Reliance Infrastructure N(V): Investor concerns remain despite positives  HSBC Research,

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Reliance Infrastructure
N(V): Investor concerns remain despite positives
 Stock performance over last six months (up 42%) after a steep
correction is a reflection of some of the operational positives
 However, some investor concerns are likely to persist and
keep the stock range-bound
 Reduce net profit by 11-15% for FY12-13e, target to INR608
(from INR710), reiterate Neutral, adding volatility (V) indicator
Recent stock performance is a reflection of some of the operational positives: Over the
last six months, R-Infra stock has performed well (up 42% versus Sensex up c4%) factoring in
positives such as: 1) extension of its distribution licence in Mumbai, 2) price hike approved by
regulator in its Delhi, 3) pick up in traffic in its Delhi metro business (c20k pax per day now)
and 4) pick up in execution in its EPC business after flat FY11 with progress at its associate RPower
projects (Sasan and Samalkot) as well as its own road projects. This is on back of stock
correction of c40% in previous six months due to various investor concerns on the company.
Numerous investor concerns to keep the stock range bound: Investors still are concerned
about 1) deployment of cash into inter-corporate deposits (ICDs), preference shares with no
clarity (INR133 per share), 2) lack of progress of R-Power power projects at Krishnapatnam,
Chitrangi and Tilaiya which also impacts its EPC business and 3) lack of gas availability at RPower’s
Samalkot power project.
Net profit growth of 11% CAGR in Fy13-14: The existing power business to provide
steady cash flows and grow modestly (4.4%CAGR), while EPC business to be moderate
negative (-3.7% CAGR) on a high FY12 base. We expect net profit growth to be driven
by commissioning of its three transmission projects, and R-Power projects (Rosa Phase II,
Butibori and Samalkot) in FY13-14. The company is unlikely to make profits in infra
segment (roads and metro) in the initial 2-3 years given the high capital costs.
Reduce net profit estimates by 11-15% for FY12-13, introduce FY14 estimates: to
account for delay in commissioning of various road and Mumbai metro project including
higher deferred tax offset by higher execution in its EPC business which is low margin.
Maintain Neutral, add volatility flag and reduce target price to INR608 from
INR710: We use a SOTP based valuation for R-Infra and arrive at our new target price of
INR608 (from INR710, see table 6 for details). Our reduction in target price is largely due
to not factoring the investments in preference shares and ICDs. Our target price implies
0.67x FY14 PB and 8.1x FY14 PE.

Valuation and risks
We continue to use sum-of-the-parts (SOTP) methodology to value R-Infra, given the differing
risk/reward profiles for its various businesses. Based on our assumptions (see table 6) our new target
price is INR608 (earlier INR710), providing potential return of 5% from the current share price, which is
within the Neutral rating band of 1%-21% for volatile Indian stocks. R-Power (RPWR IN, not rated)
provides 49%, INR303 per share to our valuation using a P/B of 1.5x (sector average PB of 1.6x) in line with
its last one year average forward PB and applying a 20% holding discount to the same.
We maintain our Neutral rating on the stock, but add a volatility flag, as the stock is considered volatile
by HSBC’s definition (see disclosures, page 7). Potential return equals the percentage difference between
the current share price and the target price, including the forecast dividend yield when indicated.
Our reduction in target price is largely due to not factoring investments in preference shares and ICDs.
Our target price implies 0.67x FY14 PB and 8.1x FY14 PE versus current PB of 0.69x and PE of 8.0x.
Risks
Upside risks include: a) faster-than-expected project execution; b) higher-than-expected EPC margins;
c) order wins from external customers, and d) higher than expected traffic at its road and metro projects.
Downside risks include disallowance of capex by the regulator in its Delhi and Mumbai distribution
business affecting profitability.