We maintain ‘overweight’ rating on Reliance Infrastructure with a revised March 2017 target price of Rs 580 per share. We factor in no value for defence, pending clarity on the business model, and make no adjustment for cash and cash equivalents net of non-SPV debt. Management has not outlined any capex commitments for defence so far.
It views it as a negative working capital business with asset turnover of 3-4x. The stock is trading at an FY15 P/E of 6.2x and P/B of 0.4x. FY15-end investments in ICDs, preference shares and debentures totaled R184 billion versus Reliance Infra’s market cap of R111 billion, and financial income was R16.5 billion. The company’s lack of a road-map to liquidate investments is an overhang on valuation.
R-Infra has embarked on an asset sale spree that could see its net D/E fall to 0.4x. With limited capex commitments so far, the residual portfolio can generate over Rs 20 billion of cash per year.
Management aims to conclude the sale of 5.6 million metric tonnes cement capacity, 11 revenue-generating road projects and a 49% stake in Mumbai regulated electricity business before end-FY16. This could unlock ~R100 billion of equity.
In our view, the asset sale is EPS-accretive in the near-term. The cement and road portfolios are in ramp-up phases and likely to be net losses in FY17. Our post-deal EPS estimate for FY17 (Rs 82) is 7% higher than ex-deal EPS. We have not yet accounted for the proportionate consolidation of a stake in Pipavav Defence.