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Reliance Energy: Tax write-back saves net

Jan 17, 2008

Performance summary
  • Topline declines by 2% YoY during 3QFY08, grows by 14% YoY for the nine-month period. Pressure inflicted due to lower EPS sales (down 54% YoY during 3QFY08)

  • Operating margins contract to 4.9% during the quarter, owing to higher power purchase costs.

  • Lower depreciation and a tax write-back has helped bottomline, which has posted a growth a 50% YoY during 3QFY08, 37% YoY during 9mFY08.

Financial performance: A snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 15,277 15,055 -1.5% 40,782 46,712 14.5%
Expenditure 14,510 14,314 -1.4% 36,580 42,656 16.6%
Operating profit (EBDITA) 767 741 -3.3% 4,202 4,056 -3.5%
Operating profit margin (%) 5.0% 4.9%   10.3% 8.7%  
Other income 2,927 3,479 18.8% 6,074 8,534 40.5%
Interest 551 854 55.2% 1,680 2,402 42.9%
Depreciation 612 566 -7.5% 1,866 1,703 -8.7%
Profit before tax 2,532 2,800 10.6% 6,729 8,486 26.1%
Extraordinary income/(expense) - -   - -  
Tax 522 (216)   1,089 753 -30.8%
Profit after tax/(loss) 2,010 3,016 50.0% 5,640 7,732 37.1%
Net profit margin (%) 13.2% 20.0%   13.8% 16.6%  
No. of shares         236.5  
Diluted earnings per share (Rs)*         42.7  
P/E ratio (x)*         52.4  
* On a trailing 12-months basis

What has driven performance in 3QFY08?
  • The 2% YoY decline in RELís topline during 3QFY08 was largely due to lower sales from the engineering, procurement and construction (EPC) business. This business recorded a 54% YoY decline in sales during the quarter, mainly due to a large base effect of 3QFY07. As a matter of fact, the EPC segment had grown its sales by almost 250% YoY during 3QFY07 owing to completion of some large contracts in the rural electrification space. The absence of similar completed contracts during the latest quarter, i.e. 3QFY08, has thus led to a YoY decline in the businessí revenues. Readers should note that EPC revenues have a lumpy nature, as completion of contracts ahead/behind schedules creates quarterly fluctuations. At the end of December 2007, the EPC business had an order backlog of Rs 83 bn (almost 4 times the segmentís FY07 revenues).

  • RELís electricity business, where it generates and distributes electricity (largely to Mumbai city), recorded revenue growth of 26% YoY during 3QFY08. This growth was led by a combination of higher volume sales as also better realisation per unit. REL sold 5% YoY higher number of electricity units during the quarter. What is more, its average realisation per unit increased from Rs 4.4 in 3QFY07 to Rs 5.3 in 3QFY08, a growth of 20% YoY. This improvement in realisation should be seen in light of the fact that the company bought power from external sources at higher cost, and this was passed through as higher tariffs to customers. Its power purchases stood at 1,203 m units (MUs) during 3QFY08, higher than 1,115 MUs that it had purchased in 3QFY07.

    Segment-wise performance
      3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Electrical Energy            
    Revenue (Rs m) 9,881 12,473 26.2% 28,382 38,219 34.7%
    % share 61.7% 81.6%   67.6% 80.8%  
    PBIT margin 8.0% 7.8%   11.1% 8.8%  
    EPC and Contracts            
    Revenue (Rs m) 6,139 2,805 -54.3% 13,591 9,074 -33.2%
    % share 38.3% 18.4%   32.4% 19.2%  
    PBIT margin 2.9% 9.0%   4.2% 8.4%  

  • As indicated above, REL purchased more units of electricity from external sources during 3QFY08 than it had in 3QFY07. The cost of these purchases increased by 32% YoY on a per unit basis (from Rs 4.1 in 3QFY07 to Rs 5.4 in 3QFY08). This ultimately had an adverse impact in the companyís operating margins, which declined marginally to 4.9% during 3QFY08. The pressure on operating margins would have been much higher but for a significant decline in EPC-related costs.

  • Despite the contraction in operating margins, REL managed to grow its bottomline by 50% YoY during 3QFY08. This was brought about by a tax write-back and higher other income (owing to higher interest income and forex gains).

What to expect?
At the current price of Rs 2,240, the stock is trading at a multiple of 52.4 times its trailing 12-months earnings and 41.9 times our estimated FY10 earnings, which makes it expensive. We shall soon update our subscribers with our latest view on the stock, considering the nine-months performance as also the proposed gains from the listing of Reliance Power, RELís power generation arm.

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