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Institutional Equities
Investment Arguments
Extension of licence period of Mumbai power distribution company
Mumbai discom includes Dahanu power generation (500MW), transmission network from Dahanu to Mumbai
area and the distribution network in Mumbai suburbs with regulated equity of Rs22bn. MERC has extended
the licence period in suburban Mumbai (which had expired on 15 August 2011) by another 25 years. It was
also clarified that new licencees shall have to lay their own distribution network for distributing electricity, as
the existing network belongs to the company. We believe this is a positive development which will eliminate
the overhang and lead to re-rating of Mumbai discom. We have valued the Mumbai suburbs power
distribution business at Rs119/share (implied P/BV of 1.4x and accounting for 16% of our SOTP) at a
CoE of 13.5%, given the fix return of 16% on regulated equity.
Exhibit 8: Regulated equity
Segment Regulated equity (Rsmn) RoE (%)
Distribution 14,900 16
Transmission 1,500 15
Generation 5,500 23
Total (Mumbai discom) 21,900 -
Delhi discoms (BRPL&BYPL) 22,000 16
Source: Company, Nirmal Bang Institutional Equities Research
Cross subsidy charges lead to reduction in subscriber migration
MERC has approved cross-subsidy charges to customers who have migrated to Tata Power Company. Crosssubsidy
charge would be levied over and above the wheeling charges. This would allow the company to
charge a higher tariff to migrated customers in order to subsidise low-end customers. Earlier, Tata Power
Company was able to poach high-end customers of Reliance Infrastructure as Tata Power Company’s tariff,
even with wheeling charges, were lower. Once cross-subsidy charges are levied, there will not be much
difference between Reliance Infrastructure and Tata Power Company’s tariff and hence, the cross-over of
customers is expected to reduce.
Exhibit 9: Customer base
Exhibit 10: Electricity units sold
Source: Company, Nirmal Bang Institutional Equities Research
Source: Bloomberg, Nirmal Bang Institutional Equities Research
Approval for regulated assets worth Rs 23bn should lead to reduction in debt
The company’s accumulated regulatory assets (the gap between power cost and tariff to consumers) of Rs
23bn has increased its debt by the same amount. MERC has approved regulatory assets of Rs 23bn, which
will be recovered over a period of time. Apart from this, the company is now levying charges based on the cost
of electricity and as result no regulatory assets are getting built.
44 Reliance Infra