Can he become the richest Indian in 2008?

IIPM, GURGAON

If all goes well with Reliance Power IPO, Anil Ambani’s net worth may be more than his brother, Mukesh. In terms of market cap, Anil’s ADAG group may become the second largest in India. But there are too many ‘ifs’ to be sorted out, including gas supply from Mukesh’s RIL

“No one is born an industrialist… even my father’s abilities were doubted when he went about setting the Jamnagar refinery.” This was how Anil Ambani, Chairman, ADAG, reacted as he kicked off India’s biggest-ever initial public offer (IPO) to mop up Rs.117 billon. Anil is convinced that the public issue of Reliance Power (RPL), a 51% subsidiary of Reliance Energy, will force his critics to treat him as a businessman par excellence. Well, he isn’t wrong too.

The initial trends are encouraging. Investors took just 60 seconds to fully subscribe to the issue and by the end of the first day there were 2.4 billion bids for just 260 million shares (10.52 times) on offer attracting a whopping Rs.1,080 billion worth of demand. “This was bound to happen,” says a broker with Religare. “The last few days have been hectic as clients are liquidating their positions to raise funds to take positions in the RPL IPO,” he adds on. Even in the grey market, RPL seems to be the hot pick. “While the scrip is trading at a premium of Rs.390-400 (offer price: Rs.450), speculators are offering a return of 9-10% on application before the scrip is listed,” confirms a Mumbai-based analyst.

More action is happening at the retail investors’ level. Considering the first day response many are sure that the issue will be highly oversubscribed and, hence, their allotments on a pro-rata basis may not be enough. So, some of them are pooling their resources to apply for larger lots. This helps them to maximise their immediate returns as they can benefit from the premium they hope to earn the day the scrip is listed at higher-than-offer price. Many brokers too are prepared to fund retail investors to apply for higher lots.

Retail investors can take advantage of the 5% discount offered by RPL, reservation of 30% of the issue for them, and an initial payment of 25% of the application amount. But if they do opt for the last option, they will have to forego the possible listing advantage (if the scrip is listed at a price that’s higher than the offer price), as they will be able to sell the shares only after they have made the full payment.

Anil has other reasons to be happy. Once RPL lists on the bourses in February, Anil has a fair chance to topple estranged brother Mukesh, and become the richest Indian. Anil’s 44% stake in RPL may be valued at $11 billion, and raise his net worth to a whopping $54 billion. It may also make the ADAG group the second largest in India in terms of market capitalisation. However, the critics are unimpressed.

They contend that the first of RPL’s 13 projects will go on-stream by December 2009, and is likely to make money in the next three years.

“Considering the long gestation periods of the projects, the issue appears to be highly overvalued. Although, on account of low liquidity and expected large oversubscription we expect the stock to list at a premium but it’s purely from a view to enjoy listing gains,” says a pre-IPO note from Emkay Share Brokers, a brokerage house.

Anil still has to sort out the matter of gas supplies from his brother Mukesh’s Reliance Industries; the issue is in the courts and, therefore, makes the business proposition seem a bit risky for investors. However, S. Mukherjee, CEO and MD, ICICI Securities disagrees: “The issue is not of owning reserves but of the availability of the fuel, which is available in plenty.” According to UBS, the cost of capital for RPL would be 20% less than state-run NTPC. With 13 projects with a capacity of 28,200 MW and proposed investments of $28 billion, RPL currently boasts of the largest development pipeline. That’s always a plus in the Indian power game.

Edit bureau: Manish K Pandey

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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