We raise price target 10% and upgrade rating from Sell to Buy: Year till date, Reliance Infrastructure (Reli) has underperformed the Sensex by 11%. We believe: (a) the core business remains relatively risk-free, (b) progress on the company?s infrastructure projects is satisfactory; and (c) Reliance Power?s project pipeline remains robust with 26,300 mw even without Dadri. We raise our price target from Rs 1,175 to Rs 1,300, as we include transmission projects in infrastructure portfolio and roll forward our EPC (engineering, procurement & construction) multiple to FY12.
The Maharashtra government has directed Tata Power to continue the supply of 358 mw to Reli until June at regulated rates. For the remaining FY11, Tata Power is to sell about 200 mw to Reli. The government has also directed that neither company will be allowed to sell power to utilities outside Mumbai. This is in line with our view that the government still holds significant power in these decisions and fixed return/cost pass-through model remains a preferred option. We think Tata Power would keep supplying power to Rel Infra until the time the government is happy with an alternative arrangement. The core business of Reli (Mumbai and Delhi) remains relatively risk-free.
Reli?s infrastructure portfolio comprises road, metro and transmission projects. Two road projects are operational and Mumbai and Delhi metro projects are to be commissioned in FY11. Reli has made an equity investment of Rs 15 bn (Dec?09) and we expect this to be >Rs 20 bn as of FY10.
In the case of Reliance Natural Resources (RNRL) versus Reliance Industries (RIL), the Supreme Court has ruled in favour of RIL. As per the verdict, RNRL will not get a supply of 28 mmscmd for 17 years at $2.34/mmbtu. The Supreme Court has ruled that under the production sharing contract, the government will take a view on the price of fuel. In our view, this would mean pricing and allocation of gas in line with the government?s gas allocation policy.
We view this as a negative for execution of Reliance Power?s (REPL) Dadri project. The 7,480 mw gas-based Dadri project represents 22% of REPL?s project portfolio (total 33,780 mw, of which domestic coal is 40%, imported coal is 15%, gas is 30%, and the rest is hydro).
There are some positive developments for Reliance Power in its other projects: (a) 300-mw unit 1 of Rosa phase-I have been commissioned; (b) 300-mw unit 2 of Rosa phase-I to be commissioned in six months: (c) 600-mw unit 1 and 2 of Rosa phase-II to be commissioned in FY12; (d) 600-mw units 1 and 2 of Butibori to be commissioned in FY12.
Valuation: We view Reli as a conglomerate with value contribution from five segments: (a) the core business; (b) Delhi distribution; (c) EPC; (d) Reliance Power; and (e) infrastructure development. Our price target of Rs 1,300 is based on a sum-of-the-parts valuation. Our value for REPL is based on our fair value estimate of Rs 140/share for REPL.
?UBS
