Goldman Sachs: Reliance Power - Butibori visit: On track, but stock already implies perfect execution

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Reliance Power (RPOL.BO)
Sell  Equity Research
Butibori visit: On track, but stock already implies perfect execution
What's changed
We visited Reliance Power’s (RPWR) 2x300 MW Butibori project located
near Nagpur. The key takeaways of our site visit were: 1) 42% of overall
project is complete and the hydro test for Unit 1 is scheduled in June 2011.
Butibori project team expects COD to be around 1Q2012, which is in line
with our expectations; 2) 70% of the material for Unit 1 and 2 is at the site
and work on railway sliding and transmission infrastructure is in progress.

JP Morgan: Reliance Power::Fuel constraints impact profits, Maintain UW.

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Reliance Power Underweight; RPOL.BO, RPWR IN
Fuel constraints impact profits, an improvement in availability is in the price, Maintain UW.



• 3Q results impacted by weak plant load factor and lower other
income: Rosa (600MW), RPWR’s lone operating project, reported a low
PLF of 53%, as expected, due to severe fuel constraints. The
management attributed lower than expected other income to low cash
yield. On the whole, reported PAT of Rs1.4B was lower than JPM est.
Rs1.7B (consensus Rs1.9B), despite deferred tax credit of Rs0.5B.
Under-recovery of fixed cost impacted Rosa numbers. At 53%, Rosa’s
PLF staged QoQ improvement from 40% in 2Q. We assume a 75%
sustainable PLF FY12 onwards. Our FY11 earnings estimate is revised
down 27% to factor in under-recovery of plant and corporate overheads.

UBS: Reliance Power 3Q FY11: Other income declined 42% YoY

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UBS Investment Research
Reliance Power
3Q FY11: Other income declined 42% YoY
􀂄 Rs2.51bn of Sales and Rs1.44bn of PAT in 3Q FY11
In 3Q FY11, Reliance Power has reported Rs2.51bn of operating revenue and
Rs1.04bn (-42% YoY) of other income. The reported PAT is Rs1.44bn. The
company has been operating the first stage of Rosa (600MW) in this quarter.
Company’s depreciation charge was lower by Rs113mn in Q3 due to change in
depreciation accounting for Rosa Unit I from rates prescribed in Companies act to
rates notified by UPERC.

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.

Reliance Power: a hill to climb :: Daiwa

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Reliance Power: Initiation of coverage: a hill to climb
Large project pipeline, execution is the key
􀂃 RPWR plans to set up more than 30GW of greenfield power
projects, but with no capacity additions due until FY12 we see
no near-term catalysts for the stock. Most of the capacityaddition
pipeline is at an early stage and so the execution risks
are likely considerable.
Uncertainty over the supply of gas for its projects
􀂃 We expect the company’s gas-based projects to face two
hurdles. First, its requirement for 35mmscmd (8.4GW pipeline)
amounts to 50% of India’s total incremental domestic gas
production of 71mmscmd (FY11-15), based on our energy
team’s forecasts. Securing such a large proportion of an already
tight resource may not be possible.
􀂃 Second, according to the recent guidelines on gas allocation
under the 12th Plan projects, preference is given to central
government and state-government utilities over the IPPs. NTPC
alone has brownfield expansion plans of more than 6GW if gas
is made available.
5 (Sell) rating and target price of Rs130
􀂃 We initiate coverage of RPWR with a 5 (Sell) rating and DCFbased
six-month target price of Rs130. We believe the key
upside risks to our rating and target price are clarity on the
availability gas and funding being confirmed for the Chitrangi
plant (4GW, based on surplus coal from the Sasan project).

Suspension of trading in equity shares/Futures/ Options -Reliance Natural Resources Limited

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Subject: Suspension of trading in equity shares

To All Members,

In pursuance of Regulation 3.1.2 of the National Stock Exchange (Capital Market) Trading Regulations Part A, it is hereby notified that the following security will be suspended from trading w.e.f November 10, 2010(i.e. closing hours of trading on November 9, 2010)

Sr. No.	Name of the Company	Symbol	Series	Reason for Suspension
1	Reliance Natural Resources Limited	RNRL	EQ/BL	Scheme of Arrangement with Reliance Power Limited

This Circular shall be effective from November 10, 2010.

For and on behalf of
National Stock Exchange of India Limited 

Reliance Power (Sell, add to CL; 12-m TP: Rs125) :: Goldman Sachs

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Reliance Power (RPOL.BO; Sell, add to CL; 12-m TP: Rs125)
Source of opportunity
 We reiterate our Sell rating on Reliance Power (RPOL.BO) and add it
to our Conviction list with an SOTP-based 12-month target price of
Rs125 (earlier Rs119) implying a potential downside of about 22%.
 We believe the current market price of Reliance Power implies
strong execution of its 24.3 GW of projects under construction and
development that are scheduled to come onstream over the next 6-8
years. In effect, the stock is already reflecting this potential growth
in the foreseeable future, in our view.
 We believe cash flows from near-term projects will not be sufficient
to meet equity requirements for projects under development over
the medium term. We expect Reliance Power to fall short of equity
by about Rs29.6 bn for Krishnapatnam, Chitrangi, and Samalkot
power projects. With the current share price already implying their
value, we believe any further equity raising may lead to equity
dilution (see Exhibit 101).
 Although Reliance Power is best positioned in terms of owning coal
mines for Sasan, Chitrangi, Tilaya, and Krishnapatnam projects
(totaling about 16GW), we believe the benefits of such backward
integration are already reflected in the current share price.
 With FY12E EV/GCI of about 1.2X, we believe the market is already
factoring in the cash return potential of about 14%, which may not
happen until FY15, in our view.
Catalyst
1) We believe news flows on delays in the projects under construction
will result in the stock underperforming its peer group; 2) Delays in coal
mining in Indonesia, which would impact Krishnapatnam power project;
3) Newsflow on timelines for likely equity issuance.
Valuation
We revise FY11E/12E/13E EPS by -17%/-13%/75% to reflect changes in
commissioning timelines and other income assumptions for FY11E/12E
and reflecting Samalkot power project in FY13E. Our revised 12-month
SOTP-based target price is Rs125 (from Rs119 as we roll over to FY12E).
The stock appears expensively valued on FY12E P/E and P/B vs. ROE
multiples (see Exhibit 20, 21 & 24).
Key risks
Completion of projects ahead of estimated timelines.

Utilities -Mixed quarter says Indiabulls research

Power Utilities
Lower generation vs expectation (for NTPC, Tata Power) and weak merchant rates (due to good monsoons leading to better hydro generation) are the key highlights for the quarter. We prefer NTPC and Power Grid in the utilities space.

Adani Power
• Third unit of 330MW of Mundra I&II plant commissioned during 2QFY11. Blended PLF for Adani Power works out to 76%, due to stabilization phase of Unit-III (CoD August 2010) where PLF was 55%.
JSW Energy
• Ratnagiri Unit-I 300MW commissioned during 2QFY11. Expect EBITDA margins to be under pressure on account of lower PLF in some of the units due to technical issues and decline in merchant rates YoY.
NHPC
• Increase in generation (9.5% to ~7.2 BUs) on account of good monsoons and commissioning of Sewa II (120MW) during 2QFY11.
NTPC
• Low growth in generation volumes at 3.6% YoY to 52.2 BUs, largely led by fuel supply issues in certain key plants.
Power Grid
• Expect revenue of `20,292mn, up 19% YoY, and net profit of `6,793mn, up 57% YoY ( pre-exceptional).
Reliance Infrastructure
• MERC revoked the stay on RELI’s tariff hike, allowing it to uniformly hike tariff across segments. 3QFY11 earnings are likely to see prior-period sales being recognized on account of the lifting of the stay on tariff hikes.
Reliance Power
• Unit-II of Rosa-I (300MW) commenced operations in 2QFY11.
Tata Power
• Decrease in generation volumes on account of lower PLF in Trombay and other units. Earnings for the quarter likely to be impacted by lower generation in Trombay plant owing to unavailability of imported coal (due to the collision of two vessels near JNPT).