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Sunday, January 3, 2010

Reliance Power - Blue Chip Power Stock - Time To Buy?

With Reliance Power's recent announcement of commencing production in phase-1 of Rosa power plant, it is time to consider Reliance power as long term investment. Many stock market analysts have started publishing their stock research report recommending to buy stocks of the company.

With commencement of Rosa power plant production, Reliance power would soon start adding these production numbers to balance sheet. They are expecting Rs. 3300 Crores revenue from this plant in next 1 - 2 years at full production capacity.

If we look at the numbers, total income in March 2009 was Rs. 334 Cr. I expect with addition of above said Rs. 3300 Cr. revenue, it would significantly increase all the numbers including EPS. Tata Power operates on net profit margin of 12.32%. Even at 10% operating profit margin, Reliance Power would add approx 330 Cr. of profit to it's approximate year 2009 profit, Rs. 275 Cr. So in next 1 - 2 years, the total figure of profit could be Rs.609 Cr. and adjusted EPS Comes at 2.54 for these forward earnings.

At CMP, Rs.155, with forward EPS of 2.54, forward P/E comes to be 61. Although it seems expensinve in P/E ratio terms, Reliance power has always commanded P/E ratio of more than 100 due to it's being in Power business and it's huge projects which would go operational in next 4-5 years.

So with the forward earnings discussed above, Reliance power stock can easily double in 2 years time frame.

Power sector is one sunshine sector everyone would be looking at in next few years due to continuously surging power demand in India. With demand for power sector businesses, power stocks would be sought after ones in future.

Considering all these factors, buying stocks of Reliance power could yield good returns with long term investing strategy. But stocks at every dip and also buy in SIP (Systematic Investment Plan) manner.

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