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Reliance Infra reported PAT of Rs4.05B, well-ahead of Rs3.1B
estimate. The PBT is however inflated by Rs2.37B, as the company
wrote back excess depreciation of previous years, following an
accounting change. Correspondingly, we believe the tax provision was
higher and hence adjusted PAT is in-line with what we had expected.
The composition of profits, though, differs from expectation: the
company has recognized higher EPC income (up 295%) and margins
(14.6%, up 220bps). Prima facie, this suggests strong execution of
RPWR projects (which constitute most of the OB), but this portion has
been volatile and may not be an indicator of sustainable margins. On the
other hand, electricity distribution EBIT, adjusted for the one-off
adjustment discussed above, seems to have declined 38%. It is surprising
that a business with assured return on capital employed can see sharp
profit drop. The EBIT of the infrastructure business has increased
sharply, due to Delhi Metro commissioning, but interest cost has
witnessed 58% increase as the benefit of capitalizing interest has ceased.
Silver lining from regulatory positives: MERC has approved the
recovery of Rs23B tariff receivables, but the timing of the recovery is
likely 5-6 years. MERC has also in-principle approved a cross-subsidy
surcharge recovery from migrating customers, but not specified the
quantum yet. There is no good news yet from Delhi distribution, where
we estimate Rs12B+ tariff receivables.
The stock has corrected sharply and is trading below book. We
however think the following catalysts are necessary for it to converge
towards fair value, and hence maintain Neutral: 1) ability to collect
tariff dues and drastic distribution reforms, 2) higher confidence in
execution, both RPWR generation and infrastructure projects, 3)
evidence of infra SPVs making money and 4) confidence in RELI’s
B/S and use of cash. The annual report of the company is not out yet.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Infra reported PAT of Rs4.05B, well-ahead of Rs3.1B
estimate. The PBT is however inflated by Rs2.37B, as the company
wrote back excess depreciation of previous years, following an
accounting change. Correspondingly, we believe the tax provision was
higher and hence adjusted PAT is in-line with what we had expected.
The composition of profits, though, differs from expectation: the
company has recognized higher EPC income (up 295%) and margins
(14.6%, up 220bps). Prima facie, this suggests strong execution of
RPWR projects (which constitute most of the OB), but this portion has
been volatile and may not be an indicator of sustainable margins. On the
other hand, electricity distribution EBIT, adjusted for the one-off
adjustment discussed above, seems to have declined 38%. It is surprising
that a business with assured return on capital employed can see sharp
profit drop. The EBIT of the infrastructure business has increased
sharply, due to Delhi Metro commissioning, but interest cost has
witnessed 58% increase as the benefit of capitalizing interest has ceased.
Silver lining from regulatory positives: MERC has approved the
recovery of Rs23B tariff receivables, but the timing of the recovery is
likely 5-6 years. MERC has also in-principle approved a cross-subsidy
surcharge recovery from migrating customers, but not specified the
quantum yet. There is no good news yet from Delhi distribution, where
we estimate Rs12B+ tariff receivables.
The stock has corrected sharply and is trading below book. We
however think the following catalysts are necessary for it to converge
towards fair value, and hence maintain Neutral: 1) ability to collect
tariff dues and drastic distribution reforms, 2) higher confidence in
execution, both RPWR generation and infrastructure projects, 3)
evidence of infra SPVs making money and 4) confidence in RELI’s
B/S and use of cash. The annual report of the company is not out yet.
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