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Reliance Power (RPOL.BO): Sell but removed from Conviction List
What happened
We reiterate our Sell rating on Reliance Power, cutting our SOTP-based
target price to Rs70 from Rs91, for potential downside of 18%. Despite
its recent decline, we continue to remain negative on the stock, as we
still consider it expensive. We do not believe the company’s ROE will
improve sufficiently to justify its current P/B until the commissioning of
the Chitrangi power project. We remove Reliance Power from our
Conviction Sell list. Since we added it to our Conviction Sell list on
October 26, 2010, the stock has declined by 46.7%, while BSE Sensex fell
15.1%. Over the past 12 months, the stock has fallen 45.5% vs. the
index’s 8.0% decline.
We reduce our SOTP-based target price, primarily given that we have
eliminated potential value from the Krishnapatnam power project. News
flow [business standard] indicates that the company may not proceed
with construction of the project unless it receives some relief in the form
of tariff hike (from distribution companies) to compensate for potentially
higher fuel costs. (Higher fuel costs are the likely outcome if the recently
proposed Indonesian mining law amendment is implemented).
Our calculations indicate that the Case 2 bid of Krishnapatnam project
implies a delivered cost of US$45/ton.
Current view
Our new target price of Rs 70 reflects our removal of the Krishnapatnam
project from our SOTP valuation, which faces high execution risk due to
a proposed change in Indonesian law that would mandate all parties to
sell coal at market prices. According to management, if this regulation
passes, it would not be able to meet the conditions set by the lenders; in
turn, the cash flow requirements of the project would be affected. We
also update our model to reflect the FY2011 annual report and valuation
of individual projects, which slightly changed due to debt and capex
amounts incurred during the year.
Key upside risks to our estimates and valuation are the following:
1) completion of projects ahead of schedule; 2) any commentary that
indicates that Reliance Power could transport coal for their
Krishnapatnam project at the negotiated prices instead of benchmark
prices; 3) news flow that the company can sell coal from the Sasan and
Krishnapatnam mines ahead of the commissioning of the project; and 4)
if the distribution utilities allow RPWR to revise the PPA of the
Krishnapatnam project allowing them higher fuel costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Power (RPOL.BO): Sell but removed from Conviction List
What happened
We reiterate our Sell rating on Reliance Power, cutting our SOTP-based
target price to Rs70 from Rs91, for potential downside of 18%. Despite
its recent decline, we continue to remain negative on the stock, as we
still consider it expensive. We do not believe the company’s ROE will
improve sufficiently to justify its current P/B until the commissioning of
the Chitrangi power project. We remove Reliance Power from our
Conviction Sell list. Since we added it to our Conviction Sell list on
October 26, 2010, the stock has declined by 46.7%, while BSE Sensex fell
15.1%. Over the past 12 months, the stock has fallen 45.5% vs. the
index’s 8.0% decline.
We reduce our SOTP-based target price, primarily given that we have
eliminated potential value from the Krishnapatnam power project. News
flow [business standard] indicates that the company may not proceed
with construction of the project unless it receives some relief in the form
of tariff hike (from distribution companies) to compensate for potentially
higher fuel costs. (Higher fuel costs are the likely outcome if the recently
proposed Indonesian mining law amendment is implemented).
Our calculations indicate that the Case 2 bid of Krishnapatnam project
implies a delivered cost of US$45/ton.
Current view
Our new target price of Rs 70 reflects our removal of the Krishnapatnam
project from our SOTP valuation, which faces high execution risk due to
a proposed change in Indonesian law that would mandate all parties to
sell coal at market prices. According to management, if this regulation
passes, it would not be able to meet the conditions set by the lenders; in
turn, the cash flow requirements of the project would be affected. We
also update our model to reflect the FY2011 annual report and valuation
of individual projects, which slightly changed due to debt and capex
amounts incurred during the year.
Key upside risks to our estimates and valuation are the following:
1) completion of projects ahead of schedule; 2) any commentary that
indicates that Reliance Power could transport coal for their
Krishnapatnam project at the negotiated prices instead of benchmark
prices; 3) news flow that the company can sell coal from the Sasan and
Krishnapatnam mines ahead of the commissioning of the project; and 4)
if the distribution utilities allow RPWR to revise the PPA of the
Krishnapatnam project allowing them higher fuel costs.
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