Reliance Infrastructure: More orders hold the key

While concerns pertaining to the power and infra projects are easing, the order book of EPC offers limited visibility

Government policies and a slowdown in India's economic growth played a key role in the case of infrastructure companies. Reliance Infrastructure had seen significant de-rating because of issues pertaining to its power and infrastructure businesses. Because of the regulatory risk, a large chunk of the equity invested by the company in some of its projects was written off by the market. While the equity invested in these businesses was not generating commensurate returns, the loans taken for these projects were eating into profits.

In the recent past, its share prices had dropped to a level less than half the company's book value. However, as the Street is once again showing its confidence about the company's projects, the stock is witnessing a re-rating and the market has started to value equity it had written off. As a result, its share price has doubled in three months. However, considering the stock is still trading at cheap valuations, analysts say there could be more upside in the light of changing business environment.

Most of the capex is now behind and the projects have started to generate revenues as they reach the operational stage. For example, Mumbai Metro's Line One started commercial operations on Sunday. In the road business, 10 of 11 projects (4,640 km) have started tolling while the one remaining is expected to start toll collection soon.

In the transmission business, too, eight of nine lines of Western Regional System Strengthening project have become operational. In the Mumbai distribution region, the company has recovered Rs 500 crore for the cross-subsidy surcharge. In Delhi distribution, it has got seven per cent increase in rate. Though the rate is still below its cost and the company continues to have under-recoveries, it has eased some worries. In cement, the company has commissioned its five-million-tonne plant in Madhya Pradesh.

The market is also eagerly waiting for its engineering, procurement and construction business to see improvement. Analysts say if the recovery in power sector takes place, large projects from Reliance Power will start coming and the order book concerns will ease to some extent. Revenues from the engineering, procurement and construction (EPC) business had been falling because of weak order book and project delays. By the end of March, EPC reported an order book of Rs 6,615 crore on a turnover of Rs 4,710 crore, indicating less revenue visibility (18 months).

"The management indicated that the first leg of the project under execution is through and the order book will now be built with new projects flowing in. It expects addition of new projects like Tilaiya, Sasan expansion, etc (of Reliance Power). It is also looking at third-party projects in power and roads sectors," said Nalin Bhatt at Motilal Oswal Securities.

Overall, part of the Street's optimism is visible in the business. But, how the EPC business shapes and performs will be crucial for further re-rating.