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Initiating Coverage
Institutional Equities
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 Institutional 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 Shares 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
Share 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