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Fairly Valued
ƒ Upgrade to HOLD from REDUCE as TP achieved
ƒ Emerging cost leader but projects are a long way off
ƒ Factoring in 11.5% equity dilution
ƒ DCF based TP of INR142.0 including RNRL
Upgrade to HOLD
We upgrade Reliance Power (RPower)
from a REDUCE to a HOLD as we believe
the stock is fairly valued after its recent
decline. We retain our TP of INR142.00.
We believe that if RPower executes as
per plan, it will emerge as a cost leader in
India’s power generation space as it has
managed to amass one of the largest
reserves of coal mines among Indian
utilities/IPPs (Independent power
producers) ensuring fuel security and the
lowest costs among Indian peers in the
long-term. The bulk deal with Shanghai
Electric Corp to source equipment and the
anticipated reduction in debt costs due to overseas debt funding should
lead to lower capital costs as well. However, we note that the projects are
still some time into the future.
What could make us turn positive?
In absence of any Power Purchase Agreements, we are valuing
RPower’s 2,400 MW Samalkot power plant assuming a 16% ROE. There
would be upside to our estimates if RPower is able to sign PPAs which
ensure an ROE in excess of 16%. Higher than expected tariffs would
increase cash flows. This would result in lower than expected equity
dilution leading to upside to our TP. We are also not valuing the Tilaiya
Ultra Mega Power Project (UMPP) and its associated coal mines. We
would factor in the Tilaiya UMPP post its achieving financial closure
which would further increase our TP by 13% to INR161.00. We have also
not factored in RPower’s pending acquisition of Reliance Infrastructure’s
(RELI IN; BUY; CMP:INR716.40) power generation assets.
Valuation
Our TP of INR142.00 is based on a DCF valuation of 16 GW of power
generation projects, external sales from its mines in Sumatra and RNRL
assets. We estimate project free cash flows for the next 15 years and
discount it with the applicable WACC of 11.5%. We add up the
discounted free cash flows of each project to arrive at free cash flows to
the firm. We assume a terminal growth rate of 3%. For our WACC
calculation we assume a cost of equity of 14% and a cost of debt of
9.5%. We are also building in an equity dilution of about 11.5% over and
above the 17% equity dilution that resulted from the RNRL-RPower
merger. Upside risks stem from earlier completion of power projects,
higher than expected power tariffs (PPA or merchant). Downside risks
stem from project execution delays or Delay in gas supplies for the
Samalkot Power plant.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Fairly Valued
ƒ Upgrade to HOLD from REDUCE as TP achieved
ƒ Emerging cost leader but projects are a long way off
ƒ Factoring in 11.5% equity dilution
ƒ DCF based TP of INR142.0 including RNRL
Upgrade to HOLD
from a REDUCE to a HOLD as we believe
the stock is fairly valued after its recent
decline. We retain our TP of INR142.00.
We believe that if RPower executes as
per plan, it will emerge as a cost leader in
India’s power generation space as it has
managed to amass one of the largest
reserves of coal mines among Indian
utilities/IPPs (Independent power
producers) ensuring fuel security and the
lowest costs among Indian peers in the
long-term. The bulk deal with Shanghai
Electric Corp to source equipment and the
anticipated reduction in debt costs due to overseas debt funding should
lead to lower capital costs as well. However, we note that the projects are
still some time into the future.
What could make us turn positive?
In absence of any Power Purchase Agreements, we are valuing
RPower’s 2,400 MW Samalkot power plant assuming a 16% ROE. There
would be upside to our estimates if RPower is able to sign PPAs which
ensure an ROE in excess of 16%. Higher than expected tariffs would
increase cash flows. This would result in lower than expected equity
dilution leading to upside to our TP. We are also not valuing the Tilaiya
Ultra Mega Power Project (UMPP) and its associated coal mines. We
would factor in the Tilaiya UMPP post its achieving financial closure
which would further increase our TP by 13% to INR161.00. We have also
not factored in RPower’s pending acquisition of Reliance Infrastructure’s
(RELI IN; BUY; CMP:INR716.40) power generation assets.
Valuation
Our TP of INR142.00 is based on a DCF valuation of 16 GW of power
generation projects, external sales from its mines in Sumatra and RNRL
assets. We estimate project free cash flows for the next 15 years and
discount it with the applicable WACC of 11.5%. We add up the
discounted free cash flows of each project to arrive at free cash flows to
the firm. We assume a terminal growth rate of 3%. For our WACC
calculation we assume a cost of equity of 14% and a cost of debt of
9.5%. We are also building in an equity dilution of about 11.5% over and
above the 17% equity dilution that resulted from the RNRL-RPower
merger. Upside risks stem from earlier completion of power projects,
higher than expected power tariffs (PPA or merchant). Downside risks
stem from project execution delays or Delay in gas supplies for the
Samalkot Power plant.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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