Reliance Power SELL - Mega deals, but yet to create value:: ICICI Sec

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Reliance Power (RPower) completed a host of mega ordering and deals during
Q2FY11 such as: 1) 30GW BTG order to Shanghai Electric Company; 2) 2.4GW
equipment order supply and maintenance deal with General Electric (GE) and; 3)
Mega financing MoUs worth Rs775bn with leading Chinese banks and US EXIM
banks. We believe these announcements and deals demonstrate management’s
intent to be a front-runner in Indian power sector. However, given the uncertainty
with regard to execution entailing from far-flung execution schedule, we remain
cautious and maintain SELL.


Further, Q2FY11 PAT of Rs2.34bn (I-Sec: Rs2bn) was on account of a higher-thanestimated
other income. Core performance was weaker than expected, primarily
owing to lack of demand in Rosa unit during the quarter that led to a lower PLF of
50.4%. We raise our full year other income estimates.

􀁦 Mega announcements. RPower announced a string of mega equipment ordering
deals of 32.4GW and financing MoUs worth Rs775bn in Q2. The size of the deals
and the financing arrangement demonstrates the management’s intent to be a frontrunner
in India’s power sector opportunity. However, we remain cautious particularly
from the low visibility of execution of the huge project pipeline.

􀁦 Q2FY11 – Weak on core. Q2 was below expectation in core performance
particularly owing to low PLF of 50.4%. PLF was low on account of lower demand
schedule for the project from Uttar Pradesh.

􀁦 Awaiting gas allocation for Samalkot project. RPower’s 2.4GW gas-based project
is still awaiting gas allocation. The equipment orders and maintenance contracts
have been placed with GE. Reliance Industries’ announcement of reduced gas
production from KG basin has led to lower gas availability for allocation. Awaiting
certainty, we ascribe 40% discount to gas-based projects.

􀁦 Execution mixed bag – Maintain SELL. In Q2, Sasan project made significant
progress on land acquisition (93%); Krishnapatnam is facing minor issue in the
construction of the boundary wall. We maintain our fair value target price of
Rs120/share and SELL recommendation.