• OCTOBER 20, 2004

Reliance Energy: Energized by interest income…

Performance summary
Reliance Energy, India’s largest private sector integrated power utility, has reported a topline growth of 4% YoY while the bottomline has risen by over 44% YoY in 2QFY05. Further, the company has been able to improve operating margins by 400 basis points.

What is the company’s business?
Reliance Energy is the country’s largest private sector power generation, distribution and transmission company. It has a significant presence in Maharashtra, Goa and Andhra Pradesh. Upto 1996, the company was engaged only in power distribution but soon integrated vertically by entering into generation with a 500 MW thermal generation plant at Dahanu. The company’s total generation capacity of nearly 941 MW spread across five projects. Parent, Reliance Industries’ natural gas finds in the Krishna Godavari Basin are likely to help Reliance Energy further integrate into a global energy player with a presence from the well-head (feedstock) to the wall-socket (final product).

(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net sales 7,626 7,917 3.8% 15,263 17,345 13.6%
Expenditure 6,368 6,292 -1.2% 12,733 14,246 11.9%
Operating profit (EBDITA) 1,259 1,626 29.1% 2,530 3,099 22.5%
EBDITA margin (%)16.5%20.5% 16.6%17.9% 
Other income 329 318 -3.2% 642 605 -5.7%
Interest (20) (303)1400.5% (7) (479)7159.1%
Depreciation 650 837 28.8% 1,300 1,648 26.7%
Profit before tax 958 1,410 47.2% 1,879 2,535 34.9%
Extraordinary income/(expense) - (1)  - 5 #DIV/0!
Tax 69 127 83.5% 108 158 46.1%
Profit after tax/(loss) 888 1,281 44.2% 1,770 2,381 34.5%
Net profit margin (%)11.6%16.2% 11.6%13.7% 
No. of shares (m) 137.9 185.7   137.9 185.7  
Diluted earnings per share (Rs)* 19.1 27.6   19.1 25.7  
Price to earnings ratio (x)  23.15    24.91  
(* annualised)      

What has driven performance in 1QFY05?
Push from better plant load factor:  The topline growth of 14% during 1HFY05 is largely due to higher volumes as the company sold 4,211 m units during the period as against 3,167 m units during 1HFY04. As a result, aggregate revenues from the energy sales show a decent growth of 33% YoY. Also, the company was able to add 0.1 m new customers to its base in Mumbai taking the number to almost 2.4 m. During the period, Dahanu plant achieved a plant load factor of 104%. Going forward, we believe the company is likely to consolidate its leadership position in the business.

Fuel costs15.1%23.4%14.9%21.4%
Tax on electricity1.6%3.6%1.6%2.7%
Cost of materials/Other direct exp.15.5%7.5%14.1%10.8%
Staff cost5.5%7.7%4.6%6.6%
Other expenditure10.6%7.8%12.1%10.4%

Operating margins:  Margins have improved by 400 basis points on the back of a sharp reduction in electrical energy purchase cost, which constitutes nearly 37% of the total expenditure. Also, the company has been successful in reducing its material and other direct expenditure while fuel costs show a sharp increase.

Net profit:  The company has witnessed a robust 44% growth in the bottomline thanks to the gains on account of interest income, as other income has increased by 89% YoY. Also, reduction in expenditure helped boost the bottomline. But for a 29% rise in depreciation costs, the bottomline would have witnessed a further jump.

Sales 8992823679927917
Net profit932.7103811001281

Over the last four quarters
Over the last four quarters, the company witnessed strong growth in the business on account of the merger with the subsidiaries, BSES Andhra Power and Reliance Salgaonkar Power Company during the 3QFY04. Further, the company has been able to better sweat out its assets over the period. To put things in perspective, the Dahanu plant operated at 100% capacity utilisation as against 91% in FY03.

What to expect?
At Rs 639, the stocks is trading at a price to earnings multiple of 23.2 times annualized 2QFY05 earnings. At the current juncture, the price seems to have factored in the future growth prospects of the company. However, given the country’s power deficiency and also the fact that Reliance Energy is in a better position to reap in the benefits of vertical integration. The integration benefits are likely to accrue from increased contribution from the gas based power projects, which have been encouraged by the government. We believe that the company is likely to witness strong growth. However, management concerns remain.

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