Reliance Infra rejig: Vote against, IiAS tells shareholders

Transfer of power business to subsidiary could increase debt levels, says proxy advisory firm

A plan by Reliance Infrastructure (R-Infra) to transfer its power generation business to a wholly owned subsidiary has not gone down well with Institutional Investor Advisory Services (IiAS).

Mumbai-based IiAS has recommended the shareholders of R-Infra vote against the proposal at the court-convened meeting scheduled the coming Monday.

State-owned institutions Life Insurance Corporation (12.3 per cent), New India Insurance (1.5 per cent) and Oriental Insurance (1.3 per cent) are among the top public shareholders. Apart from this, at least 100 foreign portfolio investors and other institutions hold a little over 20 per cent in the Anil Ambani-promoted entity.

A special resolution to “approve transfer of the power generation business and windmill division to Reliance Electric Generation and Supply Pvt Ltd (REGSPL), wholly owned subsidiary, for an aggregate cash consideration of Rs 62.9 bn (Rs 6,290 crore)” will be put to vote in the meeting.

IiAS says its own recommendation flows from the lack of detail on the funding plan and uncertainties around it. While acknowledging the structural correction of businesses is likely to increase the, IiAS said it was recommending voting against “based on the lack of clarity with respect to the need for a cash transaction and its funding plan which may increase the debt levels”.

In the first nine months of 2016, the power division had earnings before interest and tax of Rs 1,340 crore. Therefore, assuming REGSPL raises the remaining Rs 5,000 crore as debt, the ratio of debt to operational profit would deteriorate to 6, against 5.6 times as on March 2015, IiAS said.

In response to an e-mail questionnaire sent on Saturday, an R-Infra spokesperson declined to comment. The power business contributes 42 per cent of the total consolidated revenue of R-Infra. The company has said the total enterprise valuation (EV) for the business has been assigned at about Rs 12,000 crore (equity Rs 6,290 crore, debt Rs 5,810 crore). This translates into an EV/sales multiple of around 1.5, in line with peers. The consideration was being received in cash, rather than through an issue of shares, to improve liquidity at the standalone level, IiAS said.

Its report added, “The management has clarified that the consideration to be received from REGSPL will be funded through a mix of internal accruals, debt and capital infusion by promoters. However, all of these fund raising aspects are hinged on several uncertainties. This transaction will only increase consolidated debt levels, in the absence of sufficient cash flows or promoter infusion.”

R-Infra has three business segments — electrical energy, EPC (engineering, procurement, construction) and contracts, and infrastructure. Under the first one, engaged in generation, transmission, and distribution of electricity, it has a 500 Mw thermal power station at Dahanu, near Mumbai; a 220 Mw power plant at Samalkot (Andhra), a 48 Mw power plant at Mormugao (Goa) and a 7.6 Mw wind energy farm at Chitradurga (Karnataka). Of the Rs 6,290 crore consideration, Rs 5,580 crore is for the Mumbai division, while the Samalkot and Goa facilities are valued at Rs 560 crore and Rs 110 crore, respectively. The windmill was worth Rs 40 crore.

The EPC and contracts segment is engaged in the business of construction, erection, commissioning and contracting. The infrastructure segment develops, operates and maintains toll roads, metro rail transit systems and airports.

In December, the company acquired management control in Pipavav Defence.