Arihant Capital Markets has initiated coverage and recommended buying stocks of reliance Infrstructure. The stock looks good for next 12-18 months.
"At CMP, Reliance Infrastructure is trading at 14.5xFY10 standalone EPS of Rs 48.9 and 15.4xEV/EBIDTA for FY10. We have valued the power and various infrastructure business of the company separately and arrived at the price target of Rs 1070 for period of 12-18 months. This comprises Rs 196 - Mumbai power business, Rs 38 - Delhi business, Rs 105 - EPC business, Rs 117-Infrastructure segment, Rs 17-power transmission (WRSS), Rs 207-cash and cash equivalents and Rs 391- Investment in R Power. We recommend to Buy stocks," the report said.
Stable growth in power business:
Reliance Infrastructure Ltd’s (R Infra) power business (distribution licence in Mumbai and Delhi) with limited generating capacity (941 MW) is a constant cash flow generating business as increase in power and fuel purchase costs are pass through.
The T&D losses in both the Delhi distribution companies (BRPL and BYPL) have reduced substantially and the management expects both of these to come under incentive zone this year thereby improving the cash flows. We expect revenues from this business to grow at CAGR of 33% in FY08-FY10E.
Robust growth in EPC business:
Current outstanding order book of the EPC business stands at Rs.21510 cr to be executed over next 4 years. Out of this, Rs 15670 cr are internal projects which include 2 projects from Reliance Power – Sasan 3960 MW and Butibori -300 MW and a Western Region System Strengthening transmission project.
All contracts are on fixed price basis and margins are booked after project crosses the threshold revenue levels. With the projects of Reliance Power projects to be implemented in phased manner, the EPC contracts for the same could trickle down to R Infra thereby improving the visibility of future order inflows. We expect revenues from this segment to grow at a CAGR of 68.2% for FY08-FY10E.
Diversification into new businesses:
From being a pure power company, R Infra has surfaced as a diversified player with presence in infrastructure segment and currently has 11 projects under implementation. These projects are undertaken by various SPVs where R Infra will participate in the equity to the extent of their stake and the debt will be raised at SPV level without any recourse to R Infra.
No guarantee will be provided by R Infra and debt repayment will be linked to cash flow from projects. This insulates the core business of the company from funding related project risks. Inspite of the current liquidity crisis and tough market conditions, the company has been successfully able to raise funds on individual project basis.
Net cash and cash equivalents at Rs 206/share:
As on 31st Dec’09, R Infra had cash and cash equivalents of Rs 9898 cr of which Rs 5000 cr were parked in the debt mutual funds and the balance were invested in preference shares and inter-corporate deposits.
At net level this turns out to be at Rs.206/share. This along with continuous cash generation from the core business of power and EPC will suffice the funds required for equity investment in SPVs.
Award of road projects, financial closure for WRSS and Sasan UMPP in Q1FY10 - short term triggers:
R Infra has emerged as the sole bidder/L1 in 3 road projects which includes Eastern Peripheral Expressway (135 kms), Krishna –Walajpet project in South India (150 kms) and Western Freeway Sea Link Project connecting Bandra to Haji Ali (10 Kms, total cost Rs 5300 cr).
Apart from this, the financial closure for the Rs 1400 cr Western Region Strengthening Scheme (WRSS) and Reliance Power’s Sasan UMPP is awaited where R infra is an EPC player. Announcement of award of road projects as well as financial closure for the above 2 projects could trigger stock price in the short term.
Investment in Reliance Power (R Power) – Value accretive:
R Infra currently holds 44.96% stake in R Power. Assuming a 30% discount for holding company at the current market price, this turns out to be at Rs.408/share of R Infra. With the cash inflow from first project of R Power to start from next financial year this would only enhance going forward thereby increasing the valuation of R Infra.
Concerns for the company:
Execution Risk: R Infra is relatively a new player in the infrastructure segments and the pioneer one to undertake development of metro projects in the private sector. Inexperience in executing such projects can lead to delay in commissioning of the projects thereby impacting our forecasted revenue stream and cash flows.
However, since the company has partnered with qualified foreign players in executing these projects the risk is minimized.
Delay in financial closure of projects:
The current global economic crisis has dried up the liquidity in the international and domestic markets. This has increased the risk perception of bankers and they have become more cautious while lending to big infrastructure projects.
However, R Infra has been able to achieve financial closures for its scheduled projects during tough market conditions. Also due to sufficient liquidity in its balance sheet, the company can upfront commit the equity amount required for projects which makes its easier for the bankers to lend for the debt portion at favorable rates.
