Reliance Infrastructure: Concerns on quality of investments escalate: JPMorgan

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Reliance Infrastructure Ltd
Overweight
RLIN.BO, RELI IN
Annual report just out; concerns on quality of investments escalate



RELI released its FY10 annual report last evening: the delay was on
account of waiting for approvals for the de-merger exercise proposed last
year. Pending approvals from lenders, RELI has published audited
financials as per the existing reporting format. We highlight our
concerns regarding balance sheet quality. Also numbers imply ongoing
delays in project execution in our view.


• 75% yoy spike in ICDs to Rs27.7B was a significant disappointment
in our view since mgmt. had been guiding to the contrary. As of Sep-10,
loans and advances have further risen to Rs132B (vs. Rs86B as of Mar-
10) indicating a) upside risk to ICD balance, and b) higher regulatory
receivables. RELI’s pref. share investment in group co. Sonata
(Rs10.9B) remains, while Reliance Infraproject Intl. investment declined
to Rs23.3B. The yield on ICDs seems to have declined in FY10. (See
tables overleaf for breakdown of key balance sheet components.)

• Lower operating cashflows a reflection of electricity business
problems last year: Power purchase cost spiked, but could not be
recovered in tariffs, resulting in larger working capital. As per mgt, Sep-
10 regulatory receivables stand at ~Rs.20B in vs. Rs.16B in Mar-10.
• FY10-end project level debt-drawdown was weak, so was capex:

FY10 capex of Rs26.6B vs. Rs47.4B in FY09 disappoints. Based on Sep-
10 balance sheet we infer that 1HFY11 capex is Rs.20.4B (JPM est. of
Rs29B for FY11) indicating a spillover of planned capex from FY10.
Debt drawdown in metros and roads was slower than expected.

• Long dollar position. As of FY10, RELI’s $ denominated investments
stood at Rs24.2B vs. liabilities of ~Rs23B. Rs5.45B of ECBs will be up
for repayment in FY11. Given the Rs261MM Sep-q MTM forex loss in
an appreciating INR environment, we can infer that RELI now has a long
$ position on account of partial repayment of ECBs.

• Status of outstanding promoter warrants, conversion deadline ended
Nov-10: In FY10, the promoter was issued 42.9MM warrants and the
company had received an initial subscription fee of Rs9.96B. As of the
latest update, 23.3MM warrants remained unexcercised, with Rs5.4B of
upfront payment, which has to be foregone in the event of nonconversion.
The conversion price of Rs929/share is higher than CMP of
Rs.871. We note that due to sustained stock price underperformance in
FY09, the promoter had to forego an upfront payment of Rs7.83B (then
conversion price of Rs1823/share).