Kotak Sec recommends: Sell Reliance Power: Target Rs 135

Execution to gain momentum. Reliance Power (RPWR) remains confident of
achieving its ambitious target of 5 GW by FY2012E, 25 GW by FY2015E and 35 GW by
FY2017E. We believe that these targets are ambitious given the inherent execution risk
involved along with high fuel risk for its proposed 10,000 MW of gas-based capacities.
We maintain our SELL rating with target price of Rs135/share, noting the 18%
downside and risk to earnings from delayed execution and non-availability of fuel.


Ambitious plans to scale up to 25 GW by FY2015, 35 GW by FY2017
RPWR remains confident of achieving its targeted capacity of 25 GW by FY2015E which in our
view is ambitious given the high degree of execution risks involved. Our skepticism stems from the
present status of projects which are significantly lagging their original execution schedule. The
sluggish pace of execution is evident from the slow capex run rate having incurred ~Rs35 bn in
FY2010 marginally lesser than Rs37 bn in FY2009. We note that as of end FY2010, RPWR had
utilized Rs55 bn of the total IPO proceeds of Rs116 bn while Rs61 bn still remains unutilized.
High fuel risk for gas-based capacities, coal-based plants better positioned
RPWR plans to set up ~10,000 MW of gas-based capacities with 7,480 MW in Dadri and 2,400
MW in Samalkot (expansion of existing 220 MW at Samalkot which will be transferred to RPWR
from Reliance Infrastructure). Management highlighted that location of gas based capacities
remains flexible owing to uncertainties involved with land at Dadri.
In our view gas-based capacities face a high degree of fuel availability risk given the present
demand supply scenario of gas in India. In our view, securing allocations for ~28mcm/d of gas (the
approximate amount required for RPWR’s gas-based capacities) will likely be an uphill task given
the ever-increasing mismatch between demand and supply of gas. Fuel risk for coal-based
capacities is relatively lesser, with RPWR largely dependent on captive coal blocks secured in India
and Indonesia, to meet the requirement of associated capacity additions.
High execution and fuel risk, expensive valuations – maintain SELL
RPWR is currently trading at a P/B of 2.3 X on FY2012E net worth which we believe is expensive as
the 18% downside to our fair value estimate of Rs135 along with high earnings risk stemming
from execution and fuel uncertainties. Moreover, we highlight that a large portion of capacity
would be UMPPs (12,000 MW) that are not value accretive given the competitive nature of their
bids. Our DCF-based valuation for Sasan and Krishnapatnam implies a P/B of 1X on the total equity
investment for these projects. Acceleration of the commissioning schedule across the various
projects being implemented by the company could be an upside risk to our estimates.