Reliance Power -Rosa stabilizing.- Kotak Sec

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Reliance Power (RPWR)
Utilities
Rosa stabilizing. Reliance Power (RPWR) reported a 12% qoq increase in generation,
as the second unit at Rosa had its first operational quarter, though teething troubles in
fuel availability led to lower-than-estimated generation. We note a steady improvement
in the pace of execution by RPWR, though we maintain our negative stance on account
of (1) lack of fuel security for gas-based capacities, (2) dilution of earnings (and
valuation) due to proposed merger with RNRL, and (3) inferior profitability of UMPPs.




Rosa plant stabilizing, teething trouble on coal availability
RPWR reported revenues of Rs1.7 bn, operating profit of Rs282 mn and net income of Rs2.3 bn
against our estimates of Rs1.9 bn, Rs224 mn and Rs1.7 bn, respectively. Lower-than-estimated
revenues were on account of lower plant availability during the quarter due to lower amount of
linkage coal available and stabilization phase of second unit at Rosa. The management has
indicated that Rosa has secured the permission to use imported coal and going forward. RPWR
plans to use a blend of linkage and imported coal at Rosa to avoid future coal availability issues.
Higher other income (Rs3.4 bn against our estimate of Rs2.8 bn) and a lower effective tax rate of
17% led to PAT beating our estimate by 37%.

SELL on expensive valuations, high fuel and execution risk

RPWR is currently trading at a P/B of 2.6 X on FY2012E net worth, which we believe is expensive
given the limited visibility on near-term earnings growth and high degree of execution and fuel risk
in the portfolio. We highlight our key concerns on RPWR’s portfolio:
􀁠 Continued uncertainty over the allocation of gas for the proposed 9,200 MW of gas based
capacities. Media reports indicate that CEA has recommended RPWR’s Samalkot plant (2,400
MW) to be included in the priority list for gas allocation. However, uncertainty over the
availability of gas on account of slow ramp up of supply from KG – D6 block makes us skeptical
about the prospects of securing gas in the near term.
􀁠 RPWR’s proposed gas-based development at Dadri has been plagued by land acquisition issues.
RPWR had filed a plea with the Supreme Court challenging the high court directive and
currently the matter is pending with the Supreme Court.
􀁠 UMPPs will not be the value driver for RPWR as they have been bid at a relatively lower tariff
structure. Our DCF-based valuation for Sasan and Krishnapatnam implies a P/B of 1X on the
total equity investment for these projects.