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Reliance Infra: Purchase costs play spoilsport
Apr 23, 2009

Performance summary
  • Sales grow strongly by 43% YoY during 4QFY09, 52% YoY during FY09. Growth led by strong performance from both the segments - while sales of electrical energy grew by 47% YoY during the fiscal, the EPC segment recorded a growth of 73% YoY.
  • Operating margins contract by 1.8% YoY during the fiscal, largely owing to higher power purchase costs.
  • Pressure on operating margins impairs net profit growth for both the periods under consideration. While profit grows by 11% YoY during the fourth quarter, growth during the full year stands at just around 5% YoY.
  • The board has recommended a dividend of Rs 7 per share (dividend yield of 1%).


Standalone financial performance snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Sales 16,420 23,397 42.5% 63,132 96,199 52.4%
Expenditure 15,001 22,533 50.2% 56,857 88,377 55.4%
Operating profit (EBDITA) 1,419 863 -39.1% 6,275 7,822 24.6%
Operating profit margin (%) 8.6% 3.7%   9.9% 8.1%  
Other income 2,825 3,520 24.6% 10,559 9,866 -6.6%
Interest 686 1,013 47.6% 3,088 3,305 7.0%
Depreciation 526 627 19.2% 2,229 2,449 9.8%
Profit before tax 3,031 2,743 -9.5% 11,517 11,934 3.6%
Tax (83) (719) 769.9% 671 546 -18.7%
Profit after tax/(loss) 3,114 3,462 11.2% 10,846 11,389 5.0%
Net profit margin (%) 19.0% 14.8%   17.2% 11.8%  
No. of shares       236.5 226.4  
Diluted earnings per share (Rs)         50.3  
P/E ratio (x)         14.2  

What has driven performance in FY09?
  • Reliance Infrastructure (RIF) grew its topline by 52% YoY during FY09, which was a result of strong growth in both the company’s segments - electricity and EPC (engineering, procurement and construction). As for the former, sales grew by 47% YoY during the year, largely driven by higher realisations. RIF earned an average tariff of Rs 7.7 per unit during FY09 as compared to Rs 5.4 per unit in FY08. Such a substantial rise in tariff was on the back of higher cost of power generated and purchased which was somewhat passed onto the consumers. During the year, the company sold 9,581 m units (MU) of electricity, which was higher by 3% YoY. As for the company’s EPC division, sales grew by 73% YoY during FY09. This segment’s order backlog currently stands at around Rs 206 bn, up by 163% YoY. However, a large part of this backlog pertains to work contracted to it by Reliance Power that is currently in process of setting up huge power capacities.

  • RIF purchased 11% more electricity from external sources during FY09. Combined with this, the cost of electricity purchased sky-rocketed from an average of Rs 5.1 per unit in FY08 to Rs 7.9 per unit in FY09. These two facts - higher and costlier purchases - dented the company’s operating margins during the year, as they came in lower by around 1.8%. The pressure on operating margins would have been much higher but for a decline in fuel costs.

  • Due to the contraction in operating margins and lower other income, RIF managed just a 5% YoY growth in its bottomline during FY09. A lower effective tax rate however pared some pressure from the bottomline.

What to expect?
At the current price of Rs 715, the stock is trading at a multiple of 14.2 times its trailing 12-months earnings. RIF is gradually increasing focus on the EPC business as the power business growth is capped owing to shifting of business interest to Reliance Power. As such, RIF’s margins are likely to remain low going forward (EPC margins range between 8% and 12%). As for the growth, we expect a greater amount of volatility in the same going forward as is a nature of EPC businesses. Overall, we have a negative view on the stock.

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