Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Infrastructure (RELI)
Utilities
Clouds of uncertainty—buy back a step in the right direction. Reliance
Infrastructure’s stock performance continues to be plagued by (1) questions on
accounting of cash and equivalents, and (2) overall negative sentiment around
investigations of the group’s role in the telecom scam. We note that the buy-back of
shares is a step in the right direction, though clarity on larger issues remains key to the
stock reflecting its fair value.
Buy back at Rs725/share—a show of strength, but may only partially allay investor concerns
RELI management has announced a total buy-back of Rs10 bn at a maximum price of Rs725/share,
implying buy-back of 13.8 mn shares (5% of outstanding shares), in contrast the issuance of 23.3
mn shares at a conversion price of Rs929/share concluded in the month of January. In our view,
the buy back signals a show of strength by the management, however, there is no clarity on larger
issues as highlighted in the recent SEBI consent order dated January 14, 2011 and any involvement
of group companies in the spectrum allocation controversy.
Construction revenues miss estimates, margins contract further
RELI reported revenues of Rs24.9 bn (11% yoy 5% qoq), operating profit of Rs1.2 bn (-37% yoy, -
66% qoq) and net income of Rs1.7 bn (-39% yoy, -3% qoq) against our estimates of Rs26.9 bn,
Rs1.8 bn and Rs2 bn, respectively. Lower-than-estimated revenues were primarily on account of (1)
lower EPC revenues (Rs10.6 bn against our estimates of Rs12 bn) and (2) lower unit sales in
Mumbai (1,801 MU against our estimate of 2,132 MU). Margin contraction in EPC business (by
~350 bps) further aggravated miss in standalone earnings.
Step up in revenue contribution from infra projects, trend expected to continue
RELI reported consolidated net revenues of Rs37.4 bn (-12% yoy, -7% qoq), EBITDA of Rs5.6 bn
(-25% yoy, -10% qoq) and PAT of Rs4.1 bn. We note that incremental earnings on a consolidated
basis were contributed by the Delhi distribution business and three operational road projects.
During the quarter RELI started the tolling of its third road project (Pune-Satara) thus increasing the
contribution of infrastructure revenues to 5.2% in 3QFY11 (1.9% in 3QFY10 and 2.5% in
2QFY11). In our view, RELI’s consolidated earnings would be driven by infra projects which are
lined up for commissioning in next 1-2 years which includes (1) two metro projects (Mumbai and
Delhi), (2) transmission projects (WRSS already commissioned), (3) three road projects in Tamil
Nadu and, (4) Bandra Worli Sea Link.
Maintain rating with a revised target price of Rs1,030/share
We maintain our BUY rating with a revised target price of Rs1,030/share (previously
Rs1,060/share), though note that addressing investor concerns remains key to realization
of fair value estimates. Our SOTP-based target price comprises—(1) Rs194/share from the
existing generation, transmission and distribution businesses, (2) Rs110/share for the EPC
business, (3) Rs399/share for 38% stake in Reliance Power, (4) Rs47/share as the equityvalue
of the BOT road projects under-construction, (5) Rs39/share for equity investment
made in the various infrastructure projects and (5) cash and investible surplus in books of
Rs242/share.
Mumbai distribution – lower unit sales during the quarter
RELI reported revenues of Rs12.6 bn (-13% yoy, -9% qoq) on sales of 1,801 MU (-13%
yoy, -7% qoq) for the Mumbai distribution business, which has a customer base of 2.72
mn and caters to a peak demand of 1,450 MW. RELI generated 1,029 MU (-2% yoy)
from 500 MW Dahanu plant to meet the demand for the distribution business and
purchased another 1,111 MU at an average price of Rs6.5/kwh.13% yearly decline in
unit sale of power is likely on account of customer migration to TPWR network.
Highlighting recent investor concerns
RELI has under performed the benchmark BSE 30 Sensex by ~18% in the past month on
the back of investor concerns on cash and cash equivalents on the books. We discuss
below some recent events that have rattled investor sentiments and led to a massive
under performance.
On January 14, 2011, Securities and Exchange Board of India (SEBI) restricted RELI
from participating in the secondary markets along with a penal fine of Rs250 mn (to
be borne by the directors), in settlement of the investigations regarding utilization of
funds raised through the foreign currency debt markets and likely misrepresentation of
investments in the annual reports. We highlight that deployment of cash and
equivalents has been an issue with RELI, with its liquid balance sheet comprising Rs103
bn of cash (and equivalents) at the consolidated level.
Management has highlighted that RELI had not received any queries from ICAI on its
accounts for any year. ICAI has simply asked for copies of audited Balance Sheets
(which are already in public domain).
We note that as of March 2010, RELI had cash and equivalents of Rs103 bn (Rs386/share)
and the CMP of Rs624/share already implies limited value for the contentious ICDs and
preference shares, which together contribute ~Rs234/share.
Strong portfolio of infra projects, commissioning to drive consolidated
earnings
RELI continues to build on its infrastructure portfolio and we believe that valuations (and
earnings) for RELI will likely be driven by these infrastructure projects being developed
across road, metro, transmission and real estate projects. We note that as of September
2010, RELI is developing 25 projects with a total cost of Rs400 bn and is aggressively
pursuing other infrastructure opportunities. In our view, commissioning of these near-tomid-
term infra projects (especially two metro projects and four road projects) will likely
drive consolidated revenues of RELI in FY2012E and FY2013E.
However, we 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).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Infrastructure (RELI)
Utilities
Clouds of uncertainty—buy back a step in the right direction. Reliance
Infrastructure’s stock performance continues to be plagued by (1) questions on
accounting of cash and equivalents, and (2) overall negative sentiment around
investigations of the group’s role in the telecom scam. We note that the buy-back of
shares is a step in the right direction, though clarity on larger issues remains key to the
stock reflecting its fair value.
Buy back at Rs725/share—a show of strength, but may only partially allay investor concerns
RELI management has announced a total buy-back of Rs10 bn at a maximum price of Rs725/share,
implying buy-back of 13.8 mn shares (5% of outstanding shares), in contrast the issuance of 23.3
mn shares at a conversion price of Rs929/share concluded in the month of January. In our view,
the buy back signals a show of strength by the management, however, there is no clarity on larger
issues as highlighted in the recent SEBI consent order dated January 14, 2011 and any involvement
of group companies in the spectrum allocation controversy.
Construction revenues miss estimates, margins contract further
RELI reported revenues of Rs24.9 bn (11% yoy 5% qoq), operating profit of Rs1.2 bn (-37% yoy, -
66% qoq) and net income of Rs1.7 bn (-39% yoy, -3% qoq) against our estimates of Rs26.9 bn,
Rs1.8 bn and Rs2 bn, respectively. Lower-than-estimated revenues were primarily on account of (1)
lower EPC revenues (Rs10.6 bn against our estimates of Rs12 bn) and (2) lower unit sales in
Mumbai (1,801 MU against our estimate of 2,132 MU). Margin contraction in EPC business (by
~350 bps) further aggravated miss in standalone earnings.
Step up in revenue contribution from infra projects, trend expected to continue
RELI reported consolidated net revenues of Rs37.4 bn (-12% yoy, -7% qoq), EBITDA of Rs5.6 bn
(-25% yoy, -10% qoq) and PAT of Rs4.1 bn. We note that incremental earnings on a consolidated
basis were contributed by the Delhi distribution business and three operational road projects.
During the quarter RELI started the tolling of its third road project (Pune-Satara) thus increasing the
contribution of infrastructure revenues to 5.2% in 3QFY11 (1.9% in 3QFY10 and 2.5% in
2QFY11). In our view, RELI’s consolidated earnings would be driven by infra projects which are
lined up for commissioning in next 1-2 years which includes (1) two metro projects (Mumbai and
Delhi), (2) transmission projects (WRSS already commissioned), (3) three road projects in Tamil
Nadu and, (4) Bandra Worli Sea Link.
Maintain rating with a revised target price of Rs1,030/share
We maintain our BUY rating with a revised target price of Rs1,030/share (previously
Rs1,060/share), though note that addressing investor concerns remains key to realization
of fair value estimates. Our SOTP-based target price comprises—(1) Rs194/share from the
existing generation, transmission and distribution businesses, (2) Rs110/share for the EPC
business, (3) Rs399/share for 38% stake in Reliance Power, (4) Rs47/share as the equityvalue
of the BOT road projects under-construction, (5) Rs39/share for equity investment
made in the various infrastructure projects and (5) cash and investible surplus in books of
Rs242/share.
Mumbai distribution – lower unit sales during the quarter
RELI reported revenues of Rs12.6 bn (-13% yoy, -9% qoq) on sales of 1,801 MU (-13%
yoy, -7% qoq) for the Mumbai distribution business, which has a customer base of 2.72
mn and caters to a peak demand of 1,450 MW. RELI generated 1,029 MU (-2% yoy)
from 500 MW Dahanu plant to meet the demand for the distribution business and
purchased another 1,111 MU at an average price of Rs6.5/kwh.13% yearly decline in
unit sale of power is likely on account of customer migration to TPWR network.
Highlighting recent investor concerns
RELI has under performed the benchmark BSE 30 Sensex by ~18% in the past month on
the back of investor concerns on cash and cash equivalents on the books. We discuss
below some recent events that have rattled investor sentiments and led to a massive
under performance.
On January 14, 2011, Securities and Exchange Board of India (SEBI) restricted RELI
from participating in the secondary markets along with a penal fine of Rs250 mn (to
be borne by the directors), in settlement of the investigations regarding utilization of
funds raised through the foreign currency debt markets and likely misrepresentation of
investments in the annual reports. We highlight that deployment of cash and
equivalents has been an issue with RELI, with its liquid balance sheet comprising Rs103
bn of cash (and equivalents) at the consolidated level.
Management has highlighted that RELI had not received any queries from ICAI on its
accounts for any year. ICAI has simply asked for copies of audited Balance Sheets
(which are already in public domain).
We note that as of March 2010, RELI had cash and equivalents of Rs103 bn (Rs386/share)
and the CMP of Rs624/share already implies limited value for the contentious ICDs and
preference shares, which together contribute ~Rs234/share.
Strong portfolio of infra projects, commissioning to drive consolidated
earnings
RELI continues to build on its infrastructure portfolio and we believe that valuations (and
earnings) for RELI will likely be driven by these infrastructure projects being developed
across road, metro, transmission and real estate projects. We note that as of September
2010, RELI is developing 25 projects with a total cost of Rs400 bn and is aggressively
pursuing other infrastructure opportunities. In our view, commissioning of these near-tomid-
term infra projects (especially two metro projects and four road projects) will likely
drive consolidated revenues of RELI in FY2012E and FY2013E.
However, we 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).
No comments:
Post a Comment