<strong>Institutional</strong> <strong>Equities</strong> This page has been intentionally left blank 40 IRB
Initiating Coverage <strong>Institutional</strong> <strong>Equities</strong> Reliance Infrastructure Reuters: RELIN.BO Bloomberg: RELI IN Core earnings to improve Renewal of Mumbai discom licence and the recent tariff hike in Delhi electricity distribution business are likely to eliminate the overhang on Reliance Infrastructure’s valuation with respect to its power distribution business. The EPC segment has an order book of Rs280bn, which would drive revenue growth in coming years. Infrastructure projects are now turning from the development stage to the revenue generation stage with the commissioning of six road projects, Mumbai metro rail phase I and one transmission project in the next six months. However, the stock is currently trading at a P/BV of 0.5x, which we believe is unjustified and below stress case valuation. We assign a Buy rating and a target price of Rs724 to the stock. End of power distribution overhang: MERC has extended the company’s power distribution licence period in suburban Mumbai for the next 25 years, allowed charging cross-subsidy for migrated customers and also approved recovery of regulatory assets worth Rs23bn. Cross-subsidy charge will reduce the migration of high-end customers and recovery of regulated assets will reduce debt and improve cash flow. Recently, DERC hiked the power tariff by 21.7% after six years, which will ease the liquidity crunch faced by Delhi distribution units.We believe that overall it is a positive development that will eliminate the overhang with respect to electricity distribution business. EPC business with order book of Rs 280bn: The company’s order book stands at Rs 280bn, which is 7x FY11 EPC revenue. We believe EPC revenue is at inflexion point and will show a CAGR of 50% between FY12-13. We expect the company to maintain its EBITDA margin of 8% in the EPC segment driven by in-house designing, engineering capability and skilled manpower. Infrastructure projects’ earnings have started picking up: The company has a strong infrastructure portfolio that consists of eleven road projects, three metro rail lines and five power transmission projects worth Rs346bn. The execution of key infrastructure projects is on track and six road projects, Mumbai metro rail phase I and one transmission project will be commissioned during FY12. The company’s infrastructure portfolio is now turning from the development stage to the revenue generation mode. Stock trading below stress case valuation: Reliance Infrastructure is currently trading at a P/BV of 0.5x and if we adjust the value of stake in Reliance Power and cash on the books, the market appears to be assigning just 10% value to infrastructure, electricity and EPC projects, which we believe is unjustified and below stress case valuation. We assign a Buy rating and a target price of Rs724 to the stock. Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Net Sales 125,781 146,286 151,278 186,080 221,879 YoY (%) 50.7 16.3 3.4 23.0 19.2 EBITDA 6,299 12,264 14,981 30,729 40,056 EBITDA Margin (%) 5.0 8.4 9.9 16.5 18.1 Net Profit (Post MI & Associate) 13,532 15,194 15,516 16,201 19,432 YoY (%) 14.9 12.3 2.1 4.4 19.9 Adj. EPS 50.6 56.8 58.0 60.6 72.6 PER (X) 8.5 7.5 7.4 7.1 5.9 P/BV (x) 0.7 0.6 0.5 0.5 0.4 ROCE (%) 1.0 2.3 2.5 4.6 5.8 ROE (%) 8.0 7.3 6.6 6.5 7.3 Source: Company, Nirmal Bang <strong>Institutional</strong> Reearch 26 September 2011 BUY Sector: Infrastructure CMP: Rs434 Target Price: Rs724 Upside: 67% Amit K Srivastava amit.srivastava@nirmalbang.com +91-22-3926 8116 Nitin Arora nitin.arora@nirmalbang.com +91-22-3926 8169 Key Data Current <strong>Share</strong>s O/S (mn) 267.4 Mkt Cap (Rsbn/US$bn) 116/2.3 52 Wk H / L (Rs) 1,135/402 Daily Vol. (3M NSE Avg.) 1,449,998 <strong>Share</strong> holding (%) 3QFY11 4QFY11 1QFY12 Promoter 48.1 47.7 47.7 FII 17.1 16.8 16.3 DII 21.0 21.3 22.2 Corporate 2.7 2.7 3.0 General Public 11.0 11.0 10.8 One Year Indexed Stock Performance Price Performance (%) 1 M 6 M 1 Yr Reliance Infra (3.7) (31.9) (59.2) Nifty Index (1.6) (11.2) (18.3) Source: Bloomberg