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UBS Investment Research
Reliance Power
Significant positives in recent months
New developments at the company are significantly positive
In the past few months, there have been key positive developments for Reliance
Power. These include: 1) likely gas allocation of 9.6 mmscmd for the 2,400MW
Samalkot project; 2) Mine plan approval for 40 MTPA for Tilaiya coal mines; 3) a
Rs450bn contract signed with Shanghai Electric for Boiler, Turbine and Generator
(BTG) of 30,000MW coal-based projects; 4) a contract of Rs34bn with GE for a
2,400MW gas project; and 5) an MoU with Chinese banks and US Exim bank for
~Rs750bn financing.
Reliance Power could emerge as a cost leader among Indian utilities
For coal-based projects, Reliance Power could have net generation cost as low as
Rs1.25/unit. This is due to per unit savings of: a) Rs0.45 (captive coal versus
linkage coal); b) Rs0.25 (external financing versus domestic debt); and c) Rs0.1
(Chinese equipment versus domestic equipment). We believe this is a critical
advantage for a company with a large portfolio (expected generation of 150bn units
in 2015).
Upside potential in valuation could be significant
We estimate there could be 60% potential upside to our valuation if we include
gas-based projects (2,400MW Samalkot) and new coal-based projects, which
include 5,940MW of Chitrangi and capacity enhancement at Sasan and Tilaiya
(1,980MW each). The gas- and coal-based capacity could contribute Rs11and
Rs73, respectively, in our valuation.
Valuation: maintain Sell rating and DCF-based price target of Rs140
We await further clarity on projects and as of now we do not include potential
upside in our valuation. We believe the key upside risks are: 1) clarity on gas
availability; 2) financial closure for projects; and 3) new project wins.
Recent developments are significantly positive
In the past few months, there have been key positive developments for Reliance
Power. These include:
1) Likely gas allocation of 9.6 mmscmd for the 2,400MW Samalkot project,
2) Mine plan approval for 40 MTPA for Tilaiya coal mines,
3) The Rs450bn contract signed with Shanghai Electric for BTG of 30,000MW
coal-based projects,
4) A contract of Rs34bn with GE for the 2,400MW gas project,
5) An MoU with Chinese banks and US Exim bank for ~Rs750bn financing.
In our view, the new developments at Reliance Power are significantly
positive.
Reliance Power—the key strategy drivers
In our view, there are four key components of Reliance Power’s strategy. They
are:
1) Scale of operations—Reliance Power wants to have significant scale in its
power generation business. The key points in this regard are: portfolio of
~35,000MW; bids for 4,000MW capacity Ultra Mega Power Projects (UMPPs)
as it won three out of the four UMPPs awarded till now.
2) Focus on lower fuel cost—Reliance Power is very aggressive in achieving
lowest possible fuel cost for its generation. The key steps the company has taken
are: domestic coal reserves (the cheapest fuel option) of 2bn tonnes, acquisition
of assets for imported coal.
3) Bulk ordering of equipment—Reliance Power is building strong relationships
with its vendors and ordering equipment in bulk. The 30,000MW order to
Shanghai Electric for coal-based plant equipment and the 2,400MW order to GE
for gas-based plant equipment is a testimony to this. In our view, this could
significantly reduce the fixed cost for projects.
4) Cheaper sources for financing—Reliance Power wants to adopt the most
efficient capital structure for its projects and the cheapest available sources for
financing. Reliance Power has signed an MoU with Chinese banks and US Exim
bank for ~Rs750bn financing; we think this could considerably reduce the
interest costs.
In our view, the multi-faceted strategy adopted by Reliance Power is
sensible.
Reliance Power could emerge as a cost leader
For coal-based projects, Reliance Power could have net generation cost as low
as Rs1.25/unit.
The savings the company could achieve due to access to captive coal, cheaper
external financing, and use of Chinese equipment are significant.
Reliance Power—impact on profitability
With the commissioning of the 2,400MW Samalkot project, we estimate a
significant impact on profitability for FY13 and FY14.
Reliance Power—impact on valuation
We believe there is significant upside potential in valuation due to the new
projects. Overall, we estimate there could be 60% upside potential to our
valuation if we include the gas-based projects (2,400MW Samalkot) and new
coal-based projects, which include 5,940MW of Chitrangi and capacity
enhancement at Sasan and Tilaiya (1,980MW each). The gas- and coal-based
capacity could contribute Rs11 and Rs73, respectively, in our valuation.
Reliance Power’s gas-based projects
Reliance Power has achieved significant progress on the development of gasbased
projects.
2,400 MW Samalkot project
As per the company, the Samalkot gas-based project has completed most of the
pre-construction activities and development/construction has already begun at
the site.
1) Likely gas allocation of 9.6 mmscmd for Samalkot project
Gas expected for entire 2400MW
Central Electricity Authority (CEA) site inspection of Samalkot project is
complete
The CEA submitted a report on developments in the project
As per the company, the eGoM decision on gas allocation is expected shortly
2) Signed contracts with GE for 2400MW equipment
Equipment order—orders have been placed for the entire capacity
Signed an equipment supply contract with GE for 2,400MW
Long-Term Service Agreement for 15 years
3) MoU for US$5bn financing from US Exim
US Exim to support procurement of US goods & services
Sanctions have been received from domestic and international lenders
Financing has been secured for the entire capacity
4) Gas supply logistics
Plans for transportation of gas have been finalised
Dedicated pipeline of 60kms from landfall point Kakinada to the site
5) Power evacuation
The power evacuation plan for the entire capacity has been finalised
Proposed evacuation: PGCIL Network
Interim - LILO on Gajuwaka to Nunna line
Long term - 400 kV connectivity to Vemagiri pooling station (50 kms)
6) Power Sale
Power sale strategy is in place
Submitted a Case I bid in Andhra Pradesh for 1,100MW
Balance power to be sold through merchant/Case 1 bids
7) Other pre-construction requirements
Land available for entire capacity
All major clearances and approvals are in place
As per the company, the construction at site for the Samalkot project
(2,400MW) is in full swing.
Other gas-based projects
As per the company, currently, the Government of India is in process of
finalising allotments for 12th Plan projects. Reliance Power has already
identified its project development pipeline at locations on the gas pipeline route.
We understand that the government is to determine eligibility for gas allocation
to projects based on—land acquisition, Terms of Reference (ToR)/ Environment
Clearance (EC) approval, coastal location, lack of domestic coal resources, and
plant efficiency.
Domestic coal—Reliance Power has one of the
largest resource bases in private sector
The domestic coal mines are on track to being operational before the power
projects get commissioned. Also, the captive coal mines are sufficient to meet
the entire requirement.
Recent developments
Mine plan approval for 40 MTPA for Tilaiya coal mines
Sanctions of US$917m from US Exim Bank obtained to finance import of
coal mining equipment from the US
Key features
Reliance Power has one of the largest coal reserves in the private sector
Sasan Mines: reserves of 750 m tonnes
Tilaiya Mines: reserves of 1230 m tonnes
Overall, 2 bn tonnes of coal reserves within a radius of 250km
Imported coal—development on track
Reliance Power is currently developing three imported coal mines in Musi
Rawas, South Sumatra, Indonesia.
Coal logistics
Coal mine to Indonesia port: Railway
Indonesian port to Krishnapatnam: Ship
Krishnapatnam port to project site: Conveyor belt
Key features
Total resources: 2 bn tonnes
Production: over 25 MTPA
Recent developments
Preparation of mine plan is in progress
Activities on development of logistics for coal transportation within
Indonesia have already commenced
Equipment ordering for coal-based projects
Reliance Power has signed a Rs450bn contract with Shanghai Electric for BTG
of 30,000MW coal-based projects
Key benefits/advantages
Shorter delivery schedules
Similar unit configurations
Economies of scale
Equipment financing by Chinese banks
Locking in of contract prices to take care of future uncertainties
Strategic cooperation with Shanghai Electric
An agreement has been signed to support construction and operation of 42
supercritical units (27,720 MW) ordered from SEC
SEC to facilitate financing from Chinese banks and FIs
A ‘Centre of Excellence’ to be jointly set up to work towards deployment of
supercritical units in India
SEC to provide long-term supply of spares, manpower training, O&M
support, and after-sales service support
SEC plans to explore the possibility of setting up a super/ultra-super critical
BTG manufacturing facility in India.
International financing—competitive edge
ECB Financing
Chinese banks—US$12bn for financing coal-based projects starting with
Sasan UMPP
US Exim—MoU for US$5bn for financing gas-based projects, coal mining,
and renewable energy
Key advantages
ECB loans are significantly cheaper than Rupee loans
Matching dollar expenses with ECB funding to mitigate currency risk
Group and sector exposure limit risks of Indian banks mitigated
Current status of construction
The current status of Reliance Power’s various projects is as follows:
Rosa Phase II (600MW)
Construction is ahead of schedule
Project to be commissioned in FY12
More than 40% work is already complete
Butibori
Boiler foundation construction has been completed
Boiler erection activities has commenced
More than 25% work is already complete
Sasan
BTG material supply has commenced
Work on the site is in full progress
Chitrangi
Power plant land is in possession
All major clearances have been obtained
Tilaiya
Land for the power plant is in possession of the company
EC for the power plant is already obtained; first-stage EC has been obtained
for coal mines
Fastest progress in land acquisition among all UMPPs in India
Krishnapatnam
The BTG contract has been awarded
Project scheduled is to be commissioned as per power purchase agreements
Hydro projects
Reliance Power has 4,620MW of hydro projects in its portfolio.
Tato II: 700 MW
The detailed project report (DPR) was accepted by the CEA in September
Access roads are available up to the site
An experienced execution team is at site
Office infrastructure has been established
Siyom: 1000MW
The DPR was accepted by the CEA in October 2010
Access roads are available up to the site. Realignment of the existing road is
in progress
An experienced execution team is at site power house
Office infrastructure has been established
Urthing Sobla: 400MW
The Supreme Court hearing was on November 2010 and DPR should be
submitted by December 2011
Office infrastructure has been established
Renewable energy
Reliance Power is currently building 850MW of renewable energy portfolio.
During this week, Reliance Power was awarded a Letter of Intent (LOI) by
NTPC Vidhyut Vyapar Nigam Limited (NVVNL) for the purchase of 100MW
of solar power from the solar power project under the Jawaharlal Nehru National
Solar Mission (JNNSM) to be set up in Rajasthan.
In a release sent to stock exchanges, Reliance Power has informed that the
company’s wholly owned subsidiary Rajasthan Sun Technique Energy Private
Limited has been awarded through competitive bidding an LOI by NVVNL.
Reliance Power—capacity build-up
As per the company, the capacity build-up plan is as follows:
Reliance Power
Reliance Power is a subsidiary of Reliance-ADA Group (one of India's largest
business groups) in the power generation sector. With a project pipeline of
28,200MW, Reliance Power targets to become one of the largest private sector
generation companies in India by 2017. The projects are well diversified with a
coal:gas:hydro mix of 52:36:12, and plants in six states across 13 locations.
Reliance Power expects to start power generation in FY11.
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