Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Reliance Infrastructure
S trong asset play [EXTRACT]
Strong infrastructure portfolio; RELI a long-term asset play
We are positive on RELI’s strong infrastructure portfolio (11 road projects, five
airports, five transmission projects and three metro lines). We also like the
diversified nature of the business, as the company has no particular preference for
sub-sectors. In our view, RELI is a good long-term asset play on India’s
infrastructure growth story. As more projects become operational, the company
could monetise some of the assets.
RELI is addressing project execution challenges
In India, infrastructure projects face significant execution challenges that include
land acquisition, approvals and clearances, financial closure and availability of
skilled manpower. RELI is trying to meet these challenges with its: 1) captive EPC
division; b) strong in-house capabilities in different segments such as metro, roads
and transmission; 3) strong balance sheet; and 4) synergies with group companies.
We lower FY12/FY13E EPS 31%/35%; cut price target 36%
We lower our FY12/FY13E EPS from Rs63.42/70.46 to Rs43.32/45.36 on lower
EPC revenues. We introduce FY14E EPS of Rs49.77. However, we believe that
the market is ignoring the positives including the diversified portfolio of
infrastructure assets. We maintain our Buy rating and lower our price target from
Rs1,100 to Rs700.00, as we are now more conservative in our valuations of the
various businesses.
Valuation: price target of Rs700.00
Our price target is based on a sum-of-the-parts valuation. We value Reliance
Power on a 50% discount to our new price target of Rs105.00 (Rs52/share).
Valuation
We think RELI’s valuations are attractive at the current price. We maintain our
Buy rating and cut our price target to Rs700.00, which is based on a sum-of-theparts
valuation. Our valuation of Reliance Power is based on a 50% discount to
our new price target of Rs105.00 (effectively Rs52/share). The key changes to
our valuation assumptions are:
(1) Reliance Power. Previously based on a 10% discount to Reliance Power’s
old price target of Rs120.00. We now apply a 50% discount to our new
price target of Rs105.00 (effectively Rs52/share) to reflect RELI’s minority
38% stake. This is a net negative impact of Rs221.00.
(2) The Mumbai electricity business. We cut our multiple from 2.0x P/BV to
1.5x P/BV; a net negative impact of Rs27.00.
(3) EPC. We cut our revenue growth estimate 40% and the multiple from 6.0x
EBITDA to 4.0x EBITDA; a net negative impact of Rs53.00.
(4) The Delhi electricity distribution business. We cut our multiple from
2.0x P/BV to 1.0x P/BV; a net negative impact of Rs46.00.
(5) Infrastructure. We cut our multiple from 1.5x P/BV to 1.0x P/BV; a net
negative impact of Rs18.00.
Table 1: Reliance Infrastructure sum-of-the-parts valuation
Rs m Rs/sh Valuation methodology
Mumbai business 33,000 123 Mumbai electricity business regulated equity is Rs22bn, valued at 1.5x book.
EPC business 17,692 66 FY11 revenue is Rs33.89bn, FY12E growth is 45%. 9% margin. EBITDA multiple of 4x. Nil debt for the business.
Delhi business 12,250 46 The equity investment is Rs25bn, Infra has a 49% stake, valued at 1x book.
Infrastructure 48,000 180 Roads: Total investment is Rs118.8bn and equity is Rs31bn, Mumbai Metro: Rs31bn (Rs5bn +Rs26bn), Delhi Metro:
Rs7.5bn, Transmission projects: Rs21bn, Sea link: Rs10bn. Rs48bn equity has already been invested. At 1x book.
Net cash 27,000 101 Cash Rs73bn and debt Rs46bn. At 1x book.
Reliance Power 55,860 209 Reliance Power PT is Rs105, Calculated at a 50% discount to reflect RELI’s minority 38% stake.
Total 193,802 725*
*Rounded off to arrive at our price target of Rs700.
Source: UBS estimates
We are conservative in our valuation approach
Reliance Power. We conservatively value Reliance Power at Rs52/share.
This is 40% below the current share price. We also think that the market has
not factored in the key advantage in terms of 2bn tonnes of captive coal.
The Mumbai electricity business. We use 1.5x P/BV. The comparative
multiple for companies like Torrent Power (a non-covered company with a
similar business) is 1.9x FY12 P/BV, according to Bloomberg. We also think
the business is secure in nature, as it is based on regulated return on equity.
EPC. We use 4x FY12E EBITDA, which we think is conservative.
The Delhi electricity distribution business. We use 1x P/BV. The
comparative multiples for peer companies range between 1.5-2.0x P/BV. We
think the business is secure, as it is based on regulated return on invested
capital.
Infrastructure. We use 1x P/BV. We feel this is reasonable, as comparative
multiples for companies like IRB range between 1.75-2.0x.
Why we value the Delhi business at 1.0x P/BV lower than Mumbai
business at 1.5x P/BV
In our view, the electricity distribution business is more risky than generation as
distribution has a higher chance of political interference. We also think that the
tariff approval mechanism for distribution companies is more complex. In
RELI’s case, the company has a generation, transmission and distribution
business in Mumbai and only a distribution in Delhi. Hence we use 1.0x P/BV
for Delhi and 1.5x P/BV for Mumbai.
Why we value the infrastructure business at 1.0x P/BV
If we value the infrastructure projects at 1.0x P/BV, it implies that there is no
value creation. If that is the case, then we should not be positive on expansion in
this segment and it would seem that the drivers of the share price are
inconsistent with the valuation multiple.
We believe that infrastructure projects create value and that they should be
valued at a multiple higher than 1.0x (the actual multiple may vary from project
to project). However:
a) We are conservative in our valuation approach.
b) The majority of the projects are not yet operational, and there are risks
such as traffic flow (actual versus estimates) and execution delay
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Reliance Infrastructure
S trong asset play [EXTRACT]
Strong infrastructure portfolio; RELI a long-term asset play
We are positive on RELI’s strong infrastructure portfolio (11 road projects, five
airports, five transmission projects and three metro lines). We also like the
diversified nature of the business, as the company has no particular preference for
sub-sectors. In our view, RELI is a good long-term asset play on India’s
infrastructure growth story. As more projects become operational, the company
could monetise some of the assets.
RELI is addressing project execution challenges
In India, infrastructure projects face significant execution challenges that include
land acquisition, approvals and clearances, financial closure and availability of
skilled manpower. RELI is trying to meet these challenges with its: 1) captive EPC
division; b) strong in-house capabilities in different segments such as metro, roads
and transmission; 3) strong balance sheet; and 4) synergies with group companies.
We lower FY12/FY13E EPS 31%/35%; cut price target 36%
We lower our FY12/FY13E EPS from Rs63.42/70.46 to Rs43.32/45.36 on lower
EPC revenues. We introduce FY14E EPS of Rs49.77. However, we believe that
the market is ignoring the positives including the diversified portfolio of
infrastructure assets. We maintain our Buy rating and lower our price target from
Rs1,100 to Rs700.00, as we are now more conservative in our valuations of the
various businesses.
Valuation: price target of Rs700.00
Our price target is based on a sum-of-the-parts valuation. We value Reliance
Power on a 50% discount to our new price target of Rs105.00 (Rs52/share).
Valuation
We think RELI’s valuations are attractive at the current price. We maintain our
Buy rating and cut our price target to Rs700.00, which is based on a sum-of-theparts
valuation. Our valuation of Reliance Power is based on a 50% discount to
our new price target of Rs105.00 (effectively Rs52/share). The key changes to
our valuation assumptions are:
(1) Reliance Power. Previously based on a 10% discount to Reliance Power’s
old price target of Rs120.00. We now apply a 50% discount to our new
price target of Rs105.00 (effectively Rs52/share) to reflect RELI’s minority
38% stake. This is a net negative impact of Rs221.00.
(2) The Mumbai electricity business. We cut our multiple from 2.0x P/BV to
1.5x P/BV; a net negative impact of Rs27.00.
(3) EPC. We cut our revenue growth estimate 40% and the multiple from 6.0x
EBITDA to 4.0x EBITDA; a net negative impact of Rs53.00.
(4) The Delhi electricity distribution business. We cut our multiple from
2.0x P/BV to 1.0x P/BV; a net negative impact of Rs46.00.
(5) Infrastructure. We cut our multiple from 1.5x P/BV to 1.0x P/BV; a net
negative impact of Rs18.00.
Table 1: Reliance Infrastructure sum-of-the-parts valuation
Rs m Rs/sh Valuation methodology
Mumbai business 33,000 123 Mumbai electricity business regulated equity is Rs22bn, valued at 1.5x book.
EPC business 17,692 66 FY11 revenue is Rs33.89bn, FY12E growth is 45%. 9% margin. EBITDA multiple of 4x. Nil debt for the business.
Delhi business 12,250 46 The equity investment is Rs25bn, Infra has a 49% stake, valued at 1x book.
Infrastructure 48,000 180 Roads: Total investment is Rs118.8bn and equity is Rs31bn, Mumbai Metro: Rs31bn (Rs5bn +Rs26bn), Delhi Metro:
Rs7.5bn, Transmission projects: Rs21bn, Sea link: Rs10bn. Rs48bn equity has already been invested. At 1x book.
Net cash 27,000 101 Cash Rs73bn and debt Rs46bn. At 1x book.
Reliance Power 55,860 209 Reliance Power PT is Rs105, Calculated at a 50% discount to reflect RELI’s minority 38% stake.
Total 193,802 725*
*Rounded off to arrive at our price target of Rs700.
Source: UBS estimates
We are conservative in our valuation approach
Reliance Power. We conservatively value Reliance Power at Rs52/share.
This is 40% below the current share price. We also think that the market has
not factored in the key advantage in terms of 2bn tonnes of captive coal.
The Mumbai electricity business. We use 1.5x P/BV. The comparative
multiple for companies like Torrent Power (a non-covered company with a
similar business) is 1.9x FY12 P/BV, according to Bloomberg. We also think
the business is secure in nature, as it is based on regulated return on equity.
EPC. We use 4x FY12E EBITDA, which we think is conservative.
The Delhi electricity distribution business. We use 1x P/BV. The
comparative multiples for peer companies range between 1.5-2.0x P/BV. We
think the business is secure, as it is based on regulated return on invested
capital.
Infrastructure. We use 1x P/BV. We feel this is reasonable, as comparative
multiples for companies like IRB range between 1.75-2.0x.
Why we value the Delhi business at 1.0x P/BV lower than Mumbai
business at 1.5x P/BV
In our view, the electricity distribution business is more risky than generation as
distribution has a higher chance of political interference. We also think that the
tariff approval mechanism for distribution companies is more complex. In
RELI’s case, the company has a generation, transmission and distribution
business in Mumbai and only a distribution in Delhi. Hence we use 1.0x P/BV
for Delhi and 1.5x P/BV for Mumbai.
Why we value the infrastructure business at 1.0x P/BV
If we value the infrastructure projects at 1.0x P/BV, it implies that there is no
value creation. If that is the case, then we should not be positive on expansion in
this segment and it would seem that the drivers of the share price are
inconsistent with the valuation multiple.
We believe that infrastructure projects create value and that they should be
valued at a multiple higher than 1.0x (the actual multiple may vary from project
to project). However:
a) We are conservative in our valuation approach.
b) The majority of the projects are not yet operational, and there are risks
such as traffic flow (actual versus estimates) and execution delay
No comments:
Post a Comment