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Reliance Energy: Bottomline up 134% - Views on News from Equitymaster
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  • Oct 15, 2003

    Reliance Energy: Bottomline up 134%

    Reliance Energy (REL) has reported around 6% growth in topline led by a 90% growth in companyís EPC, contract and computer division. Consequently, the company reported a higher growth of around 134% in bottomline for 2QFY04. However, the revenues from the companyís core business of electricity have come down by 4% YoY.

    (Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Sale of electrical energy 6,470 6,200 -4.2% 12,666 12,713 0.4%
    Income from EPC, contracts & computer division 751 1,427 89.9% 1,502 2,551 69.8%
    Total operating income 7,221 7,626 5.6% 14,168 15,263 7.7%
    Other Income 223 459 105.7% 324 862 166.0%
    Expenditure 6,178 6,367 3.1% 11,576 12,732 10.0%
    Operating Profit (EBDIT) 1,043 1,259 20.7% 2,592 2,531 -2.3%
    Operating Profit Margin (%) 14.4% 20.3% 18.3% 19.9%
    Interest 169 110 -35.0% 329 214 -35.0%
    Depreciation 697 650 -6.7% 1,282 1,300 1.4%
    Profit before Tax 400 958 139.5% 1,305 1,879 44.0%
    Tax 20 69 246.5% 78 108 38.8%
    Profit after Tax/(Loss) 380 889 133.9% 1,227 1,771 44.3%
    Net profit margin (%) 5.9% 14.3% 9.7% 13.9%
    No. of Shares (eoy) (m) 137.8 137.9 137.8 137.9
    Diluted Earnings per share* 11 25.8 17.8 25.7
    Current P/E ratio 16.3 16.4

    Contribution of EPC business to total revenues of the company increased to 19% in 2QFY04 as compared to 10% for the same period last year. The remaining came from its electricity selling business. The operating margins of the company have improved significantly and increased by 590 basis points mainly due to reduction in cost of energy purchased. Operating profits were also higher by 20% YoY. Reduced interest cost (down 35%) and increased other income (up 106%) led to significant growth in bottomline. Net profit margins also improved by 840 basis points.

    (Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Cost of energy purchased 3,376 2,684 -20.5% 6,221 5,498 -11.6%
    Cost of fuel 941 1155 22.7% 2,057 2,279 10.8%
    Cost of material & other
    direct expenses (EPC and contracts)
    611 1178 93.0% 1,703 2,156 26.6%
    Tax on electricity 88 122 38.1% 203 241.5 19.0%
    Staff cost 310 423 36.4% 579 701.7 21.2%
    Other expenses 852 805 -5.6% 1,278 1,854 45.0%
    Total expenditure 6,178 6,367 3.1% 11,576 12,731 9.97%

    Total expenditure as percentage of net sales has come down by 200 basis points mainly due to reduced cost of energy purchased. The cost of energy purchased, which forms a major chunk of total expenditure can come down significantly in future provided the company gets nod for accessing the transmission network of Tata Power and MSEB. Currently REL purchases electricity from Tata Power for supplying in its Mumbai circle. Tata Power is charging REL Rs 3.38 per unit, which is higher by 25% as compared to bids offered by NTPC to REL.

    Among expenses, the cost of raw material for EPC and contracts division too has seen a surge of over 93% in 2QFY04. However, as a percentage of EPC revenues, these expenses have increased marginally.

    REL is still having some issues regarding standby charges with Tata Power against which a court case is still pending. However, the company has made a provision of Rs 290 m for the current quarter and a total of Rs 870 m for the current year for any future contingencies. Its outside Mumbai ventures have not shown any sign of revival. The company has said that it is trying to get things on track for its Orissa circle.

    Going forward, REL has aggressive expansion plans. Recently the company has submitted a proposal to Maharashtra State Government seeking its permission to set up power generation capacity of 3,000 MW in Vidharbh region. Being part of the Reliance Group, it will be able to take advantage of huge gas reserves that Reliance has struck, resulting in lower power generation cost for REL. It is also trying to get distribution license for regions like Pune, Aurangabad and Nasik, where it will be utilising the additional power generated.

    In another major announcement, RELís management has approved the merger of Reliance Salgaocar Power Company Ltd. (RSPCL) with Reliance Energy. The arrangement will be effective from April 1, 2003. The capacity and other details of RSPCL not yet known. What the merger brings to the table is also not clear as yet. As and when we have more details on this, we will put up an update on this matter.

    At the current price level or Rs 420, the stock trades at P/E multiple of 16.4x, annualised 1HFY04 earnings. Looking at the massive expansion plans, it seems the company is ready to grab a major chunk of private sector participation in Indian power sector. However, until further clarity emerges on the management game plan, we cannot make a comment on the valuations.



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