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Reliance Energy: Changing identity - Views on News from Equitymaster

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Reliance Energy: Changing identity

Apr 28, 2008

Performance summary
  • FY08 net sales grow by 11% YoY on a standalone basis and 21% YoY on a consolidated basis. Lower by 14% as compared to our estimates (standalone).
  • Standalone operating margins contract by 0.6% YoY, owing to higher power purchase costs.

  • Lower depreciation and tax write-back helps bottomline post a growth of 35% YoY during the fiscal. Actual profit figure just 1% higher than our estimates. Consolidated bottomline grows by 41% YoY.

  • Board recommends a dividend of Rs 6.3 per share (dividend yield of 0.4%).

Financial performance: A snapshot
  Standalone Consolidated*
(Rs m) FY07 FY08 Change FY07 FY08 Change
Sales 56,930 63,132 10.9% 68,316 82,948 21.4%
Expenditure 52,125 58,178 11.6% 62,985 78,144 24.1%
Operating profit (EBDITA) 4,805 4,954 3.1% 5,330 4,804 -9.9%
Operating profit margin (%) 8.4% 7.8%   7.8% 5.8%  
Other income 8,823 11,880 34.7% 9,430 14,652 55.4%
Interest 2,503 3,088 23.3% 3,130 4,021 28.4%
Depreciation 2,401 2,229 -7.1% 3,032 3,074 1.4%
Profit before tax 8,724 11,517 32.0% 8,598 12,361 43.8%
Tax 709 671 -5.4% 238 958 302.8%
Share of associates - Profit/(Loss) - -   (15) 386  
Minority interest - -   0 7  
Profit after tax/(loss) 8,015 10,846 35.3% 8,345 11,782 41.2%
Net profit margin (%) 14.1% 17.2%   12.2% 14.2%  
No. of shares       228.5 236.5  
Diluted earnings per share (Rs)         49.8  
P/E ratio (x)         28.7  
* Consolidated numbers include those of Reliance Energy Trading Ltd.,
Parbati Koldam Transmission Co. Ltd., and Western Region Transmission (Gujarat) Pvt. Ltd. and Western Region Transmission (Maharashtra) Pvt. Ltd.

What has driven performance* in FY08?

*Analysis of standalone results. The company has changed its name to Reliance Infrastructure Ltd. effective today.

  • Reliance Infrastructure Limited’s (RIFL) topline growth stood at 11% YoY during FY08. The actual sales number was 14% lower than our estimates. Growth during the fiscal was wholly on the back of the company’s electricity business, which grew by 34% YoY. Through this business, RIFL operates 941 MW of power generation capacity and is also involved in transmission and distribution (Delhi, Mumbai) of electricity. FY08 saw the company sell 9,292 m units (MUs) of electricity, which was higher by 6% YoY. What is more, these sales were at an average tariff of Rs 5.4 per unit, almost 26% higher than the realised rate in FY07 (Rs 4.3 per unit).

    This improvement in realisations 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 4,848 MUs (52% of electricity sales) during FY08, higher than 9% YoY. Average cost of power purchased increased from Rs 3.4 per unit in FY07 to Rs 5.1 in FY08, a substantial increase of 49% YoY.

    Segment-wise performance
      Standalone Consolidated
      FY07 FY08 Change FY07 FY08 Change
    Electrical Energy            
    Revenue (Rs m) 37,418 50,076 33.8% 48,898 70,094 43.3%
    % share 64.1% 77.6%   69.7% 82.6%  
    PBIT margin 8.6% 9.1%   7.3% 6.0%  
    EPC and Contracts            
    Revenue (Rs m) 20,946 14,444 -31.0% 21,253 14,738 -30.7%
    % share 35.9% 22.4%   30.3% 17.4%  
    PBIT margin 5.9% 9.1%   5.7% 8.3%  

  • As for RIFL’s EPC business, which formed 22% of its total standalone sales during FY08, it recorded a decline of 31% YoY. Readers should note that EPC revenues have a lumpy nature, as completion of contracts ahead/behind schedules create quarterly fluctuations. Although the management has not indicated anything of this sort for the division’s performance, this seems to flow from the poor numbers that it had reported during the first half of FY08, wherein the division’s sales had declined by 16% YoY. At the end of March 2008, the EPC business had an order backlog of Rs 78 bn (almost 5.5 times the segment’s FY08 revenues).

    In the EPC segment, RIFL is currently working on over 3,000 MW of power projects as stated hereunder:

    1. 2X300 MW of power project in Yamuna Nagar, Haryana

    2. Electrification of 6,715 villages under Uttar Pradesh rural electrification scheme

    3. 2X600 MW of power project in Hisar, Haryana

    4. 2X250 MW Parichha Thermal Power Station, Uttar Pradesh - BOP

    5. 2X600 MW Purulia project, Damodar Valley Corp.

    6. Western Region System Strengthening (WRSS) transmission project

    Apart from this, the company is also involved in development of five road projects in Tamil Nadu, metro rail projects in Delhi and Mumbai and commercial properties in Hyderabad, Mumbai and Noida.

  • As indicated above, RIFL purchased more units of electricity from external sources during FY08 than it had in FY07. The cost of these purchases increased by 49% YoY on a per unit basis. This ultimately had an adverse impact on the company’s operating margins, which contracted by 0.6% during FY08. 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, RIFL managed to grow its bottomline at a rate (35% YoY) higher than topline growth. This was on the back of a 35% YoY rise in other income and decline in depreciation and tax expenses (on account of certain write-backs). RIFL’s net profits came in just about 1% higher than our estimates for FY08.

What to expect?
At the current price of Rs 1,430, the stock is trading at a multiple of 21.6 times our estimated FY10 earnings. The company is currently undergoing a buyback process (which was announced in the first week of March 2008), wherein it has proposed to buy back shares worth Rs 20 bn (for a maximum price of Rs 1,600 per share). Out of this, it has already bought back shares worth Rs 2.5 bn at and average cost of Rs 1,230 per share.

The buyback was announced to appease shareholders following the rout the stock had seen over the past couple of months. This weakness followed a period of overvaluation where the stock price had reached dizzying heights not conforming to the company’s inherent value. Then came the Reliance Power shocker, which investors had originally believed to be a ‘fairytale’ IPO, but that turned out to be a ‘nightmare’.

We had recommended a ‘Sell’ on RIFL in January 2008 at Rs 2,135. The stock is down almost 33% since then. While we maintain our view with respect to the company’s intrinsic value and the stock does look attractive on a valuation basis, we still prefer other power stocks under our coverage for simple reasons like their lower execution risks and management integrity. We shall soon update our research report on the company, incorporating FY08 actual numbers as also our estimates for FY11.

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