Deal with Jaiprakash Power sends RPower scrip soaring

Written by fe Bureau | Mumbai | Updated: Jul 29 2014, 07:00am hrs
After Reliance Power said it has entered into a memorandum of understanding (MoU) with Jaiprakash Power Ventures to acquire its 1,800-MW hydro power projects, the RPower stock posted biggest single-day gain in more than a month, on Monday. The deal value is pegged at an enterprise value of R12,000 crore, said a source.

The deal is seen as positive for both the companies, and it was reflected in the price movement of their scrips. Reliance Power ended 3.5% higher at R94 with a total 1.06-crore shares changing hands on BSE and NSE. Jaiprakash Power Ventures gained as much as 8.7% in the day before settling for a 3.17% gain at R19.55. The counter saw more than 2-crore shares changing hands.

Prima facie we think it is a win-win deal for Jaiprakash Power Ventures (overweight), Reliance Power (underweight) and Reliance Industries (overweight). The deal solves the near-term cash flow issue for Jaiprakash Power Ventures, adds EPS and RoE accretive operating assets & improves EPC capabilities of Reliance ADAG group, JP Morgan analysts said in a note.

Experts, however, believe any re-rating of Reliance Power would depend on the progress of other projects. Solution to the unavailability of gas for the 2,400-MW Samalkot project could lead to a re-rating, an analyst with a domestic brokerage said

Issues concerning the imported coal-based Krishnapatnam UMPP have not yet been resolved, UBS added in the note. According to Bloomberg, Reliance Power currently trades at 19.41-times one-year forward earnings.

In YTD, Reliance Power has clocked gains of 28.42%, while Jaiprakash Power Ventures have gained 3.44% in the same period. The 30-share Sensex has gained 22.77% in the same period.

The deal is positive for Jaiprakash Power Ventures as it would bring down its debt. We increase our March 15 SOP PT to R31 vs R19 a share, implying a 35% upside potential. After giving effect to hydro asset sale by end FY15, we have stripped out the Karcham Wangtoo and Baspa-II projects from estimates. Net-D/E drops to 2.5x by FY16E vs 4.4x in FY14 end, JP Morgan analysts said.

Jaiprakash Associates, the holding company of Jaiprakash Power Ventures, had a consolidated net debt of around R58,911 crore as of March 31, excluding proceeds from sale of its cement plans in Gujarat and two hydropower projects.

Jaiprakash Associates intends to utilise the entire proceeds of the proposed transaction to reduce its outstanding debt and, thereby, deleverage its consolidated balance sheet, Reliance Power said in a filing on the exchanges.