R-Infra better bet than R-Power

While analysts are cautious about ADAG’s power firm due to lack of clarity over some projects, they see much value in the group’s infrastructure arm.

The share prices of the Anil Dhirubhai Ambani Group’s (ADAG) leading companies in the infrastructure segment, namely, Reliance Infrastructure and Reliance Power, continue to remain under pressure. Both the stocks fell nearly six per cent on Tuesday, adding to their underperformance versus the BSE Sensex in the past year.

The better than expected quarterly results of the two companies (announced last Thursday), and Friday’s news about the Maharashtra Electricity Regulatory Committee (MERC) renewing R-Infra’s electricity distribution licence for the Mumbai circle, clearly haven’t helped improve market sentiment.
 

INTEREST COSTS CURTAIL PROFITS
in Rs crore	R-Infra Q1FY12	% Chg (y-o-y)	R-Power Q1FY12	% Chg (y-o-y)
Sales	5,191.2	38.4	541.8	288.9
Ebitda	791.0	93.9	185.1	425.2
OPM (%)	15.2	436 bps	34.2	887 bps
Interest	216.6	57.8	76.1	158.4
Net profit	405.4	8.0	196.1	0.4
EPS (Rs)	15.2	0.6	0.7	-14.6

Both companies did well on revenue and operating performance for the quarter ended June. For R-Infra, higher revenues were helped by better execution in the engineering construction or EPC business, which grew 214 per cent compared to the year-ago period. In the case of R-Power, a 91 per cent plant utilisation of its only operational Rosa Power plant (UP’s Shahjahanpur district) helped generate three times higher volumes, leading to a similar jump in revenues in the quarter. However, due to higher interest costs, their net profits grew marginally.

At current levels, analysts see value in R-Infra’s stock, trading at almost half its book value of Rs 900. The ongoing buyback to acquire shares below Rs 725 could provide it further support. The company has so far bought back shares worth Rs 140 crore as against the Rs 1,000 crore buyback programme.

On the other hand, R-Power continues to trade at higher valuations of 16 times its 2012-13 estimated earnings compared to other utilities. “Given the company’s back-ended pipeline, delays in project execution, questions on profitability of the Krishnapatnam UMPP (increase in Indonesian coal prices) and uncertainty of gas supply for the upcoming Samalkot project (Andhra’s East Godavari district), we think the premium is not justified,” says Shilpa Krishnan of JP Morgan in a recent note on the company.

CLARITY ON R-POWER
R-Power is expected to increase its power capacity to a little over 12,000 Mw by 2014-15, compared to its current capacity of 600 Mw. However, this comes in the backdrop of the fact that some of its projects have been delayed. Also, its Krishnapatnam UMPP (Andhra’s Nellore district) of 4,000 Mw, expected to start in phases from 2013-14, has come in the limelight on account of a change in Indonesian regulations regarding the price of coal exported from that country.

Analysts say the company will most likely have to renegotiate the power purchase agreements, which could attract some penalties. Emkay’s analyst, however, notes in his report that the project is contributing a negative Rs 4 per share to R-Power’s net present value. While not significant, there is some risk. In the case of non-availability of gas, analysts have also raised concerns over its 2,400 Mw Samalkot power plant, expected to be commissioned by end-2011 or early 2012. Though issues remain, which could have an impact on future growth, the company is still expected to report strong growth over the next few years. Analysts expect its profits to more than double to Rs 1,600 crore by 2012-13 (earnings per share of Rs 5.8). However, due to lack of clarity on some of the projects, they are cautious on the stock.

R-INFRA IMPROVES
The benefits of growth in R-Power will also accrue to R-Infra, which holds 38.4 per cent in the former. Also, the company will stand to gain on the business front, as a large part of R-Infra’s order book is accounted by the EPC work for R-Power’s projects. By the end of the June quarter, R-Infra reported an order book of Rs 28,000 crore, more than nine times its revenue from that segment and provides good revenue visibility.

Its Mumbai Line-1 metro project is expected to be commissioned by March 2012. While it also has four operational road projects, another six would start generating revenues in 2011-12. In the distribution business, too, the company has seen traction. Its Mumbai licence has been renewed for 25 years and MERC has approved recovery of Rs 2,316 crore from all consumers, including those who had shifted to Tata Power. Also, the rate issues relating to the Delhi distribution circles are getting resolved. Analysts are expecting the company to report about 15-20 per cent annual growth in revenues over the next two years, with strong growth in profits next year due to increased contribution from the projects which will be commissioned by the end of 2011-12.