Reliance Power: Expensive despite recent correction: Kotak Sec

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Reliance Power (RPWR)
Utilities
Expensive despite recent correction. Reliance Power (RPWR) stock has corrected by
~35% in the past three months and is now trading at 1.9X FY2012E book. We,
however, maintain our negative stance on account of (1) lack of fuel security for gasbased
capacities, (2) dilution of earnings (and valuation) due to merger with RNRL, and
(3) inferior profitability of UMPPs. Operating results in 3QFY11 were ahead of our
estimate on account of better-than-estimated availability. Reiterate SELL.
Operating results beat estimates on better availability
RPWR reported revenues of Rs2.5 bn, operating profit of Rs617 mn and net income of Rs1.4 bn
against our estimates of Rs2.1 bn, Rs348 mn and Rs1.9 bn, respectively. Higher-than-estimated
revenues were primarily on account of better availability during the quarter (~80%) resulting in
better-than-estimated average realizations. Management has indicated that Rosa has secured the
permission to blend imported coal and availability and PLF should improve further going forward.
Net income miss was primarily driven by significantly lower-than-estimated other income (Rs1 bn
against our estimate of Rs2.9 bn) which was partially offset by (1) lower depreciation on account
of change in depreciation policy for Rosa plant to align with UPERC rates (resulting in depreciation
being lower by Rs297.9 mn) and (2) tax write-backs on account of higher provisioning in previous
quarters.
Maintain SELL despite recent correction as execution and fuel risks remain high
RPWR stock has corrected by ~35% in past three months and is now trading at 1.9X FY2012E
book. We, however, maintain our cautious stance on RPWR given the limited visibility on nearterm
earnings growth and high degree of execution and fuel risks embedded in the portfolio.
Continued uncertainty over availability of gas on account of slow ramp-up of supply from KG-D6
block makes us skeptical about the prospects on securing gas in the near term for the proposed
9,200 MW of gas-based capacities (including near-term 2,400 MW at Samalkot). Further, we
believe that UMPPs will not be the value driver for RPWR as they have been bid at a relatively
lower tariff structure. Our DCF-based valuation for Sasan and Krishnapatnam implies a P/B of 1X
on the total equity investment for these projects.
Retain SELL with a revised target price of Rs115/share
We maintain our SELL rating on RPWR with a revised target price of Rs115/share (previously
Rs135/share) as we adjust for dilution upon merger with RNRL. Our target price implies a P/B of
1.8X on FY2012E book value. We have revised our EPS estimates for FY2011E to Rs2.9/share
(previously Rs3.9/share) and for FY2012E to Rs4/share (previously Rs5.3/share) as we account for
dilution upon merger with RNRL and delays in commissioning of projects.


Status of power projects and captive coal blocks
We highlight below the execution status of key power projects of RPWR as highlighted by
the management.
􀁠 Rosa II (600 MW) – the project has achieved all necessary milestone and construction is in
progress. The project has linkage from CCL (E grade coal). The project is likely to
commission by end-FY2012E.
􀁠 Butibori (600 MW) – the project has achieved all necessary milestone and construction is
in progress. The project has linkage from WCL (D grade coal). The project is likely to
commission by June 2012.
􀁠 Sasan UMPP (3,960 MW) – all necessary clearances and approvals in place and
construction has commenced. Management has indicated that production from Sasan
coal block is likely to commence by 2012. Peak production is likely to be 25 mtpa. A part
of the coal will be used for Chitrangi project. Management has guided for commissioning
of first unit by January 2012.
􀁠 Krishnapatnam UMPP (3,960 MW) – all necessary clearances and approvals in place.
RPWR has acquired 3 coal mines in Indonesia for the project. Management has indicated
that production from Indonesian mines will commence by mid-2013 and RPWR will likely
ship in 25 mtpa of Indonesian coal. Indonesian coal will be inferior quality coal (GCV of
4,000 kcal/kg) and boilers for Krishnapatnam UMPP will be designed accordingly.
Management has guided for commissioning of first unit by September 2013.
􀁠 Tilaiya UMPP (3,960 MW) – the project is yet to achieve financial closure. Management
has indicated that production from Tilaiya coal block will likely commence by 2013. Peak
production from the project will be 40 mtpa, part of which will be used to fuel expansion
at Tilaiya.
􀁠 Chitrangi (3,960 MW) – the project is yet to achieve financial closure and acquire the
entire land for the plant. Project will use excess coal from captive coal blocks allocated for
Sasan UMPP. Management has guided for commissioning of first unit by September 2013.