India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Infrastructure (BUY)
Utilities
Capitalize on recent underperformance. We upgrade Reliance Infrastructure (RELI)
to BUY with a revised target price of Rs1,060/share offering 33% upside from CMP. We
believe that the underperformance of -26% over the past three months offers an
opportunity to participate in RELI’s diverse portfolio of infrastructure assets ranging
from ownership in extant distribution circles to growth opportunities in the roads and
other infrastructure business at reasonable valuations.
Correction offers an attractive entry point. Upgrade to BUY
We upgrade RELI to BUY as we believe that recent correction in the stock price offers a buying
opportunity into a portfolio of business that offers (1) a reasonable cushion of extant operational
earnings (derived from regulated power distribution businesses in Mumbai and Delhi) along with
(2) potential upside from a gamut of infrastructure investments. Out target price of Rs1,060/share
implies an upside of 33% from current levels.
RELI is developing 25 infrastructure projects with a total cost of ~Rs400 bn and is aggressively
pursuing other infrastructure opportunities. We currently value most of the infrastructure projects
at book value (discussed in detail later) and believe that traction on these projects offers key upside
to our target price. We highlight that management has guided for 12 operational projects by endFY2011E.
Reliance Power – CMP implies a holding company discount of 73%
We highlight that the current market prices of RPWR and RELI imply a significantly large holding
company discount of ~73% after factoring in the dilution of RELI’s stake to 38% (post issuance of
shares to RNRL). Our fair value estimate of Rs125/share for RPWR (post share issuance) also implies
a holding company discount of 67% which we believe is relatively large compared to peers
Deployment of cash and equivalents could be a cause of concern
Increased exposure to inter-corporate deposits (ICDs) may have concerned investors (as was the
case in 2008). RELI’s cash and cash equivalent of Rs103 bn as of March 2010 (net cash of Rs17 bn)
includes increased exposure to ICDs at Rs27.7 bn (Rs15.8 bn as of March 2009) that could have
rattled investor sentiment (see Exhibit 5). Redeployment of cash and cash equivalents into
operating business will likely improve the return profile of RELI and ease concerns on end-use of
cash. We note that RELI’s extant business (Mumbai distribution) was cash flow constrained due to
the stay on tariff orders, which has been revoked since September 2010.
Upgrade to BUY with revised target price of Rs1,060
We upgrade RELI to BUY (from ADD) with a revised target price of Rs1,060/share. Our SOTPbased target price comprises—(1) Rs232/share from the existing generation, transmission
and distribution businesses, (2) Rs141/share for the EPC business, (3) Rs435/share for 38%
stake in Reliance Power valued at 20% discount to our target price, (4) Rs51/share as the
equity value of the five BOT road projects under construction, (5) Rs43/share for equity
investment made in the various infrastructure projects and (6) cash and investible surplus in
books of Rs156/share. We have revised our EPS estimate for FY2011E to Rs55/share
(previously Rs57/share) and for FY2012E to Rs70/share (previously Rs83/share) to account for
(1) lower execution in EPC business and (2) dilution of stake in RPWR from 45% to 38%
(due to merger with RNRL).
We note that we value most of the infrastructure projects at their book value and believe
that further traction on these projects offers upside to our target price.
Mumbai distribution – receding customer migration and regulatory assets
RELI’s Mumbai distribution business has curtailed the migration of consumers to TPWR
having added 46,000 new customers in 1HFY11. Revocation of the stay against increase in
tariffs will likely address cash-flow constraints from a mounting regulatory asset (Rs20 bn as
of September 2010). We highlight below some key concerns over RELI’s Mumbai distribution
business that could have had an impact on recent negative sentiment.
` Migration to TPWR network – RELI has been able to control the migration of
consumers from its network to that of TPWR. We note that migration of consumers will
in any case have a limited near-term impact on earnings as RELI will continue to be
compensated for the regulated equity invested in the distribution network in Mumbai.
RELI has initiated steps to bring down the cost of power procured and towards that end
entered into an agreement with Vidarbha Industries Power Ltd (developer of the 600 MW
Butibori project) for supply of135 MW power for two years, starting April 2012, at a rate
of Rs4.85/kwh and has also tied up with two more suppliers (55 MW with Abhijeet
Group and 260 MW with KSW-Wardha Power).
` Inflating regulatory assets – RELI had a regulatory asset (earnings accrued but not
received) of Rs20 bn, including Rs5.7 bn for FY2010 against operating profit of Rs9.2 bn
from the power business. The rising regulatory asset has raised concerns on cash-flow
generation from an otherwise less risky regulated business in Mumbai. MERC had
previously in July 2009 put a stay on RELI’s tariff hike for select consumer segments which
was applicable as per MERC’s approval in June 2009. Accordingly, RELI continued to bill
these consumers at old tariff and the additional revenues were carried forward in a Tariff
Adjustment account which increased from Rs10 bn to Rs16 bn in FY2010 implying unbilled revenue accrual of Rs5.7 bn in FY2010. Regulatory assets further swelled to Rs18.5
bn as of September 2010 raising concerns on actual recovery of cash from Mumbai
distribution. We note that MERC, in September 2010, revoked its stay, allowing RELI to
increase the tariff for the power sold and facilitating the filing of the annual revenue
requirement for FY2011E. This will also help reduce the mounting regulatory asset.
` Renewal of distribution license – There have been concerns raised on the possibility of
annulment of Mumbai distribution license which comes up for renewal in mid-CY2011.
We note that RELI has applied for extension of license for next 25 years and management
has highlighted that Electricity Act, 2003 does not have any provisions for bidding out an
existing licensee and the only way it can be awarded to any other licensee is if the license
is cancelled on grounds of inefficiency (a case unlikely for RELI).
Infrastructure –diversified portfolio, invested ~Rs41 bn as of March 2010
RELI continues to build on its infrastructure portfolio and is developing 25 projects with a
total cost of ~Rs400 bn spread across roads, metros, large transmission networks, and real
estate opportunities. We, however, highlight that capex incurred on these projects have
been muted so far, and we see slippages to committed commissioning timelines.
Management has guided for 12 (out of 25) projects to be operational by year-end, we
remain cautious and believe that most of them are likely to be delayed as indicated by the
estimated capex incurred on these projects as of March 2010 (see Exhibit 4).
Our earnings model currently factor earnings from 401 km of road projects (of which two
projects aggregating 97 km are already operational) being developed by the company in
Tamil Nadu for which we ascribe a value of Rs12.6 bn (Rs51/share). We have taken
Rs43/share in our target price for the book value of equity investments (1X P/B) made in (1)
Mumbai Metro (Rs1.72 bn), (2) CBD Tower (Rs1.63 bn), (3) transmission projects (Rs3.4 bn),
and (4) Delhi Metro (Rs3.7 bn). We highlight the status of implementation across the various
infrastructure verticals of RELI:
` Roads: RELI is developing 11 road projects worth Rs120 bn, of which two roads in Tamil
Nadu are operational and another four road projects are under construction. Of the total
projects under implementation, two projects have been operational since September
2009, while another 370 km (four projects) have been 42% completed (as of March 2010)
and likely to be commissioned over the next 12 months.
` Metro: RELI is developing three metro projects in Mumbai and Delhi with total cost of
Rs160 bn. Management has indicated that Mumbai Metro Line 1 and Delhi Airport
Express Link will be operational in FY2011E. We, however, believe that both these
projects are likely to slip into FY2012E.
` Transmission: RELI is developing five transmission projects, with total project outlay of
Rs66 bn. These projects comprise two projects under WRSS, and another two projects
won by RELI under the Ultra Mega Transmission Projects put out for bidding by the
government. We note that apart from WRSS, there has been limited progress on the
other transmission projects.
` Airports: RELI acquired developing and operating rights for 95 years for 5 regional
brown-field airports in Maharashtra at Nanded, Latur, Yavatmal, Baramati & Osmanabad.
` Sea link – RELI has recently been awarded O&M contract for Bandra Worli Sea Link
(BWSL) and development of Worli Haji Ali sea link. The contract involves an upfront
payment of Rs16 bn to MSRDC and tolling of BWSL to start from 4QFY11E.
Conversion of promoter warrant – option expires in early January 2011
AAA Project Ventures Private Ltd (AAAPVL), one of the promoters of RELI, converted 19.6
mn warrants into equal number of equity shares at Rs928.89/share. The warrants were
issued in July 2009 while conversion was done in March 2010. These warrants were part of
42.9 mn promoter warrants issued is July 2009 and conversion of balance warrants would
entail a cash infusion of Rs16.2 bn. We, however, note that these warrants will expire on
January 8, 2011 post which, AAAPVL stands to forfeit Rs54.4 bn paid towards these
warrants.
No comments:
Post a Comment