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COMPANY UPDATE
Reliance Power (RPOL.BO)
Sell
Visibility on pipeline, but near term execution key for funding; Sell
What's changed
Shanghai Electric announced that it will sell 36 units of 660MW each to
Reliance Anil Dhirubhai Ambani Group for a total consideration of
US$8.29bn. The contract will be executed over a period of 10 years and the
projects identified under this contract are Krishnapatnam, Chitrangi and
Tilaiya with 12 sets each which will be delivered in two phases.
Implications
While the equipment contract provides more visibility on the pipeline, we
believe timely execution of near term projects is critical for funding the
projects covered under this contract. Our calculations indicate that
Reliance Power (RPWR) may fall short of equity by about Rs29.6 bn (refer
Exhibit 3) for funding the Krishnapatnam Phase I, Chitrangi Phase I, and
Samalkot power projects.
As we expect Phase I of Chitrangi, Krishnapatnam and Tilaiya projects is
likely to come on-stream between FY14E-FY16E, we believe Phase II will get
commissioned only post FY16E. Despite visibility of fuel supplies for projects
based on domestic coal (refer Exhibits 1 & 2), we would be hesitant to value
them now as they have commissioning timelines which are long dated.
Further, this contract implies a capital cost of Rs15.7mn/MW for the BTG
portion; we, however, note that financial closure for Krishnapatnam project
happened at Rs46mn/MW. We wait for more details on capital costs before
reflecting the benefits of lower capital costs in our valuation.
Valuation
Re-iterate Sell on RPWR with 12-m SOTP based TP of Rs125 implying
potential downside of about 25%. We believe the current market price of
RPWR implies strong execution of its 24.3 GW of projects in the existing
pipeline that are scheduled to come on-stream over the next 6-8 years.
Key risks
Completion of projects ahead of estimated timelines is the key risk.
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