Roads lift margins; sharp rise in borrowings

We maintain our Buy rating on Reliance Infrastructure with a revised target price of R810 (R820 earlier), factoring in a decrease in cash and liquid investments by R10 billion in FY13. Our SOTP (sum-of-the-parts)-based target price comprises (i) R206 per share for the existing generation, transmission & distribution businesses, (ii) R157 per share for the EPC business, (iii) R234 per share for 36% stake in Reliance Power,

(iv) R62 per share as the equity value of the build-operate-transfer (BOT) road projects under construction and

(v) R151 per share for cash and investible surplus on books.

Construction margins expand, partially offset revenue decline: Reliance Infrastructure reported another sedate quarter: Construction revenues failed to improve on a high base of the previous year and the power business offered limited growth opportunity. Consolidated earnings offered a glimmer of hope with contribution from the infrastructure segment?led by Delhi-Agra road toll revenues and resumption of services of the Delhi airport metro service.

Expansion in EPC margins, large tax credit led to earnings beat: Reliance Infra reported net sales of R38 billion, operating profit of R4.5 billion and net profit of R6 billion against our estimates of R38 billion, R4.2 billion and R3 billion, respectively. The earnings beat was driven by higher margins in the construction business. Improved realisations in the power business are reflective of the higher cost of power purchased. Pre-tax profit missed our estimate by 8% due to lower other income, though tax credit of R230 million in Q4FY13 resulted in a meaningful beat in net income.

Delhi distribution business steady: Reliance Infra reported consolidated net sales of R61 bn, operating profit of R7.8 bn and net profit of R7.3 bn (77% y-o-y, 109% q-o-q). Consolidated Ebitda was also aided by a steady improvement in contribution from the infrastructure segment, which reported Ebit of R0.7 bn, with the first full quarter of tolling revenue from the Delhi-Agra road.

Highlights of Q4

Mumbai distribution business impacted by high power purchase cost: The company reported revenue of R12.7 bn (15% y-o-y, 4% q-o-q) on sales of 1,342 MU (-1% y-o-y, -11% q-o-q) for the Mumbai distribution business. Sequential improvement in realisations to R9.5 per kilowatt hour (kWh) is likely attributable to an increase in power purchase costs to R9.8 per kWh. Reliance Infra has obtained MERCs (Maharashtra Electricity Regulatory Commission) approval to levy cross subsidy charges of R7.5 bn on open-access consumers. MERC had previously ruled against Tata Power in a petition filed to restrict the migration of large industrial and commercial consumers.

Delhi distribution shows improvement: Aggregate sale of power from the Delhi distribution business was 3,270 MU with revenue of R25 billion, implying average realisation of R7.6 per kWh. DERC had approved a tariff hike of 21% along with a surcharge of 8%, which was affected from July 2012. In this quarter, DERC also approved a power purchase adjustment charge (PPAC) of 4.5% for Reliance Infras subsidiaries, BRPL and BYPL.

Sequential growth in the EPC business aided by a margin expansion: Consolidated EPC (engineering, procurement & construction) revenue increased sequentially to R22.7 bn with expansion in Ebit margins to 13.6% (9.7% in Q3FY13). We are cautious about the prospects of the EPC segment due to the low visibility of incremental order inflows. The company’s order book shrank to R105 bn as on March 31, 2013. Our estimates factor in revenue of R70 bn from the construction business for FY14, the lower end of the management guidance of R70-80 bn.

Infrastructure segment continues ramp-up: With eight operational road projects, Reliance Infras revenues increased to R1.6 bn in Q4FY13. The improved quarterly Ebit run-rate of R700m in Q3FY13 has been sustained and we factor a steady contribution from this business for FY14e. The managements guidance indicates revenue of R9-10 bn for FY14 and Ebit margin of 50%.

Mumbai metro to start: Most civil work on the Mumbai metro has been completed and the company’s guidance indicates commencement of commercial operations in 2013.

Butibori cement plant commercialised: The Butibori grinding unit (0.6 mtpa) has started commercial operations and cement was launched in Maharashtra markets. The company is developing two 5-mtpa plants in Butibori (Maharashtra) and Maihar (MP), which are scheduled to be commercialised by FY14.

Cash and equivalents down by R10 bn; borrowings up by R60 bn: Cash and cash equivalents (including current investments) declined to R34 bn as on March 31, 2013 from R44 bn as on March 31, 2012 reflecting some liquidation in the portfolio of investments. Total borrowings increased sharply from R182 bn as on March 31, 2012 to R241 bn as on March 31, 2013.