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Reliance Infrastructure (RELI)
Utilities
Step-up in execution by construction division. Reliance Infrastructures (RELI)
reported a step-up increase in execution at the construction division, further aided by
write-back of depreciation (to align with regulatory norms) yielding a strong earnings
growth in the standalone business. We have revised our fair value estimate to
Rs920/share (Rs975 previously) factoring lower value for RELI’s ownership in Reliance
Power, though note that clarity on accounting of cash and equivalents remains key to
stock performance.
EPC business and prior-period write-backs drive outperformance
RELI reported standalone revenues of Rs33.7 bn (58% , 53% qoq), operating profit of Rs4.1 bn (-
153% yoy, 188% qoq) and net income of Rs4.3 bn (75% yoy, -14% qoq) against our estimates of
Rs25.9 bn, Rs2.2 bn and Rs2.8 bn, respectively. Strong operational outperformance was driven by
significantly higher-than-estimated EPC revenues of Rs18.8 bn (against our estimate of Rs9.3 bn)
along with gross margins of 20% against our estimate of 15%. Reported net income was further
boosted by prior-period depreciation write-back of Rs2.3 bn on account of retrospective change in
depreciation rate and corresponding lower-than-estimated depreciation during 1QFY12. We
discuss key highlights of the results in detail in a subsequent section
Improving visibility on infrastructure earnings
RELI reported consolidated net revenues of Rs49 bn (28% yoy, 29% qoq), EBITDA of Rs5 bn (23%
yoy, 50% qoq) and PAT of Rs4 bn (8% yoy, -1% qoq). We note that incremental earnings on a
consolidated basis were contributed by the Delhi distribution business, four operational road
projects and Delhi Metro project. Revenues from infrastructure projects jumped 121% sequentially
on account of commencement of tolling from Hosur Krishnagiri road and full quarter contribution
from Delhi Metro line. Effective tax rate increased to 45% on account of deferred tax component
of Rs1.3 bn at the standalone level.
Maintain rating with a revised target price of Rs920/share
We maintain our BUY rating with a revised target price of Rs920/share (previously Rs975/share) as
we adjust for revision in target price of Reliance Power (revised from Rs110/share to Rs88/share).
Our SOTP-based target price comprises—(1) Rs189/share from the existing generation,
transmission and distribution businesses, (2) Rs103/share for the EPC business, (3) Rs283/share for
38% stake in Reliance Power, (4) Rs55/share as the equity value of the BOT road projects underconstruction,
(5) Rs52/share for equity investment made in the various infrastructure projects and
(6) cash and investible surplus in books of Rs237/share. In our view, lack of clarity on cash and its
accounting will likely keep stock performance muted in the near term.
Highlights of 1QFY12 results
We summarize below some key highlights of 1QFY12 results
Sharp jump in EPC revenues. Standalone EPC revenues jumped 238% yoy, 96% qoq
while EBIT margin in EPC business was stable at 13.5% in 1QFY12. We note that sharp
uptick in EPC revenues could likely be on account of pick-up in execution for Reliance
Power’s projects. RELI’s order book stood at Rs280 bn as of June 2011 and includes six
power projects (9,900 MW), one transmission project (1,500 km) and six road projects
(570 km).
Change in depreciation rate. During the quarter, RELI changed its depreciation rates for
power business retrospectively from April 2009. Accordingly, prior-period depreciation
amounting to Rs2.27 bn (Rs2.26 bn a consolidated level) was written back during the
quarter and included in other income. Also, the impact on 1QFY12 depreciation was Rs96
mn (Rs108 mn at consolidated level).
Higher effective tax rate. RELI’s effective tax rate was significantly high at 37% (45% at
consolidated level) primarily on account of deferred tax component of Rs1.3 bn in
1QFY12. This would likely be on account of deferred taxes materialized due to
retrospective change in depreciation rates.
Mumbai distribution performance. RELI reported revenues of Rs11.9 bn (-15% yoy,
12% qoq) on sales of 1,815 MU (-15% yoy, 12% qoq) for the Mumbai distribution
business. RELI generated 1,154 MU (3% yoy, 2% qoq) from 500 MW Dahanu plant to
meet the demand for the distribution business and purchased another 1,023 MU at an
average price of Rs6.6/kwh. 15% yoy decline in unit sale of power is likely on account of
customer migration to TPWR network.
Regulatory relief for Mumbai distribution business
Recent order by Maharashtra Electricity Regulatory Commission (MERC) provided several
regulatory reliefs for RELI’s Mumbai distribution business. We summarize them below:
Recovery of regulatory assets. MERC approved recovery of Rs23 bn of regulatory assets
accumulated on account of revenue gaps in previous years (FY2007-11). Further, MERC
has ruled that the said approved regulatory assets (along with the carrying cost) will be
recovered from not just the existing RELI consumers but all those consumers who have
migrated to Tata Power supply but still on RELI’s wires (~97% of total migrated
consumers). In our view, this ruling not only lends better cash visibility from distribution
business but also reduces to an extant the tariff gap between RELI and Tata Power.
Cross subsidy surcharge. RELI has been contesting that since majority of the switchover
consumers are industrial and commercial that subsidizes the low-end and price sensitive
domestic consumers, migration to Tata Power supply has and will continue to burden the
consumers of RELI on account of loss on cross subsidy. RELI had accordingly applied for
levying a cross subsidy surcharge on consumers migrating to Tata Power network. MERC
has now approved the levy of cross subsidy surcharge on all consumers who have
migrated to Tata Power supply but still on RELI’s wires. Mechanism for calculation of
surcharge is yet to be finalized.
In our view, both these measures would reduce the gap between tariffs of RELI and Tata
Power and would help arrest the mass migration of consumers to Tata Power network.
Commencement of operations lends some visibility to infra revenues but overall
execution continues to be languid
RELI commenced commercial operations of its Delhi Metro from February 2012 and we note
that commissioning of Delhi Metro along with likely commissioning of road projects lend
visibility to earnings from Infrastructure portfolio in FY2012E. However, in our view,
execution remains languid at best with most of the road and transmission projects missing
their original guidance.
RELI is developing 25 projects with a total cost of Rs400 bn and is aggressively pursuing
other infrastructure opportunities. In our view, commissioning of these near-to-mid term
infra projects (especially the metro projects and the road projects) will likely drive
consolidated revenues of RELI in FY2012E and FY2013E.
Our earnings model currently factor earnings from 401 km of road projects (of which two
projects aggregating 97 km are already operational) being developed by the company in
Tamil Nadu for which we ascribe a value of Rs12.6 bn (Rs55/share). We value RELI’s balance
infrastructure projects at Rs52/share which includes book value of equity investments (1X P/B)
made in (1) Mumbai Metro (Rs1.72 bn), (2) CBD Tower (Rs1.63 bn), (3) transmission projects
(Rs3.4 bn) and (4) Delhi Metro (Rs7 bn). For Delhi Metro, management has guided for a
traffic of 30,000/day. Average fares would be Rs150 for journey from New Delhi Station and
IGI Airport.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Infrastructure (RELI)
Utilities
Step-up in execution by construction division. Reliance Infrastructures (RELI)
reported a step-up increase in execution at the construction division, further aided by
write-back of depreciation (to align with regulatory norms) yielding a strong earnings
growth in the standalone business. We have revised our fair value estimate to
Rs920/share (Rs975 previously) factoring lower value for RELI’s ownership in Reliance
Power, though note that clarity on accounting of cash and equivalents remains key to
stock performance.
EPC business and prior-period write-backs drive outperformance
RELI reported standalone revenues of Rs33.7 bn (58% , 53% qoq), operating profit of Rs4.1 bn (-
153% yoy, 188% qoq) and net income of Rs4.3 bn (75% yoy, -14% qoq) against our estimates of
Rs25.9 bn, Rs2.2 bn and Rs2.8 bn, respectively. Strong operational outperformance was driven by
significantly higher-than-estimated EPC revenues of Rs18.8 bn (against our estimate of Rs9.3 bn)
along with gross margins of 20% against our estimate of 15%. Reported net income was further
boosted by prior-period depreciation write-back of Rs2.3 bn on account of retrospective change in
depreciation rate and corresponding lower-than-estimated depreciation during 1QFY12. We
discuss key highlights of the results in detail in a subsequent section
Improving visibility on infrastructure earnings
RELI reported consolidated net revenues of Rs49 bn (28% yoy, 29% qoq), EBITDA of Rs5 bn (23%
yoy, 50% qoq) and PAT of Rs4 bn (8% yoy, -1% qoq). We note that incremental earnings on a
consolidated basis were contributed by the Delhi distribution business, four operational road
projects and Delhi Metro project. Revenues from infrastructure projects jumped 121% sequentially
on account of commencement of tolling from Hosur Krishnagiri road and full quarter contribution
from Delhi Metro line. Effective tax rate increased to 45% on account of deferred tax component
of Rs1.3 bn at the standalone level.
Maintain rating with a revised target price of Rs920/share
We maintain our BUY rating with a revised target price of Rs920/share (previously Rs975/share) as
we adjust for revision in target price of Reliance Power (revised from Rs110/share to Rs88/share).
Our SOTP-based target price comprises—(1) Rs189/share from the existing generation,
transmission and distribution businesses, (2) Rs103/share for the EPC business, (3) Rs283/share for
38% stake in Reliance Power, (4) Rs55/share as the equity value of the BOT road projects underconstruction,
(5) Rs52/share for equity investment made in the various infrastructure projects and
(6) cash and investible surplus in books of Rs237/share. In our view, lack of clarity on cash and its
accounting will likely keep stock performance muted in the near term.
Highlights of 1QFY12 results
We summarize below some key highlights of 1QFY12 results
Sharp jump in EPC revenues. Standalone EPC revenues jumped 238% yoy, 96% qoq
while EBIT margin in EPC business was stable at 13.5% in 1QFY12. We note that sharp
uptick in EPC revenues could likely be on account of pick-up in execution for Reliance
Power’s projects. RELI’s order book stood at Rs280 bn as of June 2011 and includes six
power projects (9,900 MW), one transmission project (1,500 km) and six road projects
(570 km).
Change in depreciation rate. During the quarter, RELI changed its depreciation rates for
power business retrospectively from April 2009. Accordingly, prior-period depreciation
amounting to Rs2.27 bn (Rs2.26 bn a consolidated level) was written back during the
quarter and included in other income. Also, the impact on 1QFY12 depreciation was Rs96
mn (Rs108 mn at consolidated level).
Higher effective tax rate. RELI’s effective tax rate was significantly high at 37% (45% at
consolidated level) primarily on account of deferred tax component of Rs1.3 bn in
1QFY12. This would likely be on account of deferred taxes materialized due to
retrospective change in depreciation rates.
Mumbai distribution performance. RELI reported revenues of Rs11.9 bn (-15% yoy,
12% qoq) on sales of 1,815 MU (-15% yoy, 12% qoq) for the Mumbai distribution
business. RELI generated 1,154 MU (3% yoy, 2% qoq) from 500 MW Dahanu plant to
meet the demand for the distribution business and purchased another 1,023 MU at an
average price of Rs6.6/kwh. 15% yoy decline in unit sale of power is likely on account of
customer migration to TPWR network.
Regulatory relief for Mumbai distribution business
Recent order by Maharashtra Electricity Regulatory Commission (MERC) provided several
regulatory reliefs for RELI’s Mumbai distribution business. We summarize them below:
Recovery of regulatory assets. MERC approved recovery of Rs23 bn of regulatory assets
accumulated on account of revenue gaps in previous years (FY2007-11). Further, MERC
has ruled that the said approved regulatory assets (along with the carrying cost) will be
recovered from not just the existing RELI consumers but all those consumers who have
migrated to Tata Power supply but still on RELI’s wires (~97% of total migrated
consumers). In our view, this ruling not only lends better cash visibility from distribution
business but also reduces to an extant the tariff gap between RELI and Tata Power.
Cross subsidy surcharge. RELI has been contesting that since majority of the switchover
consumers are industrial and commercial that subsidizes the low-end and price sensitive
domestic consumers, migration to Tata Power supply has and will continue to burden the
consumers of RELI on account of loss on cross subsidy. RELI had accordingly applied for
levying a cross subsidy surcharge on consumers migrating to Tata Power network. MERC
has now approved the levy of cross subsidy surcharge on all consumers who have
migrated to Tata Power supply but still on RELI’s wires. Mechanism for calculation of
surcharge is yet to be finalized.
In our view, both these measures would reduce the gap between tariffs of RELI and Tata
Power and would help arrest the mass migration of consumers to Tata Power network.
Commencement of operations lends some visibility to infra revenues but overall
execution continues to be languid
RELI commenced commercial operations of its Delhi Metro from February 2012 and we note
that commissioning of Delhi Metro along with likely commissioning of road projects lend
visibility to earnings from Infrastructure portfolio in FY2012E. However, in our view,
execution remains languid at best with most of the road and transmission projects missing
their original guidance.
RELI is developing 25 projects with a total cost of Rs400 bn and is aggressively pursuing
other infrastructure opportunities. In our view, commissioning of these near-to-mid term
infra projects (especially the metro projects and the road projects) will likely drive
consolidated revenues of RELI in FY2012E and FY2013E.
Our earnings model currently factor earnings from 401 km of road projects (of which two
projects aggregating 97 km are already operational) being developed by the company in
Tamil Nadu for which we ascribe a value of Rs12.6 bn (Rs55/share). We value RELI’s balance
infrastructure projects at Rs52/share which includes book value of equity investments (1X P/B)
made in (1) Mumbai Metro (Rs1.72 bn), (2) CBD Tower (Rs1.63 bn), (3) transmission projects
(Rs3.4 bn) and (4) Delhi Metro (Rs7 bn). For Delhi Metro, management has guided for a
traffic of 30,000/day. Average fares would be Rs150 for journey from New Delhi Station and
IGI Airport.
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