Reliance Infrastructure: Takeaways from India Infrastructure Conference- Overcoming Many Challenges  Citi

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Reliance Infrastructure (RLIN.BO)
Alert: Takeaways from India Infrastructure Conference: Reliance
Infrastructure - Overcoming Many Challenges
 Significant improvement in Mumbai distribution business — Renewal
of distribution license for 25 more years has removed uncertainty. Now regulations are
clear that distribution license and distribution assets are different and R-Infra can
decide to let any other distribution license holder (except Tata Power) use its
network without regulatory interference on mutually agreed commercial terms at its
own discretion. Regulatory assets (including carrying costs) are now Rs35bn and have
been approved by regulator. R-Infra has proposed to the regulator to recover these
assets over six years. If allowed, it will result in total additional cash flows of Rs44bn
(including additional carrying costs) over the next six years. With decline in load from
1300MW to 1000MW, power purchase costs have come down and regulator has
approved levy of cross-subsidy charge on customers migrating to Tata Power. As a
result, migration of customers to Tata Power has almost come to standstill. Regulatory
equity at Rs22bn.
 Delhi distribution financial health affected delay in tariff hikes — Before the last
tariff hike of 22% in September 2011, there were no tariff hikes for six years. As a result
regulatory assets end FY11 were to the tune of Rs100bn (Rs70bn till FY09 approved
by regulator). Debt on books of distribution companies is ~Rs65bn. Now IDBI bank has
given a package of Rs50bn to be funded in debt equity ratio of 80:20. Rs30bn will be
used to pay generators and Rs20bn for operations. Regulatory equity (R-Infra's share)
is Rs24bn. R-Infra has communicated to the government that it is prepared to infuse its
share of equity as soon as Delhi government puts its share
 Other projects — Mumbai Metro 1 is likely to be operational by December 2012. Due
to delay, costs have increased and concession period has been extended by 1 yr. RInfra
has started collecting toll on Trichy - Dindugal road from today and now 5 roads
(out of 11) are operational. Company expects to have 10 operational roads by FY12
end.
 Maintain Buy - Adj cons BV of Rs627 provides valuation support — R-Infra’s FY11
consolidated BV was Rs883/ share. Even if we knock off investments in preference
shares/ ICDs and regulated assets in Delhi/ Mumbai from the same adjusted
consolidated BV is still Rs627/ share.