Business Standard -20-Apr-2009
The stock of Reliance Infrastructure (Reliance Infra), which had underperformed the BSE Sensex for most of the last 12 months, has significantly outperformed in the last one month. Among reasons that could be attributed to the outperformance is it’s recently completed share buyback programme, which partly reflects the management’s belief that the company’s assets are undervalued.
Analysts also attribute some recent developments to the stock’s outperformance. Reliance Power, a 45 per cent subsidiary of Reliance Infra, won the bid to develop the 4,000 mw Tilaiya ultra mega power project (UMPP) in February 2009. The financial closure of the Delhi metro project and Reliance Infra emerging as lowest or sole bidder for three road projects worth Rs 9,440 crore are among other triggers.
Core strengths
Reliance Infra operates in some of the high growth potential sectors. It has presence in the entire value chain of the power sector including EPC, generation, transmission and distribution. In the infrastructure space, it is focused on roads, urban infrastructure, airports, real estate and SEZs.
In power, Reliance Infra currently has generation assets of 940 mw. About 80 per cent of its power division’s revenue is on account of generation and distribution of power in different cities including its biggest circles, Mumbai and Delhi. Its Mumbai distribution circle is considered to be most efficient, with Aggregate Technical and Commercial (AT&C) losses of less than 11 per cent, compared to country’s average of about 35 per cent.
| VALUATION: SUM OF PARTS | ||
in Rs per share | Low | High |
| Power * | 120 | 150 |
| Cash and equivalents | 180 | 210 |
| EPC | 40 | 50 |
| Infra projects | 80 | 90 |
| Stake in Reliance Power | 350 | 450 |
| Total value | 770 | 950 |
| * Distribution, Generation & Transmission Analysts estimates | ||
Leveraging its expertise in the business, the company has gradually lowered the AT&C losses in its Delhi distribution circle to about 20 per cent as compared to 55 per cent in FY02. Apart from the usual growth in existing circles, expect growth rates to perk up as and when the company bags new distribution circles. It is now pursuing opportunities in this space given that various states are showing willingness to privatise their electricity distribution operations; about 20 cities in three states are expected to see their distribution operations get privatised.
In power generation, the company is looking at increasing the capacity of its Dahanu power station by 1,200 mw to 1,700 mw, which interestingly will be a part of Reliance Infra’s power generation portfolio (and not Reliance Power).
The huge power generation capacities being added in India will also translate into equally big investment in transmission infrastructure, to evacuate power from the generation point to the customers. The company is currently executing three transmission projects worth Rs 4,000 crore. These projects typically offer a fixed return of 16 per cent on equity, and would ensure sustained cash inflows. Meanwhile, existing operational assets generate annual cash profits of over Rs 1,300 crore, which will help towards financing the company’s ongoing projects and further strengthen its balance sheet.
EPC
The ongoing capacity addition in the power generation business (including Reliance Power) is also providing opportunities for the company’s EPC business, which has seen its order book rise 159 per cent year-on-year to Rs 21,500 crore as on December 31, 2008. Reliance Infra has recently started work on Reliance Power’s 3,960 mw (Sasan) and 300 mw (Butibori) projects.
In totality, the company is currently executing seven projects of totalling 7,200 mw. “In FY08, about 80 per cent of the revenues came from electrical business and remaining was from EPC. However, over the next two years, the revenue contribution from EPC will substantially increase,” says Lalit Jalan, CEO & Whole-time Director, Reliance Infrastructure.
The company believes that the work for several large projects like Sasan will start in full swing in FY10, and double its EPC revenues in FY10 (annualised revenues of EPC for FY09 is Rs 2,200 crore). In terms of future opportunities, the project pipeline should remain robust given that Reliance Power itself has 14 power projects (32,200 mw) to be set up in the long-run. In the near-term, the Krishnapatnam UMPP (EPC value of Rs 12,000 crore) could further push up its order book.
Infrastructure
Among other growth potential segments is the infrastructure space mainly, roads and metro projects. Till now, infrastructure has not contributed in any significant way to revenues, but its contribution is seen increasing gradually. “We are currently having six road projects covering 467 km, of which two projects are almost complete and will start contributing to revenues from FY10. The next three road projects will be operational by Q2 FY11,” says Lalit Jalan.
Off late, the company has emerged as the sole or lowest bidder in three road projects worth Rs 9,440 crore.
Meanwhile, the company’s two metro projects (one each in Mumbai and Delhi) with total cost of Rs 5,250 crore would drive the growth in the future. For both these projects, it has completed the financial closure, ordered critical equipments, awarded contracts and started construction. These two metro projects, which are expected to start operations from Q2 FY11 onwards, have a concession period ranging 30-35 years.
| STEADY NUMBERS | |||
| in Rs crore | FY09E | FY10E | FY11E |
| Sales | 10,000.0 | 9,800.0 | 11,700.0 |
| EBITDA (%) | 12.2 | 9.8 | 9.5 |
| Net profit | 1,045.0 | 990.0 | 1,010.0 |
| EPS (Rs) | 46.1 | 44.0 | 45.0 |
| PE (x) | 13.9 | 14.6 | 14.3 |
| E: Analysts estimates | |||
Investment rationale
The company is in the growth phase and is investing aggressively in its various businesses, the benefits of which should start reflecting over the next 2-3 years. It’s annual cash flow of about Rs 1,300 crore along with cash equivalents of Rs 5,000 crore (adjusted for debt of Rs 5,000 crore) should help meet its medium-term equity funding needs of Rs 2,800 crore.
Nonetheless, the company has lately undertaken a re-organisation plan to transfer its various businesses to seven different 100 per cent subsidiaries. These include Dahanu, Samalkot and Goa power stations, transmission, distribution, EPC, toll-roads and real estate. This move should lead to a transparent structure, enhanced focus and enable the company to unlock value, if required, say analysts.
Meanwhile, analysts expect some near-term pressures, which may lead to a small dip in FY10 earnings. But, since the company operates in different businesses, they prefer to value it on a sum of parts basis and have pegged a value ranging Rs 770-950 per share, which is 20-47 per cent higher than its current market price of Rs 644.
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