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Reliance Infrastructure (RLIN.BO, Neutral, 12-m TP: Rs700)
What happened
We downgrade Reliance Infrastructure to Neutral from Buy due to
balanced risk/reward ratio and better upside for other stocks in our
coverage universe. Since we initiated on Reliance Infrastructure with a
Buy on September 16, 2009, the stock declined 49.3% vs. a 9.2% increase
in BSE Sensex. We attribute the under-performance to: 1) delays in
infrastructure projects; 2) RELI’s settlement with SEBI over the alleged
violation of regulations for foreign investment.
We reduce our 12-month target price to Rs700 from Rs925 primarily to
reflect:
(1) Lower valuation for Reliance Power (RPOL.BO, Sell, on Conviction
List, Feb 18: Rs113.80). We lower our 12-m target price of Reliance
Power to Rs91 from the earlier target price of Rs124 due to (1) lower
utilization levels for some of its power projects; (2) removing the value
for its hydro-based projects as they are too distant into the future; 3)
increasing the risk premium on the back of the current regulatory
uncertainty surrounding the group.
(2) NPV for the regulatory assets sitting on the balance sheet of Reliance
Infra. Having regard to the rising regulatory assets for Reliance Infra and
based on our recent interactions with the regulator, we believe it will
take longer for Reliance Infra to recover its regulatory assets.
(3) Increasing the risk premium on the back of the current regulatory
uncertainty surrounding the group.
Valuation
Our 12-m SOTP-based target price of Rs700 implies potential upside of
about 16% from current levels. We revise up our FY11E estimate by +6%
to reflect the 3QFY11 results and lower FY12E/FY13E estimates by
10%/5% to reflect higher interest costs for infra projects. The stock
currently trades at a discount of P/E and P/B vs. ROE on FY12E multiples.
Key risks
(1) Delay in financial closure of road projects; (2) adverse regulatory
outcome for Mumbai power distribution; and (3) delay in Sasan project
revenue recognition.
Key upside risks would be 1) timely completion of infrastructure
projects; 2) earlier than expected completion of Reliance Power’s
projects
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Infrastructure (RLIN.BO, Neutral, 12-m TP: Rs700)
What happened
We downgrade Reliance Infrastructure to Neutral from Buy due to
balanced risk/reward ratio and better upside for other stocks in our
coverage universe. Since we initiated on Reliance Infrastructure with a
Buy on September 16, 2009, the stock declined 49.3% vs. a 9.2% increase
in BSE Sensex. We attribute the under-performance to: 1) delays in
infrastructure projects; 2) RELI’s settlement with SEBI over the alleged
violation of regulations for foreign investment.
We reduce our 12-month target price to Rs700 from Rs925 primarily to
reflect:
(1) Lower valuation for Reliance Power (RPOL.BO, Sell, on Conviction
List, Feb 18: Rs113.80). We lower our 12-m target price of Reliance
Power to Rs91 from the earlier target price of Rs124 due to (1) lower
utilization levels for some of its power projects; (2) removing the value
for its hydro-based projects as they are too distant into the future; 3)
increasing the risk premium on the back of the current regulatory
uncertainty surrounding the group.
(2) NPV for the regulatory assets sitting on the balance sheet of Reliance
Infra. Having regard to the rising regulatory assets for Reliance Infra and
based on our recent interactions with the regulator, we believe it will
take longer for Reliance Infra to recover its regulatory assets.
(3) Increasing the risk premium on the back of the current regulatory
uncertainty surrounding the group.
Valuation
Our 12-m SOTP-based target price of Rs700 implies potential upside of
about 16% from current levels. We revise up our FY11E estimate by +6%
to reflect the 3QFY11 results and lower FY12E/FY13E estimates by
10%/5% to reflect higher interest costs for infra projects. The stock
currently trades at a discount of P/E and P/B vs. ROE on FY12E multiples.
Key risks
(1) Delay in financial closure of road projects; (2) adverse regulatory
outcome for Mumbai power distribution; and (3) delay in Sasan project
revenue recognition.
Key upside risks would be 1) timely completion of infrastructure
projects; 2) earlier than expected completion of Reliance Power’s
projects
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