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FY12-14 an important phase in growth trajectory
EPC to be key near-term earnings driver; assuming status quo for regulatory earnings
Reliance Infrastructure (RELI) has been facing several legal/regulatory issues in its
Mumbai/Delhi distribution business, and execution/clearance issues for its power/
infrastructure business. Such issues have also partially impacted its EPC business in
the past. Given that its subsidiary, Reliance Power will be adding ~16GW of power projects
and RELI will be commissioning infrastructure projects of Rs230b over FY12-14, this
period will mark an important phase in its growth trajectory. We believe that
transformation/change the company's outlook is contingent on its successful transition
through this phase. We assume status quo in its regulated business earnings. We
maintain our Buy recommendation, with SOTP-based target price of Rs879.
Near-term uncertainties have impacted business outlook
RELI has been facing several business headwinds: (1) Mumbai distribution business
license expiry in August 2011 and unrecovered tariff arrears, (2) Delhi distribution
business facing cash flow issues, given tariff under-recovery, (3) EPC business traction
subject to progress of power and infrastructure business, which in-turn faces possible
legal/regulatory issues and execution delays. In addition, there are market
apprehensions on the nature of investments of surplus funds and impending grouplevel
issues.
FY12-14 an important phase in growth trajectory
FY12-14 will be an important phase in RELI's growth trajectory, given the planned
commissioning of large-scale power and infrastructure assets during this period.
Reliance Power (45% subsidiary) expects operating capacity to expand to ~16GW
by FY15. In the infrastructure development business, RELI plans to commission
cumulative projects worth Rs230b during this period. Accelerated project execution
will also accelerate momentum in the EPC division, providing a virtuous growth cycle.
However, execution remains a key challenge and is contingent on several external
factors.
EPC to be key near-term earnings driver; assuming status quo for
regulatory earnings
Till FY13, the EPC business will drive RELI's standalone earnings, with the regulatory
business facing headwinds. We expect the EPC business to report revenue CAGR of
53% and EBIT CAGR of 30% over FY11-13. We assume status quo in RELI's regulated
earnings and believe that even in the event of an adverse judgment, the 'wire business'
earnings will not be impacted.
Valuations/buy back provide comfort
We expect RELI to report a net profit of Rs12b (up 11%) in FY12 and Rs14.4b (up
20%) in FY13. The stock has significantly underperformed peers/broader indices.
Commencement of Rs10b buy back (up to Rs725/share) and fund infusion of ~Rs40b
(Rs918/share) by the promoters provide downside support. We maintain our Buy
recommendation, with SOTP-based target price of Rs879.
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