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Reliance Infra: Higher purchase costs dent margins
Nov 3, 2008

Performance summary
  • Sales grow strongly by 58% YoY during 2QFY09, 46% YoY during 1HFY09.

  • Operating margins contract substantially during both the periods under consideration, owing to higher power purchase costs.

  • Pressure on operating margins impairs bottomline growth, which stood way below the topline growth during both the quarter and half year.

  • EPC segment’s order backlog stood at Rs 207 bn at the end of September 2008, a 340% YoY rise.



Financial performance: A snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 15,417 24,348 57.9% 31,658 46,329 46.3%
Expenditure 13,306 21,960 65.0% 28,106 42,005 49.5%
Operating profit (EBDITA) 2,112 2,388 13.1% 3,552 4,324 21.8%
Operating profit margin (%) 13.7% 9.8%   11.2% 9.3%  
Other income 2,283 2,401 5.1% 4,818 4,425 -8.2%
Interest 854 653 -23.6% 1,547 1,427 -7.8%
Depreciation 556 620 11.6% 1,137 1,232 8.4%
Profit before tax 2,985 3,515 17.8% 5,685 6,090 7.1%
Tax 484 626 29.3% 966 676 -30.1%
Profit after tax/(loss) 2,501 2,890 15.6% 4,719 5,414 14.7%
Net profit margin (%) 16.2% 11.9%   14.9% 11.7%  
No. of shares       228.5 230.9  
Diluted earnings per share (Rs)*         50.0  
P/E ratio (x)*         9.9  
* On a trailing 12-months basis

What has driven performance in 1HFY09?
  • Reliance Infrastructure (RIF) grew its topline by 46% YoY during 1HFY09, 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 51% YoY during the half year period, largely driven by higher realisations. RIF earned an average tariff of Rs 7.8 per unit during 1HFY09 as compared to Rs 5.3 per unit in the corresponding period of previous year. 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. As for the company’s EPC division, sales grew by 42% YoY during 1HFY09. EPC segment’s order backlog currently stands at Rs 207 bn, up by 340% YoY.

    Segment-wise performance
      2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Electrical Energy            
    Revenue (Rs m) 12,760 20,294 59.0% 25,746 38,758 50.5%
    % share 81.6% 82.1%   80.4% 81.4%  
    PBIT margin 11.9% 8.9%   9.3% 9.5%  
    EPC and Contracts            
    Revenue (Rs m) 2,871 4,438 54.6% 6,269 8,877 41.6%
    % share 18.4% 17.9%   19.6% 18.6%  
    PBIT margin 11.7% 7.9%   8.1% 9.3%  

  • RIF purchased 6% more electricity from external sources during 2QFY09. Combined with this, the cost of electricity purchased shy-rocketed from an average of Rs 5 per unit in 1HFY08 to Rs 8.3 per unit in 1HFY08. These two facts – higher and costlier purchases – dented the company’s operating margins during the half year period. The pressure on operating margins would have been much higher but for a significant decline in staff and EPC-related costs.

  • Due to the contraction in operating margins and lower other income, RIF managed just a 15% YoY growth in its bottomline during 1HFY09. A lower effective tax rate however pared some pressure from the bottomline.

What to expect?
    At the current price of Rs 495, the stock is trading at a multiple of 9.9 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.

    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 6.3 bn at and average cost of Rs 1,110 per share.

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