the IPO for Reliance Power in early 2008, it was marketed as if it is one of India's biggest Power Companies. But in reality the company had absolutely no project on the ground, only plans on papers. At the IPO price, the company was valued at over Rs. 1 lakh crores, which was way absurd and only Stupids jumped in to apply for the IPO. And Indians proved that there are millions of Stupids who don't need any financial logic when it comes to trying their luck in the Stock Market. I had tried my best to discourage as many people as possible from applying for the RPower IPO, but most people just ignored me.
It's been 7 years since the IPO and now the company trades at a Market Cap of just around Rs.18,000 crores, i.e. just about 1/6th of the IPO valuation. But the other major difference is that RPower now has atleast a few projects operational and few other in different stages of development. The projects implementation has not happened as per RPower initial projections with several projects getting delayed due to various reasons. As of now RPower has operational capacity of around 6000 MW, comprising of 5800 MW from Coal-fired Thermal plants and 200 MW from renewable sources. Currently RPower is recognising revenue from it's 1200 MW Rosa power plant, 600 MW Butibori power plant, 40 MW Solar PV plant in Rajasthan and 45 MW Wind generation capacity in Maharashtra. Very soon RPower will start recognising revenues from it's Sasan UMPP of 3960 MW, which will give a big booster to the company's topline. RPower's Total revenues for the last 3 quarters are hovering around the Rs.1800 crores mark. This could easily jump to over Rs.2500 crores mark once revenues from Sasan UMPP start getting added. The interesting part is going to be the profitability of that project. Sasan UMPP is linked to it's own Coal mine & hence raw material cost isn't a big problem. But the selling price per unit is very very competitive at just about Rs.1.20 per unit. RPower is trying to negotiate a slightly higher price claiming that the substantial change in Rupee-Dollar rate & huge jump in Diesel prices impacted the company's CAPEX plans for the project substantially.
Apart from Sasan UMPP, RPower has another UMPP linked to a coal mine, where the development work is currently progressing. That project could get commissioned in another 18-24 months. Apart from that RPower has several Hydro Power projects in it's fold amounting to a total of about 5200 MW and the project construction work is progressing on some of them. Few of those capacities are expected to be commissioned in FY'16. RPower recently commissioned a 100 MW Concentrated Solar Power project in Rajasthan, which too will add some revenues going forward. The company also signed another MOU with Rajasthan Govt to contruct another large Solar project. Going by the stream of projects that are under construction/development, RPower will see capacity & revenue boost every 2-3 quarters going forward over the next 3 years.
RPower's T-T-M Cash Profit stands at about Rs.1500 crores on a Total Revenue of about Rs.7000 crores. That means the company is currently enjoying a Cash Profit margin of 21%. I am expecting this to get diluted gradually to about 18% over the next 12 months as some new projects get on stream, which will lead to a substantial hike in the Interest Cost. But the increase in Topline should ensure that Cash Profit continues to grow, though at a slower rate initially. Once the operating projects mature, the margins will gradually improve. At the current Market Cap of just under Rs.18,000 crores, RPower trades at about 12 times it's T-T-M Cash Profit and under 18 times it's T-T-M Net Profit. This kind of valuation is neither cheap nor expensive, but I think it is not considering the potential growth over the next 2-3 years. I think RPower deserves to trade at 12 times it's 1-year forward Cash Profit or atleast 15 times it's T-T-M Cash Profit number. I think RPower is currently trading at a discount of about 20% to it's Fair Value and the Fair Value is expected to increase with every passing quarter. Not just that, RPower is even trading below it's Book Value, at about 5% discount. Compare these valuations to the public sector company NTPC, which is India's biggest Power Generation company, and one will find that RPower's valuations are really cheap on many counts. NTPC trades at 1.5 times it's Book Value and about 9 times it's T-T-M Cash Profit. But remember that NTPC has not reported any growth for the last 3 years and it's Cash Profit margins are lower than RPower's margins despite the fact that NTPC's projects are much much older than RPower's. Consider this.... NTPC's quarterly revenues are currently about 10 times that of RPower's revenues, but it's Interest Cost is less than 3 times. Remember that Interest Cost is a substantial thing for any Capital Intensive business like Power Generation and any change in Interest Cost impacts the company's margins to a great degree.
In short RPower's current valuations at a price of about Rs.60 per share are quite attractive and offer a good scope of appreciation in the coming quarters as well as over the long term.
It's been 7 years since the IPO and now the company trades at a Market Cap of just around Rs.18,000 crores, i.e. just about 1/6th of the IPO valuation. But the other major difference is that RPower now has atleast a few projects operational and few other in different stages of development. The projects implementation has not happened as per RPower initial projections with several projects getting delayed due to various reasons. As of now RPower has operational capacity of around 6000 MW, comprising of 5800 MW from Coal-fired Thermal plants and 200 MW from renewable sources. Currently RPower is recognising revenue from it's 1200 MW Rosa power plant, 600 MW Butibori power plant, 40 MW Solar PV plant in Rajasthan and 45 MW Wind generation capacity in Maharashtra. Very soon RPower will start recognising revenues from it's Sasan UMPP of 3960 MW, which will give a big booster to the company's topline. RPower's Total revenues for the last 3 quarters are hovering around the Rs.1800 crores mark. This could easily jump to over Rs.2500 crores mark once revenues from Sasan UMPP start getting added. The interesting part is going to be the profitability of that project. Sasan UMPP is linked to it's own Coal mine & hence raw material cost isn't a big problem. But the selling price per unit is very very competitive at just about Rs.1.20 per unit. RPower is trying to negotiate a slightly higher price claiming that the substantial change in Rupee-Dollar rate & huge jump in Diesel prices impacted the company's CAPEX plans for the project substantially.
Apart from Sasan UMPP, RPower has another UMPP linked to a coal mine, where the development work is currently progressing. That project could get commissioned in another 18-24 months. Apart from that RPower has several Hydro Power projects in it's fold amounting to a total of about 5200 MW and the project construction work is progressing on some of them. Few of those capacities are expected to be commissioned in FY'16. RPower recently commissioned a 100 MW Concentrated Solar Power project in Rajasthan, which too will add some revenues going forward. The company also signed another MOU with Rajasthan Govt to contruct another large Solar project. Going by the stream of projects that are under construction/development, RPower will see capacity & revenue boost every 2-3 quarters going forward over the next 3 years.
RPower's T-T-M Cash Profit stands at about Rs.1500 crores on a Total Revenue of about Rs.7000 crores. That means the company is currently enjoying a Cash Profit margin of 21%. I am expecting this to get diluted gradually to about 18% over the next 12 months as some new projects get on stream, which will lead to a substantial hike in the Interest Cost. But the increase in Topline should ensure that Cash Profit continues to grow, though at a slower rate initially. Once the operating projects mature, the margins will gradually improve. At the current Market Cap of just under Rs.18,000 crores, RPower trades at about 12 times it's T-T-M Cash Profit and under 18 times it's T-T-M Net Profit. This kind of valuation is neither cheap nor expensive, but I think it is not considering the potential growth over the next 2-3 years. I think RPower deserves to trade at 12 times it's 1-year forward Cash Profit or atleast 15 times it's T-T-M Cash Profit number. I think RPower is currently trading at a discount of about 20% to it's Fair Value and the Fair Value is expected to increase with every passing quarter. Not just that, RPower is even trading below it's Book Value, at about 5% discount. Compare these valuations to the public sector company NTPC, which is India's biggest Power Generation company, and one will find that RPower's valuations are really cheap on many counts. NTPC trades at 1.5 times it's Book Value and about 9 times it's T-T-M Cash Profit. But remember that NTPC has not reported any growth for the last 3 years and it's Cash Profit margins are lower than RPower's margins despite the fact that NTPC's projects are much much older than RPower's. Consider this.... NTPC's quarterly revenues are currently about 10 times that of RPower's revenues, but it's Interest Cost is less than 3 times. Remember that Interest Cost is a substantial thing for any Capital Intensive business like Power Generation and any change in Interest Cost impacts the company's margins to a great degree.
In short RPower's current valuations at a price of about Rs.60 per share are quite attractive and offer a good scope of appreciation in the coming quarters as well as over the long term.
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