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PAT depressed by lower power earnings and EPC revenues
Reliance Infrastructure (RELI) reported Q3FY11 PAT of INR 1.65 bn (down 40%
Y-o-Y). The dip could be due to non-receipt of interest in FMPs/surplus cash
balances, lower regulated income and lower EPC income.
EPC revenue lower, but expect catch up in Q4FY11
EPC revenues were lower at INR 11 bn versus our expectation of INR 17 bn. The
company recorded revenue of INR 24 bn in 9mFY11 against a full year target of
INR 45 bn (management guidance). EPC margins were healthy at 9% at the
EBIT level. RELI’s EPC order book currently stands at INR 235 bn consisting of
7.5 GW of power projects and six road projects. With more power, road, and
metro projects under development we expect healthy order book growth.
Road, metro, and transmission projects to start cash flows in FY11
RELI expects to commission five road projects, the Delhi Metro project, and its
WRSS transmission project in Q4FY11. Though cash flows are expected in the
next quarter, we expect losses at the net level, at least in the initial years, due
to the projects’ long gestation, wherein, traffic/passenger growth is expected to
be gradual.
Announced buyback up to INR 725/share; sets aside INR 10 bn
The board has approved a share buyback programme up to a maximum price of
INR 725/share aggregating INR 10 bn. The quantum will be almost equivalent to
three earlier buybacks aggregating INR 9.2 bn. If successful, based on the above
market price, promoter shareholding will increase to ~50% post the buyback.
Outlook and valuations: Positive; maintain ‘BUY’
We have recalibrated FY11E and reduced FY12E earnings by ~13% and ~6%,
respectively, to factor in lower other income. We are revising SOTP to INR 1,358
(earlier INR 1,418) to factor in higher Ke due to upward revision in our risk-free
rate now at 8% and also rolling over to FY13 estimates. While the traction on
infrastructure projects and benefits from R Power (both EPC order + investment)
are a positive, group-related issues are a key risk which we believe could dent
effective utilization of cash and growth opportunities. We maintain our ‘BUY’
recommendation, but on relative return basis revise rating on the stock to
‘Sector Underperformer’ from ‘Sector Outperformer’.
Other highlights
Mumbai LA and treasury income
MERC has lifted its stay on tariff hike and RELI has started charging higher tariff.
However, this is yet to reflect on financials. With greater capex in future, the
company expects falling cash position will impact its treasury income. Moreover,
since the cash is invested in 13 month FMPs, the dividend income is lumpy and may
not show a steady quarterly trend.
Metro
The Delhi Metro has been completed and it is currently awaiting security forces from
CISF before starting operations. Advertisement and real estate deals have been
signed at New Delhi and Shivaji Stadium stations. The Mumbai project is expected
to be completed by Q3FY12.
Roads
Three road projects are currently functional, while five more are expected to be
operational in FY11. Six more projects are under development.
Transmission
The WRSS project has started generating revenue from February 2011, though COD
is delayed to August 2011, due to delay in receiving some approvals. CERC has
already approved tariffs and the project will earn RoEs from current quarter despite
actual COD in August 2011, since it has completed its work on time, while delay is
due to extraneous factors.
Table 1: SOTP
Business INR/share
EPC 190
Power 174
R Power 523
Metros 194
Roads 149
Transmission projects 24
Net cash 104
Total 1,358
Source: Edelweiss research
Company Description
Reliance Infrastructure (RELI, an Anil Dhirubhai Ambani Group company) is involved in
infrastructure projects, power EPC projects, and generation, transmission and
distribution of electricity. In the infrastructure space, it is developing five road projects
on build-operate-transfer (BOT) basis in Tamil Nadu. This division is involved in the
development of metro rail projects in Mumbai and Delhi. It is also developing a 100-
storey trade tower and a business district in Hyderabad. The EPC division presently has
an order book of over INR 210 bn, comprising EPC and balance of plant (BoP) power
projects. In the utility space, it distributes more than 28 bn units of electricity to cover
25 mn consumers across different parts of the country, including Mumbai and Delhi, in
an area that spans over 1,24,300 sq km. It generates 941 MW of electricity through its
power stations located in Maharashtra, Andhra Pradesh, Kerala, Karnataka, and Goa. The
company holds 38% in Reliance Power that plans to have a portfolio of 32 GW of
generating asset.
Investment Theme
• RELI’s EPC order book has grown ~400% over the past two years and slated to
grow even further. We believe the company will emerge as a major power EPC
player in the next few years, benefiting from the large addressable market to be
created by the addition of ~80,000 MW in the Twelfth Plan. Further, it holds stake in
Reliance Power, and thus, has the opportunity to invest in the entire power space,
ranging from generating asset development to building transmission assets and
power EPC.
• RELI is developing various road and metro projects, and is also bidding for various
infrastructure projects. This space too, like power, is expanding in a big way with a
potential market size of USD 494 bn. The company, being part of ADAG, plans to be
a major player in the infrastructure segment by owning assets on BOT basis and
leveraging its financial and technical strengths.
Key Risks
• There have been changes in margins from the EPC business in the past one year due
to the volatility in commodity prices and high interest rates. While we understand
that RELI has entered into back-to-back contracts to minimize margin erosion, the
scale and timing of projects could expose the company to execution risks.
• The road traffic growth has been dented due to the depressed industrial growth and
weak macro environment. This, in addition to any delay in execution of
infrastructure projects, could impact valuations.
• The company has parked sizeable part of its investments in group entities and yield
bearing instruments. Since other income contributes significantly to the total
earnings of the company, any diminution in the value of the same could impact
valuations.
• The recent Supreme Court verdict rests the right of gas allocation and price
determination with the Government, creating uncertainty on its gas based capex.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
PAT depressed by lower power earnings and EPC revenues
Reliance Infrastructure (RELI) reported Q3FY11 PAT of INR 1.65 bn (down 40%
Y-o-Y). The dip could be due to non-receipt of interest in FMPs/surplus cash
balances, lower regulated income and lower EPC income.
EPC revenue lower, but expect catch up in Q4FY11
EPC revenues were lower at INR 11 bn versus our expectation of INR 17 bn. The
company recorded revenue of INR 24 bn in 9mFY11 against a full year target of
INR 45 bn (management guidance). EPC margins were healthy at 9% at the
EBIT level. RELI’s EPC order book currently stands at INR 235 bn consisting of
7.5 GW of power projects and six road projects. With more power, road, and
metro projects under development we expect healthy order book growth.
Road, metro, and transmission projects to start cash flows in FY11
RELI expects to commission five road projects, the Delhi Metro project, and its
WRSS transmission project in Q4FY11. Though cash flows are expected in the
next quarter, we expect losses at the net level, at least in the initial years, due
to the projects’ long gestation, wherein, traffic/passenger growth is expected to
be gradual.
Announced buyback up to INR 725/share; sets aside INR 10 bn
The board has approved a share buyback programme up to a maximum price of
INR 725/share aggregating INR 10 bn. The quantum will be almost equivalent to
three earlier buybacks aggregating INR 9.2 bn. If successful, based on the above
market price, promoter shareholding will increase to ~50% post the buyback.
Outlook and valuations: Positive; maintain ‘BUY’
We have recalibrated FY11E and reduced FY12E earnings by ~13% and ~6%,
respectively, to factor in lower other income. We are revising SOTP to INR 1,358
(earlier INR 1,418) to factor in higher Ke due to upward revision in our risk-free
rate now at 8% and also rolling over to FY13 estimates. While the traction on
infrastructure projects and benefits from R Power (both EPC order + investment)
are a positive, group-related issues are a key risk which we believe could dent
effective utilization of cash and growth opportunities. We maintain our ‘BUY’
recommendation, but on relative return basis revise rating on the stock to
‘Sector Underperformer’ from ‘Sector Outperformer’.
Other highlights
Mumbai LA and treasury income
MERC has lifted its stay on tariff hike and RELI has started charging higher tariff.
However, this is yet to reflect on financials. With greater capex in future, the
company expects falling cash position will impact its treasury income. Moreover,
since the cash is invested in 13 month FMPs, the dividend income is lumpy and may
not show a steady quarterly trend.
Metro
The Delhi Metro has been completed and it is currently awaiting security forces from
CISF before starting operations. Advertisement and real estate deals have been
signed at New Delhi and Shivaji Stadium stations. The Mumbai project is expected
to be completed by Q3FY12.
Roads
Three road projects are currently functional, while five more are expected to be
operational in FY11. Six more projects are under development.
Transmission
The WRSS project has started generating revenue from February 2011, though COD
is delayed to August 2011, due to delay in receiving some approvals. CERC has
already approved tariffs and the project will earn RoEs from current quarter despite
actual COD in August 2011, since it has completed its work on time, while delay is
due to extraneous factors.
Table 1: SOTP
Business INR/share
EPC 190
Power 174
R Power 523
Metros 194
Roads 149
Transmission projects 24
Net cash 104
Total 1,358
Source: Edelweiss research
Company Description
Reliance Infrastructure (RELI, an Anil Dhirubhai Ambani Group company) is involved in
infrastructure projects, power EPC projects, and generation, transmission and
distribution of electricity. In the infrastructure space, it is developing five road projects
on build-operate-transfer (BOT) basis in Tamil Nadu. This division is involved in the
development of metro rail projects in Mumbai and Delhi. It is also developing a 100-
storey trade tower and a business district in Hyderabad. The EPC division presently has
an order book of over INR 210 bn, comprising EPC and balance of plant (BoP) power
projects. In the utility space, it distributes more than 28 bn units of electricity to cover
25 mn consumers across different parts of the country, including Mumbai and Delhi, in
an area that spans over 1,24,300 sq km. It generates 941 MW of electricity through its
power stations located in Maharashtra, Andhra Pradesh, Kerala, Karnataka, and Goa. The
company holds 38% in Reliance Power that plans to have a portfolio of 32 GW of
generating asset.
Investment Theme
• RELI’s EPC order book has grown ~400% over the past two years and slated to
grow even further. We believe the company will emerge as a major power EPC
player in the next few years, benefiting from the large addressable market to be
created by the addition of ~80,000 MW in the Twelfth Plan. Further, it holds stake in
Reliance Power, and thus, has the opportunity to invest in the entire power space,
ranging from generating asset development to building transmission assets and
power EPC.
• RELI is developing various road and metro projects, and is also bidding for various
infrastructure projects. This space too, like power, is expanding in a big way with a
potential market size of USD 494 bn. The company, being part of ADAG, plans to be
a major player in the infrastructure segment by owning assets on BOT basis and
leveraging its financial and technical strengths.
Key Risks
• There have been changes in margins from the EPC business in the past one year due
to the volatility in commodity prices and high interest rates. While we understand
that RELI has entered into back-to-back contracts to minimize margin erosion, the
scale and timing of projects could expose the company to execution risks.
• The road traffic growth has been dented due to the depressed industrial growth and
weak macro environment. This, in addition to any delay in execution of
infrastructure projects, could impact valuations.
• The company has parked sizeable part of its investments in group entities and yield
bearing instruments. Since other income contributes significantly to the total
earnings of the company, any diminution in the value of the same could impact
valuations.
• The recent Supreme Court verdict rests the right of gas allocation and price
determination with the Government, creating uncertainty on its gas based capex.
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