Reliance Power (Sell, add to CL; 12-m TP: Rs125) :: Goldman Sachs

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Reliance Power (RPOL.BO; Sell, add to CL; 12-m TP: Rs125)
Source of opportunity
 We reiterate our Sell rating on Reliance Power (RPOL.BO) and add it
to our Conviction list with an SOTP-based 12-month target price of
Rs125 (earlier Rs119) implying a potential downside of about 22%.
 We believe the current market price of Reliance Power implies
strong execution of its 24.3 GW of projects under construction and
development that are scheduled to come onstream over the next 6-8
years. In effect, the stock is already reflecting this potential growth
in the foreseeable future, in our view.
 We believe cash flows from near-term projects will not be sufficient
to meet equity requirements for projects under development over
the medium term. We expect Reliance Power to fall short of equity
by about Rs29.6 bn for Krishnapatnam, Chitrangi, and Samalkot
power projects. With the current share price already implying their
value, we believe any further equity raising may lead to equity
dilution (see Exhibit 101).
 Although Reliance Power is best positioned in terms of owning coal
mines for Sasan, Chitrangi, Tilaya, and Krishnapatnam projects
(totaling about 16GW), we believe the benefits of such backward
integration are already reflected in the current share price.
 With FY12E EV/GCI of about 1.2X, we believe the market is already
factoring in the cash return potential of about 14%, which may not
happen until FY15, in our view.
Catalyst
1) We believe news flows on delays in the projects under construction
will result in the stock underperforming its peer group; 2) Delays in coal
mining in Indonesia, which would impact Krishnapatnam power project;
3) Newsflow on timelines for likely equity issuance.
Valuation
We revise FY11E/12E/13E EPS by -17%/-13%/75% to reflect changes in
commissioning timelines and other income assumptions for FY11E/12E
and reflecting Samalkot power project in FY13E. Our revised 12-month
SOTP-based target price is Rs125 (from Rs119 as we roll over to FY12E).
The stock appears expensively valued on FY12E P/E and P/B vs. ROE
multiples (see Exhibit 20, 21 & 24).
Key risks
Completion of projects ahead of estimated timelines.