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Reliance Infra: A step closer to being a defence player

PSP deal, intention to exit cement and other non-core businesses point to rising focus on defence

Hamsini Karthik  |  Mumbai 

Reliance Infra: Step closer to being a defence play

The Reliance Infrastructure scrip has gained six per cent since the signing of a non-binding term sheet with Canadian pension fund Public Sector Pension Investment Board (PSP Investments) to sell 49 per cent stake in the company’s Mumbai power generation, transmission and distribution business. While the proposed transaction is subject due diligence and regulatory approvals, the deal is likely to fetch the company Rs 3,500 crore, if concluded by the end of FY16.

Reliance Infra would carve out its Mumbai power business into a separate subsidiary called Reliance Energy, in which it would continue to hold 51 per cent equity. Reports say the Mumbai power company’s Rs 8,000 crore debt would be transferred to Reliance Energy, helping the firm prune its long-term borrowings currently at Rs 16,840 crore. With debt equity ratio at 0.7 times, the firm’s borrowings are well within industry standards. Analysts say there is more to this transaction than just retirement of debt.

Reliance Infra: A step closer to being a defence player
The Mumbai power business accounts for 45 per cent of the company’s revenues from the power segment and 35 per cent of its total revenues on a consolidated basis. If this business is to be hived off into a separate entity, analysts say the deal would proportionately disrupt the firm’s earnings in the near-term. As the company is yet to conclude the acquisition of Pipavav Defence and Offshore Engineering, the earnings potential appear clouded in the near-term, though the stake sale of Mumbai power business would boost Reliance Infra’s valuation. Edelweiss says, “The listed entity will now be left with the engineering procurement construction (EPC) business, the Mumbai metro and Delhi distribution businesses, all which have limited growth visibility.”

Reliance Infra recently announced its intention to exit cement, road and other non-core businesses. This, coupled with the PSP deal points to the company’s increasing focus on the defence business. Analysts believe the firm is transitioning itself from a services-based entity to a manufacturing entity focusing on defence.

The Reliance Infra stock, which is currently trading at inexpensive 5.19 times its 12-month trailing price-earnings, also reflects the uncertainty on the outlook and the transition. Much of the firm’s fortunes are dependent on value unlocking from the Pipavav Defence acquisition. Four out of nine analysts polled on Bloomberg have a 'buy' call on the Reliance Infra stock, while the rest have a 'hold' recommendation with a target price of Rs 488.60, which is 17 per cent higher than the current price.

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First Published: Tue, November 17 2015. 22:22 IST