Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
If Reliance Power builds out its planned 24GW of coal-fired generation capacity over the next five years,
we believe the share price could triple. Equally, Reliance Power may be merged with Reliance
Infrastructure at a discount to market value the same way that Reliance Natural Resources was merged
with Reliance Power in July 2010. We have no way to assess the probability of the latter event. But,
dismissing the best- and worst-case scenario, we cannot justify a valuation less than INR 80 given
operational and construction competence and an attractive portfolio. Upgrade to Market-Perform.
If Reliance Power continues to evolve into a dull-but-steady power company, the stock could be worth
~INR240 per share. The company is building power stations on time and on budget in a market that
needs cheap electricity. Reliance Power operates its one existing power station at high utilization and has
secured low-cost fuel supply in a market where obtaining inexpensive coal is famously difficult. The
company's business model is based on becoming the low cost provider of electricity and assumes – or is
even driving - a low-priced electricity market in India.
We like the sharp-elbowed style in dealings with third parties. The company's decision to bid
aggressively for the Sasan UMPP and then use coal from Sasan to fuel other power stations - effectively
for free – has, to put it politely, real flair. Similarly, the company's implicit threat to abandon its
Krishnapatnam UMPP unless it receives a tariff increase so that it can pay more to its wholly owned coal
mining subsidiary in Indonesia for its own coal – is, simultaneously, infuriatingly illogical… and
potentially highly accretive to shareholder value.
The risk is that this approach carries over to dealings with minority shareholders. The Anil Ambani
group's history with minority shareholders is poor. In July 2010, Reliance Natural Resources was
merged into Reliance Power at a 31% discount to its share price. Reliance ADA group controlled 54.8%
of RNRL stock and RNRL was, at the time of the merger, down over 40% from its high the previous
summer. Today, Reliance ADA group controls 80.4% of Reliance Power and Reliance Power is down
45% over the past twelve months. We have no way of quantifying the probability of an intra-group
merger occurring with Reliance Power at a discount to market value. But given the history in this group,
the risk is not zero.
Discounting the worst- and the best-case scenarios, we estimate the stock is worth INR80 per share.
We are valuing the stock based on a liquidation value, using the company's to-date capital spending of
INR 150B, and assuming these assets could be sold at a P/B of ~1.5x (NTPC trades at 2x book).
Investment Conclusion
In our view, the Indian power generation sector is heading for an extended period of overcapacity. The
sector's moderate success in developing new projects (~12GW in the last year) is outstripping Coal India's
ability to produce coal, the Ministry of Railways's ability to transport the coal and the distribution sector's
ability to pay for all the electricity the generation sector could produce. The consequence is falling
utilization rates and falling merchant power prices.
Reliance Power is, to an extent, shielded from these risks as it has signed long term power purchase
agreements with customers, limiting exposure to merchant electricity prices and is developing its own coal
mining facilities both in Indonesia and in India. In our view, the stock is already pricing in risks from
uncertainty of fuel supply, execution of new projects, financial health of the State Electricity Boards, and
dilution of existing holders through future equity issuances.
Accordingly, we are upgrading the stock to Market-perform. We had previously valued the stock on a DCF
basis employing all of the company's guidance around capital spending, utilization and pricing. We
believed, based on cash burn implied from that guidance, that it was likely that Reliance Power would seek
additional equity and calculated share price based on that assumption. Even using the company guidance,
we reached a valuation that – for most of the last fifteen months – implied an "Underperform" rating.
Given the sell-off in the stock since the end of July, we are now valuing the stock based on current
liquidation value and assuming a P/B of ~1.5x, which gives us a value of ~INR 80 per share and a Marketperform rating. We remain concerned about the AGA group companies' poor history with minority
shareholders. Therefore, notwithstanding the clear upside to valuation if the company executes its stated
expansion plan, we remain cautious on the stock.
We are lowering our FY2012 EPS estimate from INR 4.09 to INR 3.10, and lowering our FY2013 EPS
estimate from INR 14.36 to INR 10.81, based on the continued decline in merchant power pricing. We are
lowering our weighted average tariff to ~INR2.20 per kWh by December 2014 from the previous ~INR2.60
per kWh to reflect this deterioration in power pricing.
We are rate NTPC Market-perform with a target price INR 190. Given NTPC's regulated rate of return
business, we believe that the upside to current valuation is limited.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
If Reliance Power builds out its planned 24GW of coal-fired generation capacity over the next five years,
we believe the share price could triple. Equally, Reliance Power may be merged with Reliance
Infrastructure at a discount to market value the same way that Reliance Natural Resources was merged
with Reliance Power in July 2010. We have no way to assess the probability of the latter event. But,
dismissing the best- and worst-case scenario, we cannot justify a valuation less than INR 80 given
operational and construction competence and an attractive portfolio. Upgrade to Market-Perform.
If Reliance Power continues to evolve into a dull-but-steady power company, the stock could be worth
~INR240 per share. The company is building power stations on time and on budget in a market that
needs cheap electricity. Reliance Power operates its one existing power station at high utilization and has
secured low-cost fuel supply in a market where obtaining inexpensive coal is famously difficult. The
company's business model is based on becoming the low cost provider of electricity and assumes – or is
even driving - a low-priced electricity market in India.
We like the sharp-elbowed style in dealings with third parties. The company's decision to bid
aggressively for the Sasan UMPP and then use coal from Sasan to fuel other power stations - effectively
for free – has, to put it politely, real flair. Similarly, the company's implicit threat to abandon its
Krishnapatnam UMPP unless it receives a tariff increase so that it can pay more to its wholly owned coal
mining subsidiary in Indonesia for its own coal – is, simultaneously, infuriatingly illogical… and
potentially highly accretive to shareholder value.
The risk is that this approach carries over to dealings with minority shareholders. The Anil Ambani
group's history with minority shareholders is poor. In July 2010, Reliance Natural Resources was
merged into Reliance Power at a 31% discount to its share price. Reliance ADA group controlled 54.8%
of RNRL stock and RNRL was, at the time of the merger, down over 40% from its high the previous
summer. Today, Reliance ADA group controls 80.4% of Reliance Power and Reliance Power is down
45% over the past twelve months. We have no way of quantifying the probability of an intra-group
merger occurring with Reliance Power at a discount to market value. But given the history in this group,
the risk is not zero.
Discounting the worst- and the best-case scenarios, we estimate the stock is worth INR80 per share.
We are valuing the stock based on a liquidation value, using the company's to-date capital spending of
INR 150B, and assuming these assets could be sold at a P/B of ~1.5x (NTPC trades at 2x book).
Investment Conclusion
In our view, the Indian power generation sector is heading for an extended period of overcapacity. The
sector's moderate success in developing new projects (~12GW in the last year) is outstripping Coal India's
ability to produce coal, the Ministry of Railways's ability to transport the coal and the distribution sector's
ability to pay for all the electricity the generation sector could produce. The consequence is falling
utilization rates and falling merchant power prices.
Reliance Power is, to an extent, shielded from these risks as it has signed long term power purchase
agreements with customers, limiting exposure to merchant electricity prices and is developing its own coal
mining facilities both in Indonesia and in India. In our view, the stock is already pricing in risks from
uncertainty of fuel supply, execution of new projects, financial health of the State Electricity Boards, and
dilution of existing holders through future equity issuances.
Accordingly, we are upgrading the stock to Market-perform. We had previously valued the stock on a DCF
basis employing all of the company's guidance around capital spending, utilization and pricing. We
believed, based on cash burn implied from that guidance, that it was likely that Reliance Power would seek
additional equity and calculated share price based on that assumption. Even using the company guidance,
we reached a valuation that – for most of the last fifteen months – implied an "Underperform" rating.
Given the sell-off in the stock since the end of July, we are now valuing the stock based on current
liquidation value and assuming a P/B of ~1.5x, which gives us a value of ~INR 80 per share and a Marketperform rating. We remain concerned about the AGA group companies' poor history with minority
shareholders. Therefore, notwithstanding the clear upside to valuation if the company executes its stated
expansion plan, we remain cautious on the stock.
We are lowering our FY2012 EPS estimate from INR 4.09 to INR 3.10, and lowering our FY2013 EPS
estimate from INR 14.36 to INR 10.81, based on the continued decline in merchant power pricing. We are
lowering our weighted average tariff to ~INR2.20 per kWh by December 2014 from the previous ~INR2.60
per kWh to reflect this deterioration in power pricing.
We are rate NTPC Market-perform with a target price INR 190. Given NTPC's regulated rate of return
business, we believe that the upside to current valuation is limited.
No comments:
Post a Comment