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Reliance Infra: Lower purchase costs aid margins
Feb 22, 2011

Power to EPC major Reliance Infrastructure recently announced its 3QFY11 results. On a consolidated basis, the company has reported a 14% YoY growth in its sales while net profits have grown by 10% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated net sales grow by 14% YoY during 3QFY11, 6% YoY during 9mFY11. Growth led by strong performance from the EPC segment, where sales grew by 91% YoY.
  • Operating margins rise to 14.9% during the quarter, led by lower cost of power purchased (both in absolute terms and also as percentage of sales).
  • Net profits rise by 10% YoY during the quarter. But for the decline in other income and higher interest costs, the profit growth would have been better.
  • Approves a share buyback of up-to Rs 10 bn. The buy-back price will be a maximum of Rs 725 per share, or around 17% higher than the current price.

Consolidated financial performance snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Sales 32,866 37,440 13.9% 109,316 116,104 6.2%
Expenditure 28,697 31,859 11.0% 98,508 100,269 1.8%
Operating profit (EBDITA) 4,169 5,581 33.9% 10,809 15,834 46.5%
Operating profit margin (%) 12.7% 14.9%   9.9% 13.6%  
Other income 1,949 1,277 -34.5% 5,963 3,035 -49.1%
Interest 1,282 1,564 22.0% 4,162 4,457 7.1%
Depreciation  1,315 1,257 -4.4% 3,523 3,710 5.3%
Profit before tax 3,521 4,036 14.6% 9,087 10,703 17.8%
Tax 459  568 23.7% 1,395 1,846 32.3%
Share of profit in associates 616  582 -5.6% 2,792 2,549 -8.7%
Minority interest -  (2)    0  (2)  
Profit after tax/(loss) 3,679 4,052 10.2% 10,484 11,407 8.8%
Net profit margin (%) 11.2% 10.8%   9.6% 9.8%  
No. of shares       225.3 244.9  
Diluted earnings per share (Rs)*         65.8  
P/E ratio (x)*         9.4  
* On a trailing 12-months basis

What has driven performance in 3QFY11?
  • Reliance Infrastructure (RIF) grew its topline by 14% YoY during 3QFY11, which was a result of strong growth in the company's segments EPC (engineering, procurement and construction) business. Sales for this business surged by 91% YoY during the quarter, led by execution of the existing order book. RIF's current EPC order backlog stands at Rs 235 bn.
    Segment-wise performance
      3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Electrical Energy            
    Revenue (Rs m) 27,188 26,394 -2.9% 88,067 93,248 5.9%
    % share  82.7% 70.5%   80.6% 80.3%  
    PBIT margin 10.0% 12.6%   6.7% 10.7%  
    EPC and Contracts            
    Revenue (Rs m) 5,564 10,613 90.7%  21,117 22,170 5.0%
    % share  16.9% 28.4%   19.3% 19.1%  
    PBIT margin 7.3% 9.5%   8.4% 10.0%  
    Roads            
    Revenue (Rs m) 114 419 269.2%  131 666 407.7%
    % share  0.3% 1.1%   0.1% 0.6%  
    PBIT margin -23.6% 18.7%   -28.7% 29.0%  

  • Sales from the electrical energy business, which is around 80% of RIF's total consolidated sales, declined by 3% YoY during the quarter. This was due to an 11% YoY decline in the volume sales of electricity. RIF sold 2,192 m units (MU) of electricity during 3QFY11, as against 2,457 MU during 3QFY10. Volume sales in the Mumbai circle declined by 13% YoY.

  • RIF purchased 1,111 MU of electricity from external sources during 3QFY11. This was lower by around 18% YoY, and led to a decline in the company's power purchase costs. These costs declined from 50.4% of sales in 3QFY10 to 38.8% in 3QFY11, thereby aiding the improvement in operating margins. Margins for 3QFY11 stood at 14.9%, as against 12.7% in 3QFY10.

  • RIF's net profit grew by 10% YoY during the quarter. The profit growth would have been higher but for a 35% YoY decline in other income. The 22% YoY rise in interest costs also impacted the profit growth during the quarter.

What to expect?
At the current price of Rs 618, the stock is trading at a multiple of 0.7 times our estimated FY13 book value per share. RIF has announced a share buyback of up to Rs 10 bn. The buy-back price will be a maximum of Rs 725 per share, or around 17% higher than the current price. Given the buy-back amount and price, the company will buy-back around 5.6% of its current outstanding equity shares.

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