| Reliance Power (RPWR IN) Meeting takeaways | Underweight Price: Rs67.30 08 May 2014 Price Target: Rs54.00 PT End Date: 31 Mar 2015 | |
Reliance Power is hopeful that under a new government relief for non-remunerative power purchase agreements (and ongoing litigations) would be fast tracked or some one-time scheme be evolved to allow relief on fuel cost in tariff over the next 2-3 years. However, management acknowledges that the latter would be extremely challenging to implement. It is hopeful that private sector participation in coal mining would be stepped up by identifying and awarding blocks where clearances are not time consuming and CIL shall be pushed to raise production. A marked step-up in environmental clearances is not going to prove easy, as per management.
· Inputs on Sasan UMPP (6x660MW). (a) The commissioning of the 6th660MW unit may stretch up to Sep-14 vs. Jun-14 guided earlier. As per CEA data, three units are fully commissioned as of now and operated at 71% PLF in Apr-14. (b) RPWR’s plea to CERC for relief in tariff in light of the unprecedented currency depreciation (see ‘India Power Sector: Eliminating FX risk would be a masterstroke’, 20 Mar-14) was heard on 6th May. As per the Financial Express, CERC has asked Reliance Power to elaborate on benefits to the company from its Feb-2008 IPO and implications on cost of equity for Sasan UMPP. A favorable verdict from CERC in this matter is crucial for the long term profitability of Sasan. We have already factored in Rs0.15/kWh relief in our base case starting FY15 over the balance of the life of the PPA. (c)Management was confident that they shall get permission to sell 5-6MTPA of excess coal from operating Moher & Moher Amlohri mines at CIL notified rates (Rs1,030/ton for 4300-4600kcal/kg) in the medium term which can boost profitability. As per management coal mining cost (excluding capital cost of mine development which is already included in Sasan UMPP project cost) is ~Rs300/ton, implying post tax profit of ~Rs500/ton. We have not factored sale of coal in our base case earnings and PT; (d) the regulator’s verdict in the matter of FY13 being treated as year 1 of the Sasan PPA (with tariff of Rs0.7/kWh) is still pending; the last hearing was on 6th May.
· Implications of new CERC tariff regulations on Rosa (1,200MW). The returns of Rosa are based on UPERC tariff regulations. Management is of the view that UPERC may not replicate the tightening of O&M norms and sharing of 40% of financial gains with Discoms as suggested by CERC. Under UPERC regulations incentive calculations is already based on PLF (Rs0.25/kWh above 85% PLF in UP, which could be raised to Rs0.5/kWh same as new CERC regulations). UP may follow CERC in implementing a shift in the coal cost pass through mechanism using GCV “as received” vs. GCV “as fired” earlier.
· Inputs on Butibori (600MW). The PPA for 600MW on regulated return basis with Reliance Infrastructure in Mumbai kicked off on 1st Apr, as planned. As per CEA data, the project operated at 55% PLF in Apr-14. The FSA has been signed with WCL (subsidiary of CIL) for unit 1 (300MW) so far, and coal for unit 2 is being received on MoU basis currently. Sufficient Coal receipt from WCL could prove to be an issue and management plans to supplement requirement using e-auction coal.
· Inputs on pipeline projects. Management is hopeful of faster progress on pending stage-II clearance of Chhatrasal mine post elections, which is a hurdle for commencement of capex on Sasan expansion project. A quick solution on issues related to gas based projects in India (and RPWR’s Samalkot) appears improbable. Management is in no hurry to go ahead with Krishnapatnam UMPP even if compensatory tariff is offered on coal (like TPWR, ADANI) given the steep INR depreciation since the project was awarded has changed project economics adversely.
Investment Thesis
RPWR has an operating capacity of 4GW and 4.4GW under construction and 17.8GW under development. We have an UW rating given that CMP partially prices in pipeline projects on which material progress has not been made.
Valuation
We maintain our Mar-15 PT of Rs54. Our PT includes Rs39 for fully operational projects, Rs10 for Sasan and an 80% probability of Chitrangi being executed at Rs5/share. We don't include Samalkot, for which there is no gas visibility, despite Rs31B of equity (equates to Rs11/share) being invested, or Tilaiya UMPP, for which land acquisition is not yet complete.
Risks to Rating and Price Target
Upside risks to our UW rating and price target include: (1) meaningful progress on pipeline projects warranting inclusion in SOTP; (2) a grant of more than Rs0.15/kWh tariff hike by CERC against petition for Sasan; (3) gas availability for Samalkot; and (4) better-than-expected RoIE for Butibori post-commencement of PPA.
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