Growth concerns to weigh on R-Infra's valuations

Though its electricity business provides steady growth, the construction and engineering (EPC) business, which continues to report declining revenues, is a concern for Reliance Infrastructure. The EPC business, which accounted for about half the company’s revenues, saw its share fall to a third at the end of December. During the quarter ended December, EPC revenues fell 38 per cent, resulting in a 14-per cent year-on-year fall in consolidated revenues.

Visibility in the EPC business remains a concern; analysts don’t expect any of the hurdles to be resolved soon, owing to the overall economic slowdown and the weak investment climate. Earlier, the company had estimated Rs 12,000 crore of revenue in the EPC business for FY13. Later, this was scaled down to Rs 9,000-10,000 crore. However, looking at the current growth (for the April-December period, the EPC segment recorded revenue of Rs 5,392 crore), analysts' expectations are low. The company’s order book has fallen from Rs 17,300 crore at the end of March 2012 to Rs 12,145 as of December-end.

Sustaining healthy growth in the EPC business is important, as this would take care of fixed costs incurred on the company’s infrastructure projects. Apart from the metro rail projects in Delhi and Mumbai, Reliance Infrastructure has eight operational road projects. Recently, its Delhi metro project had been restarted, after obtaining the required clearances. Work on the Mumbai metro is progressing, albeit with some delays. Despite a large portfolio of projects, the infrastructure segment, which accounts for 37 per cent of the capital invested in business, contributes just three per cent to overall revenues. During the December quarter, about 38 per cent of operating profits were used to pay interest costs (which rose 27 per cent year-on-year). Given the recently executed projects in infrastructure, interest costs could remain at elevated levels. This would keep a tab on consolidated earnings, as seen in the December quarter (the company reported a 5.6 per cent rise in net profit at Rs 429 crore, excluding gains of about Rs 300 on the sale of shares of Reliance Power).

MUTED BOTTOMLINE
In RS crore	Q3'FY13	FY13E	FY14E
Revenues	5,296	22,216	25,378
% change y-o-y	-14.0	25.7	14.2
Ebitda	775	2,103	2,122
% change y-o-y	-2.6	32.3	5.3
Net profit	429	1,333	1,459
% change y-o-y	5.6	-37.2	9.5
EPS (Rs)	-	49.8	54.5
PE (x)	-	10.4	9.5
Consolidated financials Source: analyst reports

“The results are below UBS estimates, mainly due to a poorer-than-expected performance in the EPC business (primarily execution related issues),” Pankaj Sharma, who tracks the company at UBS Securities, said in a recent note.

Lack of substantial growth and concerns over some of its projects like the Mumbai metro is reflected in the current low valuations. Given the nature of business, analysts prefer to value the stock on the basis of assets. Today, the stock closed at Rs 519.35 on the BSE, 0.5 times its book value of Rs 995 a share. Though the company has a strong balance sheet and a huge asset base, comprising large projects in the power (932 Mw generation project, distribution assets in Mumbai and Delhi) and infrastructure segments and a 36.52 per cent stake in Reliance Power (worth Rs 9,400 crore at current prices), considering the concerns, the stock is unlikely to rise in a hurry.