Reliance Power & Reliance Infrastructure US$8.3B contract for power equipment -JPMorgan

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Reliance Power & Reliance
Infrastructure
US$8.3B contract for power equipment supply slated
to be signed today - ALERT



• Sheer scale! Shanghai Electric Group Company Limited (2727 HK) announced
that it has passed a resolution to approve equipment supply, service contracts and
mandatory spare parts supply contract with Reliance ADAG, for 36 supercritical
coal fired units of 660MW. The total consideration is ~US$8.29B implying
~Rs16MM/MW at a steep discount to BTG contracts awarded to BHEL/L&T
(~Rs28MM/MW). The contracts are expected to be signed on 28th Oct 2010.
• 3 projects, 12x660MW each, includes the following projects of Reliance Power-
(1) Imported coal based Krishnapatnam UMPP (6x660MW), the only project
which has achieved financial closure. Also 6x660MW Phase-II expansion project
at a nearby coastal site. (2) 2 Phases of 6x660MW at Chitrangi which proposes to
use excess coal from captive coal mines allocated to Sasan UMPP (6x660MW),
(3) Captive coal based Tilaiya UMPP (6x660MW) and the Phase-II expansion
project (6x660MW).
• Rationale. Reliance Infrastructure (EPC contractor for RPWR’s projects) and
RPWR had clearly highlighted their preference for Shanghai Electric as an
equipment supplier for pipeline projects. Shanghai Electric is the supplier for
under construction Sasan UMPP (6x660MW). The sheer scale of the
development pipeline comes as a surprise. According to the company the
rationale for entering into a LT contract- (1) Lower pricing of equipment due to
bulk nature of the contract, (2) Standardized configuration, and O&M across
projects, lower cost of generation, (3) funding support from Chinese EXIM bank,
which also improves prospects of securing ECBs in future. Fuel availability
(RPWR's captive coal mines in India and Indonesia drives the exuberance, in our
view.
• Advance payment for equipment orders. Reliance Power will need to make an
advance payment of 10% of the contract value for every 6 units being ordered i.e.
one whole phase of either of the three projects. Based on the total contract value of
$8.3B this equates to ~$138M (Rs.6.15B) for every 6 units. RPWR had Rs82.5B
of cash & cash equivalents on balance sheet as of Mar-10, so initial advances do
not pose a concern.
• Significant execution risk, project commissioning to be a long drawn affair.
In our estimate the first phase (6x660MW) of Chitrangi, Krishnapatnam, and
Tilaiya will be commissioned in upto FY16-17. Both Chitrangi and Tilaiya
projects are at land acquisition stage for Phase-I. The brown field expansions of
each of these projects will take longer. Phase-II is quite nascent and land needs to
be acquired to start with. The contract with Shanghai Electric itself could span
over 10 years. Execution risk is significant and could delay the projects/ lead to a
scale down, in our view.
• Potential accretion from Chitrangi. The placement of the equipment order for
Chitrangi (4GW) improves visibility for the project (Tilaiya and Krishnapatnam
Phase-I are already valued). Inclusion of this project in our SOTP provides a
Rs30/share (21%) upside potential to our Mar-11 SOTP based PT of Rs145/share
for Reliance Power. However we await financial closure and completion of land
acquisition to attribute value. Risks to PT: significant progress on project pipeline
and low free float.