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Reliance Infrastructure
Overhang removed
Mumbai license renewal seems probable
Lower power costs to check accumulation of regulatory assets
Execution concerns persist, earnings momentum key
Maintain BUY with SoTP-based TP of INR1,077
Probable extension of license
Of the three scenarios for the Mumbai
distribution business that we highlighted in
our report One for the believers (15 April
2011), we believe the likelihood of
extension of Reliance Infrastructure’s (RInfra)
license is likely. MERC recently
issued a public notice inviting objections
to its decision to extend R-Infra’s license.
R-Infra’s management highlighted that the
regulator has taken this decision after
considering all its options and consulting
the Solicitor General of India on legal
issues. In summary, there is a high
likelihood of R-Infra getting an extension
of its license for additional 25 years.
Delhi Metro site visit – lower capex increases valuation
We also visited R-Infra’s Delhi Airport Metro Express and came away
marginally positive. The company incurred INR24.5b in capex, 12.5%
lower than our estimate. However, the current daily passenger traffic of
12,000 per day is about 20% below our estimate. The company has also
leased out 20% of 6,000 sq m leasable area. Net, we are increasing
Delhi Metro’s valuation by 22% to INR22/share.
Stock at discount to book, earnings momentum required
Fundamentally, we believe the stock is trading at a discount to its intrinsic
value, primarily due to execution concerns and negative sentiment on the
progress of its regulatory and infrastructure assets. The company’s FY11
book value of INR958 per share implies that the stock is trading at a 40%
discount to book. The R-Power stake contributes 36% to our fair value for
R-Infra where execution concerns and fuel availability has been an
overhang. Additionally, negative press about the company’s infrastructure
assets – metros and sea link – has hurt investor sentiment.
Fundamentally, we believe a strong earnings profile from the assets
portfolio will be a positive share-price catalyst. Separately, we believe
easing macroeconomic conditions could result in significant re-rating.
Valuation
We value R-Infra’s stock on an SOTP basis at INR1,077. The standalone
business contributes INR467 (including EPC, Mumbai distribution and net
cash). The Reliance Power stake (38.4%) contributes INR391. All other
projects (Delhi distribution, highways, metros and the WRSS
transmission project) contribute INR219. Key risks to our TP are: poor
execution, less traffic, lower valuation for R-Power, and inability to
recover cash advances.
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 �� ��
Reliance Infrastructure
Overhang removed
Mumbai license renewal seems probable
Lower power costs to check accumulation of regulatory assets
Execution concerns persist, earnings momentum key
Maintain BUY with SoTP-based TP of INR1,077
Probable extension of license
Of the three scenarios for the Mumbai
distribution business that we highlighted in
our report One for the believers (15 April
2011), we believe the likelihood of
extension of Reliance Infrastructure’s (RInfra)
license is likely. MERC recently
issued a public notice inviting objections
to its decision to extend R-Infra’s license.
R-Infra’s management highlighted that the
regulator has taken this decision after
considering all its options and consulting
the Solicitor General of India on legal
issues. In summary, there is a high
likelihood of R-Infra getting an extension
of its license for additional 25 years.
Delhi Metro site visit – lower capex increases valuation
We also visited R-Infra’s Delhi Airport Metro Express and came away
marginally positive. The company incurred INR24.5b in capex, 12.5%
lower than our estimate. However, the current daily passenger traffic of
12,000 per day is about 20% below our estimate. The company has also
leased out 20% of 6,000 sq m leasable area. Net, we are increasing
Delhi Metro’s valuation by 22% to INR22/share.
Stock at discount to book, earnings momentum required
Fundamentally, we believe the stock is trading at a discount to its intrinsic
value, primarily due to execution concerns and negative sentiment on the
progress of its regulatory and infrastructure assets. The company’s FY11
book value of INR958 per share implies that the stock is trading at a 40%
discount to book. The R-Power stake contributes 36% to our fair value for
R-Infra where execution concerns and fuel availability has been an
overhang. Additionally, negative press about the company’s infrastructure
assets – metros and sea link – has hurt investor sentiment.
Fundamentally, we believe a strong earnings profile from the assets
portfolio will be a positive share-price catalyst. Separately, we believe
easing macroeconomic conditions could result in significant re-rating.
Valuation
We value R-Infra’s stock on an SOTP basis at INR1,077. The standalone
business contributes INR467 (including EPC, Mumbai distribution and net
cash). The Reliance Power stake (38.4%) contributes INR391. All other
projects (Delhi distribution, highways, metros and the WRSS
transmission project) contribute INR219. Key risks to our TP are: poor
execution, less traffic, lower valuation for R-Power, and inability to
recover cash advances.
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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