RInfra: Don't fret over discoms

Even if licences get cancelled, the market should take it positively, as large liabilities would shift out of company books

The concerns about the regulatory risk over Reliance Infrastructure’s power and infrastructure businesses in the recent past, particularly the political development in Delhi has added a new chapter. So far, the Delhi government was insisting on bringing down the power rate but now the focus has shifted towards cancelling the licence of Reliance Infra’s distribution companies. The reason: While Delhi discoms, including the one run by Tata Power, were finding it difficult to cut rates, the two discoms of Reliance Infra claim they do not have sufficient funds to pay their dues to NTPC, threatening to cut supplies if these are not cleared by February 10. The Delhi government, in turn, has written to the Delhi Electricity Regulatory Commission to cancel the licences if the two discoms resort to long hours of blackout in the country’s capital.

As a result, Reliance Infra's stock continues to languish and because of these issues, the Street is ascribing little value to some of its lucrative power and infrastructure assets. This is also visible from the fact that the stock at Rs 364 is currently trading at almost half its book value of around Rs 800 a share.

The Delhi distribution business is fairly large in terms of revenues and the amount of capital invested. However, the return ratios (return on capital employed and networth) have been on a decline in the past three or four years.

How much impact will these developments have on the financials and stock of Reliance Infra will depend on the Delhi government's and DERC's action on the same. However, market experts say it should be very little.

"First of all, the market is anyway not giving much value to these investments in the overall valuations of the company (Reliance Infra). So even if in the worst case, which does not seem to be possible currently, one can write off those investments from the valuations to the extent of Reliance Infra's stake in these companies," said an analyst with a leading broking house.

An email questionnaire sent to the company remained unanswered at the time of going to print. Reliance Infra's Delhi distribution business is undertaken by two companies - BSES Rajdhani Power Limited (BRPL) and BSES Yamuna Power Limited (BYPL) - having an aggregate total income of Rs 9,818 crore. Reliance Infra holds a 29 per cent stake each in the two companies, which together have about Rs 2,500 crore in shareholder's funds (equity).

Even at 29 per cent, the value of Reliance Infra's stake works out to about Rs 725 crore, which is merely 2.8 per cent of its consolidated equity (networth of Rs 25,181 crore at end-March 2013) and 7.6 per cent of its market capitalisation (Rs 9,402 crore). The market was anyway ascribing a very low multiple. At half the book value, the per-share value of these investments works out to just Rs 14 or four per cent of its current market price of Rs 358.

"Though the market may be ignoring these investments, we do not think the cancellation will have any major negative impact. In fact, if it is cancelled, there will be huge incentive for the company as it will get its equity back, which the market is completely ignoring. Further, the company will not have to provide continuous financial support to these companies, which are sitting on Rs 10,000-15,000 crore regulatory assets and debt in the books of about Rs 6,000 crore," said an analyst who is tracking the company at another leading broking house.

In this light, although the market does not see any probability of its licence getting cancelled, even if that takes place, the market should take it in positive stride given that large amount of liabilities would shift out of its books. However, that may still not lead to a re-rating of its stock as most analysts are cautious at this point due to the growth uncertainty hovering around its other businesses.