India: Reliance Power unplugged by inconstant investors

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By:
Lawrence White
Published on:

 Anil Ambani

Anil Ambani: no longer as big as the market

February 11 was supposed to be so much fun for Anil Ambani. The billionaire younger son of the late Indian industrialist Dhirubhai had just floated his latest investment vehicle on the Mumbai stock exchange. Reliance Power’s stock sale was a cracker: sold in less than 60 seconds, its mid-January roadshow was a whopping 73 times subscribed, sucking huge chunks of liquidity from the system. Investors scrambled to buy paper linked to India’s latest infrastructure play – a company so shiny new that its valuation is based on a dozen huge power plants that won’t come online until 2012.

Yet Ambani’s party, held at his plush Mumbai residence, turned out to be more wake than celebration. In the few weeks since Reliance Power’s roadshow, India’s markets tanked. The local benchmark Sensex index lost more than 20% in the five weeks to February 12. Several infrastructure-related IPOs were also pulled in early February, including Indo-Dubai real estate joint venture Emaar MGF, whose initial stock sale was slightly less than 90% subscribed when it was pulled.

By February 11, foreign and local investors had almost wholly fled the markets, leaving Reliance at the mercy of the bears. Its stock had the worst Indian IPO debut in years – after pricing at Rs450 and opening at Rs550, it sank, losing 17% on its first day of trading. Chatting to bankers and traders around Mumbai late that day, many found it hard to contain their glee – despite being forced to book losses on the tattered paper. "Dhirubhai, Anil and [Anil’s elder and richer brother] Mukesh have always been seen as invincible people who could do what ever they want," noted one salesman. "But now it looks as if the market has become bigger than them – the market seems to have become ‘democratized’." At Anil’s party that evening, friends and bankers milled around disconsolately while their teetotal host presented a homage to his father on a big screen.

"It wasn’t the most enjoyable evening I’ve ever spent," says a foreign banker who was present, "though at least the food was good."

Reliance Power’s shares have gained slightly since but they still lag far below their listing price. Critics – many of whom have lost money on the stock – whine that the offering was overpriced, leading to its poor early performance. Yet trading on India’s unregulated grey market – which acts as a pre-market barometer, providing guidance on the likely debut performance of any stock sale – suggested the stock would open at Rs900, or even higher. "The hype surrounding [the IPO] was ludicrous," says a Mumbai-based trader. "I had random people I know – people who had never bought a stock before – buying Reliance Power because they saw it going to four figures [more than Rs1,000] on the first day of trading. Then they’d flip it and take the profit. One guy I know asked me if it was legal for a stock to fall. It’s quite a learning experience for a lot of people here."

That chastening experience might force the younger Ambani to reconsider the mooted sale of 10% of Reliance Infratel, the telecom infrastructure unit of Reliance Communications, the flagship entity of the Anil Dhirubhai Ambani Group. R-Infratel, which filed its draft prospectus with the Securities and Exchange Board of India in early February, was hoping to raise more than $1.5 billion, although that target now looks optimistic.

The focus will now shift to the $240 million initial stock sale of Mumbai’s IRB Infrastructure Developers, which builds toll roads and bridges. IRB in mid-February fixed the price of its IPO at Rs185, the very bottom end of the range, appeasing investors, who see IRB’s strong connections in the infrastructure space as the reason why its IPO has not been scrapped altogether given market conditions. Other infrastructure-related IPOs slated for the coming months include twin $1 billion sales by Jaiprakash Power and realty firm Unitech, and a $100 million offering by Gammon Infastructure.

Investors will be watching these sales keenly. India’s government last year committed itself to pumping upward of $400 billion into much-needed infrastructure over the next five years. As a result, many leading Indian corporates have rummaged around in their box of assets, pooling together and marketing anything – power, toll roads, realty, cement, even mobile phone masts – that can be even linked to the word infrastructure, however feebly.

If banks can’t sell infrastructure-related paper to Indian and foreign investors, the thinking goes, then India’s IPO market might remain under water for some time yet.

Soggy conditions

Indeed, India-focused investors might have to get used to soggy market conditions. The local Sensex bourse has been something of a dud this year. In January – again boding ill for the capital markets – foreign institutional investors in India sold record net holdings of $3.23 billion, according to figures from the Securities and Exchange Board of India. That marked the highest monthly net sales by FIIs since they entered the Indian market. If anything, February has been worse. The Sensex lost more than 7% in the first two weeks of the month, with FIIs leading the selling on all but two of those days.

Back at Anil’s party it wasn’t just market mayhem, investor inconstancy and pulled public offerings sullying the mood. The younger Ambani still controls more than 50% of Reliance Power, even after the listing, and is stuck in an acutely visible power struggle with his brother to be the richest Indian on the planet. Mukesh is worth about $45 billion, a couple of billion dollars more than Anil. Had Reliance Power opened at Rs900 a share, Anil’s personal wealth would have jumped to $47 billion – meaning that, for the time being, the family’s younger financial genius would have usurped his elder brother, the corporate strategist with impeccable government links.

That might indeed have happened if Reliance Power’s IPO – originally scheduled for January – had not been delayed, after SEBI officials and several politicians made a series of technical complaints relating to the company’s stock sale back in December 2007. Since then, Anil has pointed the finger at several figures at Reliance Industries, owned by his brother Mukesh, blaming them for allegedly sabotaging the Reliance Power stock sale, further souring the already bad blood between the two.