Reliance Power: Swinging the other way

The much-awaited decision will have a telling impact on its plans. 

The long-pending event has happened. And, expected to have negative impact on Reliance Power and, thereby, Reliance Infrastructure. Little wonder both entities saw market capitalisation drop by Rs 5,000 crore on Friday. The decision on gas pricing and availability was seen as the key swing factor for Reliance Power. Profits will be there, but the extent of estimated earnings is set to be lower. This is the factor that could impact share price movement, reckon analysts. 

While calculating earnings, analysts had assumed a swing factor that could take the shares down, in the range of 30-40 per cent. With the court ruling in favour of a $4.2 per mBtu price, the impact on earnings will be felt. 

The 7,480-Mw Dadri project (as envisaged, when fully complete) is in jeopardy, as estimates were made at $2.3/mBtu rates. Analysts feel the gas cost will more than double: in this case, the $4.2/mBtu cost is a wellhead cost. There would be an additional $1/mBtu cost to take it to the plant from KG-D6 in Andhra Pradesh to Dadri in Uttar Pradesh. With such rates, the cost of power production is expected to be more than Rs 6 per unit. 

Experts cite the example of the Dabhol Power Project, which uses the same gas at the same rate to generate power at Rs 4.40 per unit. There would be few takers for power at this rate. Not to mention the case if the rupee depreciates or gas prices rise. 

Then, there are the other gas projects. Overall, the company intends to implement around 10,280 Mw of gas-based projects in its plan for a 33,780-Mw generation capacity for the next decade. 

For the ultra mega power projects, there is little scope for margin growth, as this allows little or no pass-through of the tariff for either inflation or energy costs. 

Moreover, fuel procurement for the projects at Tilaiya and Sasan is under a cloud. 

However, the impact on Reliance Infra would be lower, as it already has an established diversified business. 

Yet, since Reliance Power was also a source of earnings through the construction of the power plants, it would get impacted. Investors need to now watch for the negotiation details.