JPMorgan, :: Reliance Power- Strong operating performance, but stock remains expensive

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Reliance Power
Underweight
RPOL.BO, RPWR IN
Strong operating performance, but stock remains expensive


RPWR’s  Rosa  plant  (600MW)  based  in  UP  reported  a  strong  PLF  of  91%  and
PAF of 94% in the June quarter, in line with expectations. This was despite June
being a monsoon month and, of late, SEBs  reducing  power  from imported coalbased gencos like Adani and JSW. Jun-q EBITDA was 12% ahead of expectation
while  PAT  of  Rs1.96B  was  well  ahead  of  our  est.  of  Rs1.26B,  higher  other
income and lower tax rate contributing to the beat.
 Rosa  benefits  from  use  of  market-priced  coal. Rosa  reported  a  PAT  of
Rs1.1B  benefiting  from  a lower  station  heat  rate  on  using imported/e-auction
coal and PLF  based incentives. Management  guided to Rs2.75-3B  of PAT  for
the  year  (well above  our  estimate  of Rs1.4B with an  80% PLF) implying 30-
33% return on invested equity for this cost-plus project.
 Continued bullishness on project pipeline. At the analyst meet, management
was  once  again  positive  on  gas  availability for  its  Samalkot  plant to  meet
requirement for ~70% PLF. On the other hand, companies like GMR and GVK
have  cited difficulties in  gas availability. Since  tariffs  in South  India  are
relatively  higher,  top  ups  from  LNG  are  also  an  option.  Commissioning
schedules  for  under-construction  projects  (Butibori, Rosa  2,  Samalkot,  Sasan)
and pipeline projects (Tilaiya, Chitrangi) were maintained.
 Krishnapatnam  project  was  the  centre  of  discussion. Reliance  Power  has
been  lobbying  to  renegotiate  the  PPA,  given the  change  in  regulation  by  the
Indonesian  Govt  on  establishing  a  minimum  reference  price  for  coal  exports,
making the project unviable. The company has stalled all activity  on the project
and as per the PPA, ~Rs3B of penalties are applicable if the performance is not
as  per contract  - a small amount  for a Rs175B  project. However management
was  clear  that  the  Indonesian  Govt  was  not  interested  in  only  the  requisite
royalties and taxes (an opp stance taken by Adani) and the applicable reference
price AND consequent duties/taxes are to be levied (reiterated by TPWR in its
last con call).
 Maintain Mar-12  PT  of  Rs90  and  UW  rating. RPWR  trades  at  16x  FY13
P/E, well ahead of other IPPs. Given the company’s back ended pipeline, delays
in  project  execution,  questions  on  profitability  of  Krishnapatnam  UMPP
(increase  in  Indo  coal  prices)  and  uncertainty  of  gas  supply  for  the  upcoming
Samalkot project (2.4GW) we think the premium is not justified. Maintain UW
rating.