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Institutional Equities
Assign Buy rating to stock with a target price of Rs724
We assign a Buy rating and a target price of Rs724 to Reliance Infrastructure, implying 58% upside from the
CMP, as the company’s business model comprises regulated returns, market driven returns, long gestation
projects, and investments that cannot be captured by earnings-based multiple. Hence, we have used SOTP
methodology, using a combination of price to book value (P/BV) and discounted cash flow (DCF) approach for
the regulated business and infrastructure projects (road and metro rail projects), EV/EBITDA for EPC business
and investment in Reliance Power at a 30% discount to the CMP. Our SOTP-based TP comprises: (1)
Rs150/share from electricity business (Mumbai discom and Delhi discom), (2) Rs121/share from the EPC
business, (3) Rs223/share from 38% stake in Reliance Power (4) Rs191/share as equity value of infrastructure
projects (road, metro rail and transmission projects), and (5) Cash and investible surplus in the books at
Rs40/share (at 50% discount).
Exhibit 1: SOTP valuation
Valuation (Rsmn) Stake Method Multiple EBITDA EV Rs/share
EPC segment - EV/EBITDA FY13, 5x 6,483.84 32,419 121
Mumbai licence area - DCF-Equity CoE-14% - - 119
R-Power 38% 30% disc. to CMP - - - 223
Delhi distribution 49% DCF -Equity CoE-14% - - 31
Metro rail projects - DCF -Equity CoE-16% - - 27
Road projects - DCF -Equity CoE-16% - - 149
Power transmission projects - DCF -Equity CoE-16% - - 14
Net cash - - - - - 40
Target price - - - - - 724
Source: Company and Nirmal Bang Institutional Equities Research
Stock trading below stress case valuation level
Reliance Infrastructure has historically traded in the range of 0.7x to 4.5x P/BV, which has come down to 0.5x.
Adjusted for the value of stake in Reliance Power and cash in its books; the market appears to be assigning
just 10% value to infrastructure, electricity and EPC businesses combined, which we believe is unjustified. We
believe the stock will be re-rated on successful commencement of infrastructure projects under development,
deployment of cash in profitable infrastructure projects and improvement in execution of EPC order book.
Exhibit 2: PE ratio trend
(x)
60
50
40
30
20
10
0
Sep-07 Sep-08 Sep-09 Sep-10 Sep-11
P/E
5 year avg
Source: Company, Nirmal Bang Institutional Equities Research
Exhibit 3: P/BV trend
(x)
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Sep-07 Sep-08 Sep-09 Sep-10 Sep-11
P/B
5 year avg
Source: Bloomberg, Nirmal Bang Institutional Equities Research
Electricity business
The company’s electricity business includes Mumbai discom (generation, transmission and distribution) and
Delhi distribution which earns regulated return on equity. We have used the DCF model to value the electricity
business. We have assumed 14% cost of equity and a terminal growth of 3%. Accordingly, we have derived a
value of Rs119/share (implying a P/BV of 1.4x) for Mumbai discom and Rs 31/share (implying a P/BV of
0.75x) for Delhi discoms.
42 Reliance Infra