JPMorgan:: Reliance Power - Expect underperformance to continue since pipeline is back ended

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Reliance Power
Underweight; RPOL.BO, RPWR IN
Expect underperformance to continue since pipeline is back ended


• RPWR derives ~30% of its SOP from under-construction projects,
which we believe are vulnerable to funding and execution delays:
Specific issues: a) low capacity utilization of new plants, as recent PLF
data points have shown, on the back of coal supply issues; b) possible
delay in funding for unfunded projects, which make up 34% of SOP; and
c) expensive valuation at 16.6x FY13 P/E and 18.8x EV/EBITDA.

• We reduce our earnings estimates by 15% and 20% for FY12 and
FY13, as we reduce our PLF assumption for Rosa I&II (weak track
record, linkage coal), Butibori (linkage coal), and Samalkot (lower gas
offtake) as well as the captive coal based UMPPs. We maintain UW,
with a reduced Mar-12 PT of Rs90. Besides lower sustainable PLF,
results in a decrease in our DCF-based fair value to Rs110, we think
RPWR will trade at a meaningful discount to fair value given the
funding and execution concerns highlighted above. Our PT factors in a
~20% discount.
• An improvement in funding and execution climate, any progress on
the Chitrangi project (potentially, Rs50/share of SOP value but
ignored due to funding concerns) would make us more positive. The
stock has underperformed its peers and market quite sharply, and we
believe this will continue in the near term.