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Reliance Infra: Taxes play the trick
Nov 3, 2009

Performance summary
  • Sales grow by 7% YoY during 2QFY10, 7% YoY during 1HFY10. Growth led by strong performance from the EPC segment.
  • Operating margins rise to 11.8% in 2QFY10, largely owing to lower power purchase costs.
  • Net profits rise by 6% YoY during the quarter. Growth would have been better but for a 19% YoY decline in other income. However, lower taxes (due to a previous year tax adjustment) add to some respite on the bottomline.


Standalone financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Sales 24,732 26,496 7.1% 47,635 50,959 7.0%
Expenditure 21,960 23,366 6.4% 42,005 44,835 6.7%
Operating profit (EBDITA) 2,772 3,129 12.9% 5,630 6,124 8.8%
Operating profit margin (%) 11.2% 11.8%   11.8% 12.0%  
Other income 2,016 1,633 -19.0% 3,119 4,074 30.6%
Interest 653 740 13.3% 1,427 1,776 24.5%
Depreciation 620 740 19.3% 1,232 1,462 18.6%
Profit before tax 3,515 3,283 -6.6% 6,090 6,961 14.3%
Tax 626 214 -65.9% 675 726 7.6%
Profit after tax/(loss) 2,890 3,069 6.2% 5,415 6,235 15.1%
Net profit margin (%) 11.7% 11.6%   11.4% 12.2%  
No. of shares       230.9 225.3  
Diluted earnings per share (Rs)*         54.2  
P/E ratio (x)*         19.3  
* On a trailing 12-months basis

What has driven performance in 2QFY10?
  • Reliance Infrastructure (RIF) grew its topline by 7% YoY during 2QFY10, which was a result of strong growth in the company’s business of EPC (engineering, procurement and construction). This segment grew sales by 120% YoY during the quarter, and formed around 37% of the company’s total sales. As for the electricity division (63% of total sales), sales fell by 17% YoY during the quarter. This was largely due to a decline in power tariffs, and was despite the fact that volume sales of electricity grew by 9% YoY. The company seemingly passed on the lower cost of fuel and power purchased to consumers in the form of lower tariff, which impacted the segment’s sales.

    Segment-wise performance
      2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Electrical Energy            
    Revenue (Rs m) 20,294 16,754 -17.4% 38,758 35,559 -8.3%
    % share 82.1% 63.2%   81.4% 69.8%  
    PBIT margin 8.9% 8.8%   9.5% 9.1%  
    EPC and Contracts            
    Revenue (Rs m) 4,438 9,742 119.5% 8,877 15,400 73.5%
    % share 17.9% 36.8%   18.6% 30.2%  
    PBIT margin 7.9% 9.4%   9.3% 9.5%  

  • As for the company’s EPC division, order backlog currently stands at around Rs 196 bn. However, a large part of this backlog pertains to work contracted to it by Reliance Power that is currently in process of setting up huge power capacities.

  • RIF purchased 5% more electricity from external sources during 2QFY10. However, given that the cost of power purchased declined substantially, the total cost of electricity purchased (as percentage of sales) came down from 49.2% in 2QFY09 to 33.3% in 2QFY10. While this would have led to substantially higher operating margins for the company, it was the higher cost of the EPC business that pared gains in the same. These costs rose from 13.4% of sales in 2QFY09 to 30.6% in 2QFY10.

  • RIF’s net profits grew by 6% YoY during the quarter. The growth would have been better but for a 19% YoY decline in other income. However, lower taxes added to some respite on the bottomline. Effective tax rate dropped from 17.8% in 2QFY09 to 6.5% in 2QFY10, helped by a large tax adjustment for previous year. Excluding this tax adjustment, RIF’s 2QFY10 net profits would have fallen by almost 9% YoY.

What to expect?
At the current price of Rs 1045, the stock is trading at a multiple of 15.4 times our estimated FY12 earnings. As is seen from this quarter’s results, 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.

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