Reliance Infrastructure: On firm foundation

Better revenue visibility and execution capabilities make it one of the best plays in the infrastructure sector.

Reliance Infrastructure’s consolidated sales inched up 1.7 per cent year-on-year to Rs 4,043 crore, led by an 11 per cent rise in power revenues to Rs 3,318 crore (including prior period item of Rs 160 crore related to pending rates). Sales from engineering, procurement and construction (EPC) declined 27 per cent year-on-year to Rs 712 crore.

Operating profit jumped 73 per cent to Rs 618 crore due to stable fuel costs and a 31 per cent drop in raw material costs. Profit before interest and tax margin in the power segment almost doubled to 13 per cent, while that in the EPC business rose marginally by 79 basis points to 9.3 per cent.

However, net profit grew just 11 per cent to Rs 360 crore on the back of a loss of Rs 26 crore in other income, as compared to a positive Rs 147 crore a year ago. Also a 26 per cent jump in interest, depreciation and taxation, totalling Rs 339.5 crore, dragged profits.

Going ahead, the company’s power business will benefit from the lifting of the stay order on rate increase by the Maharashtra Electricity Regulatory Commission, renewal of the Mumbai licence, tie-ups with various state governments for distribution franchises and resolution of cross-subsidy issues with Tata Power.

The EPC order book of Rs 24,000 crore jumped 30 per cent sequentially due to four new road projects. This is expected to improve further, as Reliance Power (its 45-per cent subsidiary) achieves financial closure for more power projects.

In the medium term, of the total 25 infrastructure assets worth Rs 40,000 crore spanning various segments, 12 projects of around Rs 20,000 crore (including five roads, one each in transmission, metro and sea link) are expected to generate revenues by the end of 2010-11, with more meaningful impact in 2011-12.

Given the improved visibility of revenues, strong underperformance of the stock compared to the Sensex and a favourable risk-to-reward ratio, most analysts recommend buying the stock.