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Execution slippages across businesses, ADAG overhang, and weak sentiment
for electricity distcoms has caused the stock to correct by 70% over the past
two years. At current valuations, we think the correction phase is drawing to
an end, and any improvement in above parameters could constitute stock
catalysts. We upgrade RELI to OW.
RELI’s residual value1, at Rs27B, implying an EV/EBITDA of 5.3x
FY12 earnings, is at its lowest since RPWR became a significant sub
(circa Jan-08). We attribute this de-rating to 1) overhang on ADAG group
following the “2G scam”, 2) jitters at electricity distribution business
(Delhi, Mumbai) owing to unremunerative tariffs, receivables and
competition from TPWR, 3) execution slippages on infra BOTs and power
projects, impacting earnings, 3) non-transparency of RELI’s balance sheet /
investments on a quarterly basis, 4) potential margin risks for EPC business.
We think the negatives are in the price, and upgrade RELI to OW with
a revised PT of Rs575 (down from Rs825 earlier): Catalysts include: 1)
power distribution reforms; 2) the ability to source cheaper power for
distribution businesses, once LT PPAs start kicking off (expected FY12); 3)
pick-up in RPWR project execution, a catalyst for the EPC business, which
appears to be in sight; and 4) better execution and profitability of infra
BOTs, which is also visible, in our view.
Downside risks: (1) Continued use of RELI’s cash flows to fund group
plans. (2) Any earnings hit that EPC business might have to take in the
event of cost overruns for RPWR projects. (3) Continued execution delays
at infra BOTs.
Our estimate cuts, at 40% for FY12/13/14 are steep, and arise from
execution delay at power and infra BOTs and lower-than-expected traffic.
We think the stock price decline so far already factors in these potential
cuts. Our new SOP-based PT of Rs575, following these earnings cuts, gets
half of its value from RPWR stake and includes 20% conglomerate discount.
click below for Sector update
R-Infra, Adani and Jaiprakash - A stark price-value mismatch ::JPMorgan
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Execution slippages across businesses, ADAG overhang, and weak sentiment
for electricity distcoms has caused the stock to correct by 70% over the past
two years. At current valuations, we think the correction phase is drawing to
an end, and any improvement in above parameters could constitute stock
catalysts. We upgrade RELI to OW.
RELI’s residual value1, at Rs27B, implying an EV/EBITDA of 5.3x
FY12 earnings, is at its lowest since RPWR became a significant sub
(circa Jan-08). We attribute this de-rating to 1) overhang on ADAG group
following the “2G scam”, 2) jitters at electricity distribution business
(Delhi, Mumbai) owing to unremunerative tariffs, receivables and
competition from TPWR, 3) execution slippages on infra BOTs and power
projects, impacting earnings, 3) non-transparency of RELI’s balance sheet /
investments on a quarterly basis, 4) potential margin risks for EPC business.
We think the negatives are in the price, and upgrade RELI to OW with
a revised PT of Rs575 (down from Rs825 earlier): Catalysts include: 1)
power distribution reforms; 2) the ability to source cheaper power for
distribution businesses, once LT PPAs start kicking off (expected FY12); 3)
pick-up in RPWR project execution, a catalyst for the EPC business, which
appears to be in sight; and 4) better execution and profitability of infra
BOTs, which is also visible, in our view.
Downside risks: (1) Continued use of RELI’s cash flows to fund group
plans. (2) Any earnings hit that EPC business might have to take in the
event of cost overruns for RPWR projects. (3) Continued execution delays
at infra BOTs.
Our estimate cuts, at 40% for FY12/13/14 are steep, and arise from
execution delay at power and infra BOTs and lower-than-expected traffic.
We think the stock price decline so far already factors in these potential
cuts. Our new SOP-based PT of Rs575, following these earnings cuts, gets
half of its value from RPWR stake and includes 20% conglomerate discount.
click below for Sector update
R-Infra, Adani and Jaiprakash - A stark price-value mismatch ::JPMorgan
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