The current power generation capacity of the country stands at around 1,08,930 MW and we need to add another 150,000 MW generation capacity to bridge the demand supply gap. There are plans to add 100,000 MW of thermal power capacity and 50,000 MW of hydropower capacity. In such a scenario, Reliance Energy (REL) with its massive expansion plans is expected to play a leading role as far as private power players are concerned.
REL has planned a 9,000 MW generation capacity by 2012, almost 10 times its current capacity. Talking about green field projects, the management is waiting for the state government's nod to begin its 3,000 MW gas power project in Vidarbh region of Maharashtra. Apart from that, it is also considering take over existing power capacities like Dabhol. The company has already announced merger of Reliance Salgaocar Company Limited (RSPCL) and BSES Andhra Power Limited (BAPL) with REL.
With this merger, the generation capacity of the company has increased by 268 MW, with both RSPCL and BAPL contributing 48 MW and 220 MW respectively. This move alone will lead to an increase in FY04 revenues by over Rs 4 bn (around 15% of FY03 revenues) and bottomline will increase by Rs 580 m (36% of FY03 net profits). However, the cash profits of the company are expected to increase by Rs 1,280 m. This additional cash generated can be used towards the company's new projects.
Reason for lower operating margins of REL (15% in FY03 as compared to 25.7% of Tata Power) is that Tata Power is charging around Rs 3.4 per unit of electricity as compared to bulk power prices of around Rs 2.7 per unit. To overcome this, REL has recently approached the state regulator to take advantage of open access on existing infrastructure, under which it will be using the existing transmission network of MSEB (Maharashtra State Electricity Board) and Tata Power to import cheap power from various other sources.
If REL gets approval for using transmission lines to import cheaper power, then it will be able to save Rs 1,340 m annually. This move alone will help the company to increase its operating margins by around 500 basis points. However, it is subject to approval from the CERC (Central Electricity Regulatory Commission).
Even if the state government gives REL approval for open access, it will still take the company over 3 years to set up the proposed 3,000 MW capacity. Till that time, the company is planning to import electricity from other generators in view of the open access regime. The company has already initiated the bidding process for importing power and has reportedly got a good response for it.
Net profit margins
All figures for FY04E
For Reliance Energy figures after the merger
At the current price level of Rs 460, the stock trades at P/E multiple of 22.1x, expected FY04 earnings. At the current juncture, valuations of the REL look stretched as compared to its peer Tata Power. However, over the longer term, if REL's plans get approval, then one could be looking at greater profitability from the company.
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