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Reliance Infra: Taxing times

Jun 2, 2010

Power to EPC major Reliance Infrastructure recently announced its FY10 results. On a standalone basis, the company has reported a 2% YoY growth in its sales while net profits have grown by a marginal 1% YoY. Here is our analysis of the results.

Performance summary
  • For the standalone business, sales grow marginally by 2% YoY during FY10. Consolidated sales up 16% YoY.
  • Operating margins improve to 11.2% for the standalone entity in FY10. Margins decline to 10.2% on a consolidated basis. Higher cost in the EPC business lead to this decline in margins.
  • A sharp jump in taxes hurt the bottomline - net profit grows by just 1% YoY for the standalone business during FY10. Consolidated profit up 12% YoY.
  • Declares dividend of Rs 7.1 per share (yield of 0.7%).


Financial performance snapshot
  Standalone Consolidated
(Rs m) 4QFY09 QFY10 Change FY09 FY10 Change FY09 FY10 Change
Sales 24,092 26,439 9.7% 98,686 100,273 1.6% 128,447 148,648 15.7%
Expenditure 22,533 23,725 5.3% 88,377 89,081 0.8% 114,352 133,445 16.7%
Operating profit (EBDITA) 1,559 2,714 74.0% 10,309 11,192 8.6% 14,095 15,203 7.9%
Operating profit margin (%) 6.5% 10.3%   10.4% 11.2%   11.0% 10.2%  
Other income 2,824 1,668 -40.9% 7,379 7,898 7.0% 6,978 8,249 18.2%
Interest 1,013 581 -42.7% 3,305 2,922 -11.6% 4,394 5,251 19.5%
Depreciation 627 907 44.6% 2,449 3,198 30.6% 3,304 4,724 43.0%
Profit before tax 2,743 2,895 5.5% 11,934 12,969 8.7% 13,375 13,476 0.8%
Tax (719) 384 -153.4% 546 1,453 166.3% 783 1,498 91.3%
Share of profit in associates NA NA   NA NA   934 3,215 244.3%
Minority interest NA NA   NA NA   (7) (2) -75.0%
Profit after tax/(loss) 3,462 2,511 -27.5% 11,389 11,517 1.1% 13,532 15,194 12.3%
Net profit margin (%) 14.4% 9.5%   11.5% 11.5%   10.5% 10.2%  
No. of shares       226.4 244.9   226.4 244.9  
Diluted earnings per share (Rs)         47.0     62.0  
P/E ratio (x)         22.5     17.1  

What has driven performance in FY10?
  • Reliance Infrastructure (RIF) saw a 16% YoY growth in consolidated sales during FY10. This was a result of a 31% YoY growth in its EPC & Contracts division (22% of total sales). This segment currently has an order backlog of Rs 192 bn, and is working on 5 power projects of over 7,500 MW and 2 road projects.

  • As for RIF’s electrical energy division (78% of consolidated sales), sales grew by 12% YoY during the year. However, standalone sales for this division dropped by 12% YoY. This was largely owing to a 16% YoY decline in power tariffs. The performance would have been worse but for a 6% YoY rise in volume sales of electricity. As for RIF’s Delhi distribution business, sales grew by 10% YoY during the year, led by an equivalent growth in volume sales.

    Segment wise performance
      Standalone Consolidated
      FY09 FY10 Change FY09 FY10 Change
    Electrical Energy
    Revenue (Rs m) 73,696 65,054 -11.7% 103,188 115,345 11.8%
    % share 74.7% 64.9%   80.3% 77.6%  
    PBIT margin 8.5% 8.4%   7.0% 7.2%  
    EPC and Contracts
    Revenue (Rs m) 24,990 35,219 40.9% 25,259 33,048 30.8%
    % share 25.3% 35.1%   19.7% 22.2%  
    PBIT margin 8.2% 8.1%   7.3% 7.3%  
    Roads
    Revenue (Rs m)         253  
    % share         0.2%  
    PBIT margin         61.2%  
    Total*
    Revenue (Rs m) 98,686 100,273 1.6% 128,447 148,646 15.7%
    PBIT margin 8.4% 8.3%   7.0% 7.3%  
    * Excluding inter-segment adjustments

  • RIF recorded a decline in its cost of power purchased from external sources. For the consolidated business, these costs declined from 48.4% of sales in FY09 to 46.8% in FY10. However, the benefit of this was not felt on the company’s operating margins that declined by 0.8% YoY to 10.2% in FY10. Higher staff and EPC costs led to this decline in overall margins.

  • Despite a marginal 8% YoY growth in operating profits during FY10, RIF’s net profits grew by 12% YoY. This was led by higher other income and significantly higher share of profit in associates. The profit growth would have been even higher but for a sharp 91% YoY rise in taxes. The company’s effective tax rate stood at 11% in FY10, as against 6% in FY09.

What to expect?
At the current price of Rs 1,060, the stock is trading at a multiple of 15.7 times our estimated FY12 earnings. RIF’s FY10 standalone sales have come in line with our estimates. Its profits are however lower than our estimates owing to higher taxes. The company continues to focus aggressively on the EPC business.

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