Sasan UMPP to boost R-Power's revenue

Unlocking idle equity of about Rs 7,100 cr could result in further re-rating of the stock

A significant breather for Reliance Power (R-Power) came recently in the form of the Central Electricity Regulation Commission (CERC) approving the Change in Law petition filed by Sasan Power, a subsidiary of R-Power, which operates the 3,960 megawatt (Mw) ultra-mega power plant (UMPP). According to the order, the Sasan UMPP would be entitled to a tariff increase of 9 paise for every unit of power generated; a move which will fetch Rs 300 crore of revenue every year for the next 25 years. R-Power would also receive a one-time compensation of Rs 271 crore. The company can also pass cost escalation (mainly due to energy duty rate and energy development cess) every month.

This development is critical for the Sasan UMPP as the plant now operates at 100 per cent plant load factor and accounts for over 70 per cent of total power generated by R-Power. Consolidated revenues of RPower saw 55 per cent jump in the first half of financial year 2016 (Rs 5,492 crore) with the Sasan plant operating at full efficiency in the June ‘15 quarter. Analysts believe incremental revenue from Sasan could boost revenues by about six to eight per cent and the ability to pass-through cost escalation will help operating margins expand from the current level of 47 per cent.

This should also help in servicing debt as, despite healthy revenue growth in H1 FY16, interest cost – which more than doubled in the past year (at Rs 1,187 crore in H1 FY16) – contained the profit growth to 39 per cent year on year (y-o-y). Analysts feel earnings growth should even out at 10 to 12 per cent annualised over the next three years. JPMorgan in its report notes that stable operating business will be sufficient to service interest and debt repayment and should result in cash accretion of around Rs 480 crore in FY17.

The research house estimates that in the absence of capex and cash generation, debt equity ratio of R-Power should ease out from 1.8 times in FY15 to one in FY19. That said, idle equity of nearly Rs 7,100 crore stuck in the Samalkot gas-based plant and other projects such as Krishnapatnam could continue to remain a drag on its return on equity or ROE (around seven per cent), despite higher revenues. R-Power’s stock price has gained 18 per cent after its Q2 FY16 results and Streets expect further re-rating if factors which are a drag on its ROE ease out in the next few quarters.