Improving operating performance
Reliance Infrastructure’s revenue declined 13.6% to Rs52.9 bn YoY (2.4% above our
estimate but 2.4% below Bloomberg estimate) as revenue from the EPC segment edged
lower. EBITDA fell 2.5% YoY to Rs7.75bn, but was 23%/20% above our/Bloomberg
consensus estimates, respectively, as revenue contribution from the high-margin
segments like road, power transmission projects surged coupled with decline in other
expenditure. RPAT grew 78% to Rs7.27bn YoY, which includes an exceptional gain of
Rs3.79bn on account of profit on sale of the shares of an associate company (Reliance
Power). Robust operating performance led to adjusted net profit of Rs4.29bn (~25%
above our and Bloomberg estimates). We have upgraded our earnings estimate by 3%
and 4% for FY13E and FY14E, respectively, to factor in the traction in infrastructure
business earnings. We have retained our Buy rating on the stock with a revised target
price of Rs665 from Rs652 earlier.
EPC revenue growth declines: For 3QFY13, EPC revenue declined 37% to Rs18.4bn YoY
(in line with estimates) due to subdued project execution run-rate following the completion of
some active projects and lower order book position. EBIT margin of the EPC segment stood
at 9.7%, down 100bps YoY and up 30bps QoQ. The order book currently stands at
Rs121.4bn (1.1x FY12 EPC revenue) comprising power generation, power transmission and
road projects.
Power distribution revenue edges higher on tariff hike: Power distribution revenue grew
6% YoY to Rs32.8bn driven by higher realisation on account of a 21% tariff hike in the Delhi
region, but volume remained muted due to the lean season. Energy sales in the Mumbai
region declined 5% to 1.5bn units YoY, while electricity volume in the Delhi region was flat at
3.37bn units YoY. Tariff revision process of the Mumbai power distribution company is
underway and it is likely to be approved by the regulator shortly.
Rise in revenue contribution from infrastructure projects - the trend likely to continue:
Revenue from infrastructure business improved 80% YoY and 38% QoQ to Rs1.52bn, driven
by commencement of incremental road projects. EBIT of the infrastructure segment improved
40% to Rs786mn QoQ (versus a loss of Rs212mn in 3QFY12). Currently, eight road projects
are revenue operational and we expect two more road projects to be commissioned in FY13E.
The company has resumed operations of Delhi Airport Metro Expressway after obtaining
necessary clearances. As much as 99% of the civil works of Mumbai metro rail project has
been completed, which is likely to be operational by 1QFY14. Six out of nine power
transmission lines of the WRSS project are generating revenue and the company expects
them to be fully operational by the end of FY13.
Retain Buy rating on the stock: We have revised our earnings estimates by 3%/4% for
FY13E/FY14E, respectively, to factor in higher income from infrastructure business compared
to our estimates. We have retained our Buy rating on the stock with a revised target price of
Rs665 from Rs652 earlier. We believe the completion of infrastructure projects leading to a
rise in infrastructure revenue, and recovery of regulatory assets next year are key triggers for
the stock’s outperformance likely in the next 12 months.
Conference call highlights
The company expects tariff hike in Mumbai power distribution business by March 2013. Regulatory
assets of Rs17.9bn (including carrying costs amounting to Rs36bn) have been approved by the power
regulator, which will be recovered amounting ~Rs7bn/year. The company has proposed the regulator to
recover regulatory assets by levying a surcharge (same is being done in Delhi distribution business) on
the prevailing tariff.
Regulatory assets in Delhi distribution business amounted to Rs50bn as of end-FY11 and filing has been
done to get approval of worth Rs40bn regulatory assets for FY12/FY13. The recent increase surcharge of
8% will help the company to recover regulatory assets worth Rs3.5bn in nine months. The company has
proposed to the power regulator a surcharge of 15%.
Delhi power Distribution Company is witnessing Rs10bn of under-recovery, which would be covered up in
the next tariff hike.
The company is facing hurdles in the WRSS transmission project related to Right of Way(Row) on the
remaining three transmission lines but expects them to start operations in FY13 itself. Also, it expects
the Parbati-Koldam transmission project to get commissioned by 2QFY14.
The company has resumed operations of Delhi Airport Metro Expressway after obtaining necessary
clearances. However, it did not quantify the loss suffered due to shutdown since the last seven months as
the matter is currently under arbitration. The company expects to commission the Mumbai metro rail 1
project by 1QFY14.
The company expects its infrastructure segment’s revenue to grow 50% for the next eight quarters and
garner Rs10bn revenue in FY15E.
The company did not provide visibility on the upcoming EPC projects (especially external projects) and
expects to clock EPC revenue of Rs65bn-Rs70bn in FY13E/FY14E, respectively.
The company has announced a strategic long-term partnership with the Wanda Group of China for real
estate development in Hyderabad where it owns 80 acres of land.
Standalone performance
Net sales on standalone basis declined 22.8% to Rs34.5bn YoY, primarily due to lower EPC revenue and
subdued power distribution revenue. EPC revenue fell 35.4% to Rs19.2bn YoY due to lower project execution
rate following the completion of some active projects. EBITDA witnessed a 22.5% YoY decline at Rs4.89bn,
but EBITDA margin marginally inched up to 14.2% level. Net profit declined (due to lower revenue and
EBITDA) by 21.9% to Rs3.2bn. Reported net profit rose 58.6% to Rs6.6bn, led by exceptional income of
Rs4.18bn on account of profit on the sale of shares of an associate company (Reliance Power).
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