Reliance Power
Overhangs remain; downgrading to Sell
Reliance Power has been one of the best performing stocks in the last month
Following positive sentiment in the sector driven by the formation of a new Central
Government, Reliance Power has been one of the best performing stocks in our
coverage universe, up around ~50% in the last month. However, we do not think
much has changed fundamentally for the company in such a short span and many
serious overhangs remain. We are downgrading our rating to Sell from Buy while
maintaining our price target of Rs100.
Overhangs remain: Gas availability; low power demand; usage of excess coal
We think the following overhangs remain: 1) no visibility on gas availability for the
2,400MW Samalkot Project; 2) power demand from distribution companies has been
lower (due to their poor financial position), which is a risk for plant utilisation; and 3)
there is still no final clarity on usage of excess coal from Sasan UMPP. The other issues
are a lack of visibility on imported coal-based 4,000MW Krishnapatnam UMPP and slow
hydro project development.
We are still positive on structural reforms in the sector
Direct control by the central government on some core power sector issues is limited
but we are positive regarding the initiation of structural reforms in the sector because:
1) state electricity boards (SEBs) and power distribution companies need financial
support from banks and they are controlled by the central government; 2) the central
government could help SEBs improve performance by offering efficiency-linked
incentives; and 3) the central government controls public sector undertakings (PSUs)
such as NTPC and Power Grid. If large-scale structural reforms are implemented, we
think the impact on distribution (and, therefore, the power sector) would be positive.
Valuation: Downgrading rating to Sell from Buy; maintain PT of Rs100
Our DCF-based PT includes 13,680MW of projects assuming an 8.8% risk-free rate, a
risk premium of 6.5% for the Chitrangi power station and 5.5% for other projects.
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Overhangs remain; downgrading to Sell
Reliance Power has been one of the best performing stocks in the last month
Following positive sentiment in the sector driven by the formation of a new Central
Government, Reliance Power has been one of the best performing stocks in our
coverage universe, up around ~50% in the last month. However, we do not think
much has changed fundamentally for the company in such a short span and many
serious overhangs remain. We are downgrading our rating to Sell from Buy while
maintaining our price target of Rs100.
Overhangs remain: Gas availability; low power demand; usage of excess coal
We think the following overhangs remain: 1) no visibility on gas availability for the
2,400MW Samalkot Project; 2) power demand from distribution companies has been
lower (due to their poor financial position), which is a risk for plant utilisation; and 3)
there is still no final clarity on usage of excess coal from Sasan UMPP. The other issues
are a lack of visibility on imported coal-based 4,000MW Krishnapatnam UMPP and slow
hydro project development.
We are still positive on structural reforms in the sector
Direct control by the central government on some core power sector issues is limited
but we are positive regarding the initiation of structural reforms in the sector because:
1) state electricity boards (SEBs) and power distribution companies need financial
support from banks and they are controlled by the central government; 2) the central
government could help SEBs improve performance by offering efficiency-linked
incentives; and 3) the central government controls public sector undertakings (PSUs)
such as NTPC and Power Grid. If large-scale structural reforms are implemented, we
think the impact on distribution (and, therefore, the power sector) would be positive.
Valuation: Downgrading rating to Sell from Buy; maintain PT of Rs100
Our DCF-based PT includes 13,680MW of projects assuming an 8.8% risk-free rate, a
risk premium of 6.5% for the Chitrangi power station and 5.5% for other projects.
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