Reliance Power Sector Fund, an interesting play

Investment Objective: The primary investment objective of the scheme is to seek to generate continuous returns by actively investing in equity and equity-related or fixed income securities of power and other associated companies. The scheme has been a top performer in recent weeks, delivering a phenomenal 109% return over the last 12 months. Link.

However, a closer look at the most recent fact sheet indicates some interesting developments. One, the scheme holds close to 32% of its assets in debt, derivatives, cash & other receivables, two, it holds very little of NTPC (the largest power generation company in India by miles) and nothing of Power Grid Corporation (the largest power distribution company in India, a monopoly at this point of time) and three, the scheme has mopped up close to Rs.2,380 crore in the last four months ended 30th November 2007.

I think the first point, i.e. holding close to 32% in debt, derivatives and cash is a clear indication of Reliance Capital getting significant allocations during the IPO of Reliance Power. And, given how most of the Reliance group (ADA or MDA) stocks have fared over the past few years, it won't be surprising if Reliance Power does well too, infact very well. This, despite the fact that Reliance Power might not earn great revenues till 2010-11. Well, if Reliance Petroleum can command a mcap of over a lac crore without refining a single drop of crude oil, then so can Reliance Power !!!

Point two is a little perplexing given that both, NTPC and Power Grid are light years ahead of their competition so to that extent any play of the power sector it incomplete without the two. And, it is quite ironical that NTPC, which is around 6 times bigger than Reliance Energy & Tata Power (in terms of sales) and around 8-10 times bigger (in terms of bottomline), is quoting at a P/E of 24 times whereas Reliance Energy and Tata Power are quoting at 33 times and 51 times respectively.

The third point (i.e. Reliance Power fund mopping up close to Rs.2,380 crore and most of it lying on the sidelines) indicates that their is still some more steam left in the power sector rally. Personally, I think most of the stocks in this sector are quoting at unheard of valuations. But, then history tells us that most of the bull markets end up in excesses.

Talking of power sector valuations, you may want to see these three charts that I had prepared a couple of weeks back. The charts provide a bird's eye view of the various segments of the power sector, their financial performance over the past three years and their current valuations. One sector that stands out is Power Cables. The sector has been growing at a rapid clip and is also attractively priced. Among the companies in this sector, I have taken a small exposure to Nicco Corporation.