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Monday, September 3, 2012

RELIANCE INFRASTRUCTURE : Accumulate at every Dip !!!

Scrip Code: 500390 RELINFRA
CMP:  Rs. 444.10; Buy at Rs. 435 - Rs. 440 levels.
Short term Target: Rs. 500; Medium to Longer term Target: Rs. 600; 
STOP LOSS – Rs. 404.00; Market Cap: Rs. 11,679.38 Cr; 52 Week High/Low: Rs. 679.75 / Rs. 328.30
Total Shares: 26,29,90,000 shares; Promoters : 12,76,26,990 shares –48.53 %; Total Public holding : 13,53,63,100 shares – 51.47 %; Book Value: Rs. 705.00; Face Value: Rs. 10.00; EPS: Rs. 72.12; Div: 73.00 % ; P/E: 6.23 times; Ind. P/E: 14.00; EV/EBITDA: 9.37
Total Debt: 9,147.73; Enterprise Value: Rs. 17,024.13 Cr.

RELIANCE INFRASTRUCTURE LTD: The Company was incorporated in 1929 and is based in Mumbai, India. The Company was formerly known as BSES which later was renamed as Reliance Energy Limited and changed its name to Reliance Infrastructure Limited in April 2008. Reliance Infrastructure is an Anil Dhirubhai Ambani Group (ADAG) company. Reliance Infrastructure Limited engages in the generation, transmission, distribution, and trading of power in India. The company also focuses on other key infrastructural areas, such as highways, roads, bridges, metro rail (Delhi and Mumbai), and other mass rapid transit systems, special economic zones, and real estate. The company distributes approximately 36 billion units of electricity to approximately 30 million consumers across an area that spans approximately 1,24,300 square kilometers and includes India's two primary cities, Mumbai and Delhi. It generates approximately 940 MW of electricity through its power stations located in Maharashtra, Andhra Pradesh, Kerala, Karnataka, and Goa. The Company operates in two business segments, Electrical Energy; and Engineering, Procurement, and Construction (EPC) and Contracts. In Electrical Energy, the company operates a 500 MW Thermal Power Station at Dahanu; a 220 MW combined cycle power plant at Samalkot; a 48 MW combined cycle power plant at Mormugao; and a 7.59 MW Wind farm at Chitradurga. It also purchases power from third parties and supplies the power through its own distribution grid. The company supplies power to residential, industrial, commercial, and other consumers. In the EPC and Contracts Segment it renders value-added services in construction, erection, and commissioning. It undertakes contracts of projects in various fields like power generation, transmission, and distribution. This division mainly focuses on the power sector projects. The company holds 38% in Reliance Power that plans to have a portfolio of 32 GW of generating asset. The company is compared with Torrent Power Ltd, TATA POWER, PTC INDIA, POWER GRID and CESC Limited.

Investment Rationale:
RELIANCE INFRASTRUCTURE LIMITED is developing various road and metro projects besides bidding for various infrastructure projects. The infrastructure space too, like power, is expanding in a big way with a potential market size of $49,400 Cr. The company, being a part of ADAG, plans to be a major player in the infrastructure segment by owning assets on a Built- Operate and Transfer (BOT) basis and leveraging its financial and technical strengths. The company’s Two road projects – Gurgaon ‐ Faridabad and Salem ‐ Ulundurpet has completed recently. With this, 7 out of 11 road projects are revenue operational. Of the balance, Rel Infra expects three more roads to be revenue operational in FY13 and the last one in FY14. From the Rs. 15,600 Cr EPC order book, half comes from Reliance Power’s projects (Sasan, Butibori and Samalkot) and the balance from external/BOT projects. The company has made considerable progress on its cement projects in Maharashtra & Madhya Pradesh, the grinding & blending unit at Butibori in Maharashtra is nearly completed. The company expects to start production very soon may be within a month, RELINFRA have already started trial runs & produced a sample bag of Cement. RELINFRA’s Delhi Airport metro operations have been suspended due to problems in the civil structures which were 92% of the bearings and 7% of pillars which were recognized as defective and lots of girders were impacted. Since the Special Purpose Vehicle (SPV) which owns the project is expected to incur losses on the project, the management has decided to park its stake in one of its associates and reverse the same once the issue is resolved. The company expects the Mumbai Metro to be completed by FY13 end. Reliance Infrastructure (RELI) reported a standalone PAT of Rs. 380 Cr, due to weakness in the EPC division numbers. The management expects the low EPC order book (Rs. 15,600 Cr order book is 1.3x TTM revenues) to improve over the next 12‐ 18 months through both internal and external projects; hence FY13 revenues are expected to be around Rs. 9,000‐10,000 Cr. Tariff revision in Delhi discom is a positive, and the completion of all infrastructure projects by FY14 should boost future cash flows. RELINFRA’s Other income is higher due to better yields on FMP maturity on cash surplus of Rs. 10,500 Cr. Considering that most of the equity infusion in the infrastructure business has already been done, the management expects other income to be better than previous year going forward. The company’s EPC division posted revenues of Rs. 1,770 Cr with margins of 10.3% (flat sequentially). The company hiked the power tariff in Mumbai by 16.48% from 1st August 2012 while in Delhi; tariffs were hiked by 21% from July 1, 2012 which should improve the cost recovery and profitability. In Delhi, regulatory assets worth Rs. 5,500 Cr have been approved. Of the balance, RELI expects Rs. 4000 Cr to be approved by the year end. Regulatory assets worth another Rs. 4000 Cr, already approved by the appellate tribunal, have been challenged by the regulator. 

Outlook and Valuation:
Reliance Infrastructure Ltd is believed to be emerged as a major power EPC player in the next few years, benefiting from the large addressable market to be created by the addition of 100,000 MW in the 12th Plan. Further, it holds a stake of 38% in Reliance Power and thus has the opportunity to invest in the entire power space, ranging from generating asset development to building transmission assets and power EPC. There have been changes in margins from the EPC business in the past one year due to the volatility in commodity prices and high interest rates. While it is understand that RELINFRA has entered into back‐to‐back contracts to minimize the margin erosion, the scale and timing of projects could expose the company to execution risks. The road traffic growth has been dented due to the depressed industrial growth and weak macro environment. This, in addition to any delay in execution of infrastructure projects, could impact valuations.  The company has parked a sizeable part of its investments in group entities and yield bearing instruments. Since other income contributes significantly to the total earnings of the company, any diminution in the value of the same could impact valuations. The Resolution of regulatory issues is a positive since it would improve earnings and cash flows. The declining competition for infra projects (due to funding issues) will benefit financially sound companies like RELINFRA. However, limited revenue visibility and clearance issues related to R Power’s projects are a dampener. The Maharashtra Electricity Regulatory Commission (MERC) has now ordered that any residential category consumer wishing to switch over from RELINFRA to TATA POWER should have minimum consumption of 300 units. Its a great relief for REL INFRA as its consumer base was reducing due to its consumer being switching over to TATA POWER for cheaper power. It is to be noted here that REL INFRA buys power from TATA POWER and supplies to its consumers around Mumbai. This order of a cap of 300 units will benefit REL INFRA. At the current market price of Rs. 444.10 the stock is trading at 9.11 x FY13E for which Earning Per Share (EPS) is seen at Rs. 48.70 and for FY14E it trades at 9.00 x FY14E for which EPS is seen at Rs. 49.30. One can buy REL INFRA with a short term target price of Rs. 500 for the Medium to Long term players it should be Rs. 600 with ultimate target of Rs. 936. 

Business FY13E
Value Per Share (in Rs.)
Reliance Power
Infrastructure Projects
Regulated Power Business
Net Cash

SALES (Rs. Crs)9,560.0017,906.7015,672.4015,747.20
NET PROFIT (Rs. Crs) 1,125.401,546.201,280.301,296.80
EPS (Rs.)42.1058.8048.7049.30
PE (x)12.509.0010.8010.70
P/BV (x)0.800.700.700.70
EV/EBITDA (x)4.903.703.103.00
ROE (%)6.6011.006.706.40
ROCE (%)7.9019.2012.0011.90

I would buy RELIANCE INFRASTRUCTURE LTD with a price target of Rs. 500 for the short term and Rs. 600 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 404.00 on every purchase. 



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