Reliance Power - In a sweet spot but valuations still steep, maintain UW:: JPMorgan,

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RPWR’s  steep  valuation  and  gas  constraints  still  make  us  skeptical:  any
delay in gas availability could result in cost escalations at Samalkot, which
the company is vigorously pursuing. On the positive side, Rosa’s operating
performance  has  been  stronger  than  expected.  With  large  captive  coal
reserves,  RPWR  does  have  its  advantages.  Passage  of  time,  news  of  gas
availability  and  progress  on  Chitrangi  project  would  make  us  more
positive.
 Rosa  is  in  a  sweet  spot:  RPWR’s  lone  operating  600MW  plant  is
running  efficiently  (91%  PLF).  Blending  imported  coal  has  pushed  up
tariff for this regulated-return plant to Rs4.45, but demand is high from
home-state  UP,  which  goes  into  election  next  year.  Availability-based
incentives and savings on O&M have caused RoIE of 48% in 1Q, much
above  assured  15.5%. We  doubt  if  this  can  sustain,  but  upgrade  FY12
estimates by 6%, implying a 23% RoIE on Rosa.
 Krishnapatnam  UMPP  - an  onerous  PPA:  Like  Adani  and  TPWR,
Krishnapatnam  could  see  bad economics  with  market-based  coal
imports. But unlike the former, there are no debt drawdowns, investment
is limited to  Rs18.8B  (mainly EPC advances to RELI and land), slated
completion  is  FY15  (leaving  more time  for  a  resolution)  and  mgmt. is
open to re-negotiate (albeit with penalty of Rs3B).
 Samalkot  – where  is  the  gas?  RPWR  is  going  full  steam  on
implementation  of  2.4GW  Samalkot  combined  cycle  plant,  despite
doubts on gas availability, and units are going live from Nov-11. We are
apprehensive  of  the  plant  idling/operating  below  optimum,  like  APbased IPPs did in 2005-07, resulting in debt servicing issues. RPWR has
invested  ~Rs8B  of  equity  in  the  project  and  according  to  management
will  soon  start  drawing  debt  from  its  EXIM  facility, incurring  30%  of
total capex by end of FY12.
 Still  not  comfortable  on  valuation: We  reduce FY13/14 estimates by
43/28%,  raising  fuel  prices  and  reducing tariff  assumptions  for  various
projects  where  there  is  less  clarity.  RPWR  is  trading  at  ~26x  FY13E
P/E, much above  sector average. But it is not as leveraged  (0.4x NDER
in  FY12E)  and  fuel  security is  superior. Chitrangi  (currently  not in  our
SOP)  could  add  huge  value  (~Rs42/share)  if  it  progresses  well,  posing
upside risk. Our new PT is Rs72, down from Rs90.