Reliance Infrastructure-Regulatory relief- Kotak Sec

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Reliance Infrastructure (RELI)
Utilities
Regulatory relief boosts standalone earnings. Reliance Infrastructure (RELI) reported
strong operating income on account of prior period revenues of Rs1.6 bn after a stay
on the tariff hikes that had been imposed by MERC (in July 2009) was lifted. However,
the construction business reported weak margins and a forex loss led to 40% yoy
decline in net income at the standalone level. We continue to like RELI based on
incremental value accretion from infrastructure portfolio and the earnings cushion
provided by a stable power business.

Prior period revenues boost sales, construction margins disappoint
RELI reported revenues of Rs23.6 bn, operating profit of Rs3.4 bn and net income of Rs1.7 bn
against our estimates of Rs21.5 bn, Rs2.4 bn and Rs2.8 bn, respectively. Higher-than-estimated
revenues were primarily on account of Rs1.6 bn of prior-period revenues recognised retrospectively,
after the lifting of a stay on tariff hike by MERC. MERC, in September 2010, had revoked its earlier
stay order pertaining to tariff hike by RELI. Accordingly, RELI recognised additional revenues of
Rs2.5 bn pertaining to April-August 2010 period which included Rs1.6 bn in 1QFY11. However,
disappointing construction margins and significantly lower other income dented profitability,
leading to reported PAT missing our estimates by 40%. Other income declined from Rs2.7 bn in
1QFY11 to Rs240 mn in 2QFY11, primarily on account of forex losses during the quarter. EPC
revenues at Rs8.1 bn were in line with our estimates but EBIT margins declined to 7.8% in
2QFY11.

Commissioning of infra projects to boost consolidated earnings
RELI reported consolidated net revenues of Rs40.4 bn, EBITDA of Rs6.2 bn and PAT of Rs3.6 bn.
We note that in 2QFY11, incremental earnings on a consolidated basis were contributed by the
Delhi distribution business and two operational road projects. RELI started the tolling of its third
road project (Pune Satara) in October 2010 and management has guided for 12 revenue
generating projects by end FY2011 including eight road projects, Delhi Metro, WRSS and Sea Link
(BWSL).

Maintain ADD with a revised target price of Rs1,160/share
We maintain our ADD rating and target price of Rs1,160/share. Our SOTP-based target price
comprises—(1) Rs230/share from the existing generation, transmission and distribution businesses,
(2) Rs212/share for the EPC business, (3) Rs473/share for 45% stake in Reliance Power valued at
20% discount to our target price of Rs135/share, (4) Rs42/share as the equity- value of the five
BOT road projects under-construction, (5) Rs51/share for equity investment made in the various
infrastructure projects and (5) cash and investible surplus in books of Rs155/share.