Reliance Energy, formally known as Bombay Suburban Electric Supply (BSES), is a 56% stake holding of Reliance Group. Formerly, the company was only into distribution of power in the northern suburbs of Mumbai. In last few years, it has not only expanded its distribution circle but has also entered into generation (55% of power requirements generated in-house with an installed capacity of 885 MW). The company has significant presence in EPC (engineering, procurement and construction) business.
In FY03, the topline increased marginally but the bottomline declined sharply by 42% YoY. It is mainly due to the change in the billing policy. The company has discontinued its previous policy of raising bills on customers on an estimated/provisional basis in cases where meter readings were not available. It is installing new meters so the effect will get wiped off in the coming quarters. Its Mumbai circle grew by 4% and was the only profitable area for the company. It experienced losses in Delhi and Orissa circle. Company is still having some dispute relating to standby charges against Tata Power Company.
In FY03, it generated 3,965 MU (million units) of electricity from its Dahanu plant. Its plant operated at an average plant load (PLF) factor of 90.5%, which is much above the industry standards. Owing to the reforms introduced by electricity bill and the expected improvements in the power sector, company has plans to increase its generation capacity to 9,000 MW by the end of 2012.
The company's Orissa distribution venture is still giving it sleepless nights. The losses of these distribution companies have eroded their net worth, which is being considered to be of permanent nature at this stage. Though the Kerala plant has restarted its operations, the company still has to recover dues from the Kerala State Electricity Board. Its natural gas plant in Andhra Pradesh is fully operational but due to lack of gas it has not been able to operate at the rated capacity. Its Delhi distribution companies have taken lots of capital expenditure in order to strengthen and moderanise the distribution network but the results are yet to come. However, though the distribution business will turn positive, but it may take some time.
The contracts and EPC division shrunk by around 11% in FY03. However, this trend is short-term in nature, as the orderbook size for EPC contracts has increased to Rs 7.7 bn, which is approximately two times the current EPC segment revenues. Owing to huge orderbook size, in 1QFY04, revenues for this segment were up 51% YoY.
At the current price of Rs 357, stock trades at P/E multiple of 30.4x FY03 earnings. On a peer value comparison basis, valuations seem to be on the higher end of the spectrum. While the company's ambitious plans are sign of things to come, it has also got to be borne in mind that capacity expansion would involve large-scale capital expenditure in the initial phase. From this perspective, one has to exercise caution.
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