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Reliance Infrastructure is likely to retain its license to distribute power
in suburban Mumbai over the next 25 years. The license was slated to
expire in Aug-11. The issue of the renewed license by the regulator to RELI
is subject to favorable outcome of a public hearing to be held on 9th July
(Source TOI). Mumbai distribution is RELI’s cash flow engine and
accounted for ~37% of consolidated EBIT in FY11. The sustainability of
these cash-flows was in question owing to the nearing expiry date.
RELI has bid the lowest tariff over FY12-16 (between Rs3.35-
Rs4.34/unit), followed by Torrent Power (Rs4.01-Rs4.49), Indiabulls
(Rs4.12-Rs4.3), MSEDCL (Rs.4.53-5.6) and Lanco (Rs4.96-Rs5.79).
TPWR already has a distribution license and was not required to bid. Lanco
and Indiabulls do not have past experience of distributing power. The
aspiring suppliers, including experienced players like MSEDCL and
Torrent, were required to lay their own distribution wires and could not use
RELI’s existing network. This factor seems to have contributed to RELI’s
cheaper bid. As per management RELI has tied up >500MW with KSK
Energy, Abhijit Group and Reliance Power in the range of ~Rs4.4-
Rs4.85/unit. Management expects that the blended tariff including captive
generation at Dahanu (500MW) should allow them to match their bid tariff.
RELI is trading at 0.5x FY12 book value; markets discounting infra
business. Stake in RPWR valued at our Mar-12 PT of Rs90/share (at a 17%
discount to CMP) amounts to Rs383/share or 72% of RELI’s stock price.
Combined with our DCF based valuation for Mumbai and Delhi distribution
businesses at Rs135/share, the two account for ~98% of CMP. The balance
portfolio i.e. (1) the EPC business (order book of ~Rs300bn, mainly
RPWR’s projects), (2) 11 roads (3 operational) (3) 3 metro projects of
which Delhi is operational and (4) net-cash on balance sheet appears to be
heavily discounted. Management comments on plans to sell stake in
infrastructure projects to foreign funds/PE firms (as per Reuters) is positive
in our view, as - (1) This would set a valuation benchmark for the project;
(2) Spread project risk to strategic investors
Stock view. Our concerns on the stock arise from group exposures, use of
cash flows for unrelated/low-return ventures, EPC risks; besides
sustainability of Mumbai distribution cash flows. RELI's sharp
underperformance is reflecting these concerns, but it would take some
improvement in market risk appetite for a decisive bounce back. Renewal of
Mumbai distribution license is a strong stock-specific catalyst in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Infrastructure is likely to retain its license to distribute power
in suburban Mumbai over the next 25 years. The license was slated to
expire in Aug-11. The issue of the renewed license by the regulator to RELI
is subject to favorable outcome of a public hearing to be held on 9th July
(Source TOI). Mumbai distribution is RELI’s cash flow engine and
accounted for ~37% of consolidated EBIT in FY11. The sustainability of
these cash-flows was in question owing to the nearing expiry date.
RELI has bid the lowest tariff over FY12-16 (between Rs3.35-
Rs4.34/unit), followed by Torrent Power (Rs4.01-Rs4.49), Indiabulls
(Rs4.12-Rs4.3), MSEDCL (Rs.4.53-5.6) and Lanco (Rs4.96-Rs5.79).
TPWR already has a distribution license and was not required to bid. Lanco
and Indiabulls do not have past experience of distributing power. The
aspiring suppliers, including experienced players like MSEDCL and
Torrent, were required to lay their own distribution wires and could not use
RELI’s existing network. This factor seems to have contributed to RELI’s
cheaper bid. As per management RELI has tied up >500MW with KSK
Energy, Abhijit Group and Reliance Power in the range of ~Rs4.4-
Rs4.85/unit. Management expects that the blended tariff including captive
generation at Dahanu (500MW) should allow them to match their bid tariff.
RELI is trading at 0.5x FY12 book value; markets discounting infra
business. Stake in RPWR valued at our Mar-12 PT of Rs90/share (at a 17%
discount to CMP) amounts to Rs383/share or 72% of RELI’s stock price.
Combined with our DCF based valuation for Mumbai and Delhi distribution
businesses at Rs135/share, the two account for ~98% of CMP. The balance
portfolio i.e. (1) the EPC business (order book of ~Rs300bn, mainly
RPWR’s projects), (2) 11 roads (3 operational) (3) 3 metro projects of
which Delhi is operational and (4) net-cash on balance sheet appears to be
heavily discounted. Management comments on plans to sell stake in
infrastructure projects to foreign funds/PE firms (as per Reuters) is positive
in our view, as - (1) This would set a valuation benchmark for the project;
(2) Spread project risk to strategic investors
Stock view. Our concerns on the stock arise from group exposures, use of
cash flows for unrelated/low-return ventures, EPC risks; besides
sustainability of Mumbai distribution cash flows. RELI's sharp
underperformance is reflecting these concerns, but it would take some
improvement in market risk appetite for a decisive bounce back. Renewal of
Mumbai distribution license is a strong stock-specific catalyst in our view.
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