We upgrade Reliance Infrastructure to ?buy? with a revised target price of Rs 1,060 per share offering 33% upside from the current market price. We believe that the underperformance of about 26% over the past three months offers an opportunity to participate in Reliance Infra?s diverse portfolio of infrastructure assets ranging from ownership in extant distribution circles to growth opportunities in the roads and other infrastructure business at reasonable valuations.

Reliance Infra is developing 25 infrastructure projects with a total cost of Rs 40,000 crore and is aggressively pursuing other infrastructure opportunities.

We currently value most of the infrastructure projects at book value (discussed in detail later) and believe that traction on these projects offers key upside to our target price. We highlight that management has guided for 12 operational projects by end-FY2011E.

Increased exposure to inter-corporate deposits (ICDs) may have concerned investors (as was the case in 2008). Reliance Infra?s cash and cash equivalent of Rs 10,300 crore as of March 2010 (net cash of Rs 1,700 crore) includes increased exposure to ICDs at Rs 2,770 crore that could have rattled investor sentiment. Redeployment of cash and cash equivalents into operating business will likely improve the return profile of Reliance Infra and ease concerns on end-use of cash.

Our SOTP-based target price comprises 1) Rs 232 per share from the existing generation, transmission and distribution businesses; 2) Rs 141/share for the EPC business; 3) Rs 435/share for 38% stake in Reliance Power valued at 20% discount to our target price; 4) Rs 51/share as the equity value of the five BOT road projects under construction; 5) Rs 43/share for equity investment made in the various infrastructure projects; 6) cash and investible surplus in books of Rs 156/share. We have revised our EPS estimate for FY2011E to Rs 55/share and for FY2012E to Rs 70/share (previously Rs 83/share) to account for lower execution in EPC business and dilution of stake in RPWR from 45% to 38% (due to merger with RNRL).