>Reliance Power (CENTRUM)

● Huge potential upside: We believe Reliance Power (RPower) is well-placed to capitalise on the emerging opportunities in the power sector. The stock currently trades close to its bear-case value of Rs90, which would be rewarding in the long-term, considering the huge 207% potential upside in our best case scenario.

● Rs120bn cash in books, internal accruals adequate to fund 21GW capex: About Rs120bn cash combined with internal accruals from initial projects and treasury gains should be adequate to fund its 21GW capex plan. We expect the Rosa (Phases 1 and 2), Butibori, Sasan, Krishnapatanam, Dadri and Tilaiya projects to be funded without resorting to equity dilution.

● Projects are fundable, nearing financial closure: RPower’s projects have equity support, tied-up fuel requirements, received requisite clearances and in most cases completed land acquisition. We believe these factors give RPower projects good chance to complete financial closure at the earliest.

● Projects are profitable; provide high IRR: We estimate the equity IRR of Sasan and regulated projects at around 18% and that of Krishnapatanam and Tilaiya UMPPs at about 25%. Based on a tariff of Rs2.5/unit, the Chitrangi and Dadri projects have an estimated IRR of about 50%.

● 2bn tonne excess coal reserves a significant value add: We believe the excess 1bn tonne reserves from the coal mines allocated to it for the Sasan and Tilaiya projects and the additional 1bn tonne coal reserves from its Indonesian mines are a significant value add.

● Base case valuation gives target price of Rs140: Based on our base case valuation, we arrive at a target price of Rs140 using DCF methodology. The stock has limited downside from here, but the upside potential is 207% in a best case scenario.

● Risks: Key risk is delay in achieving financial closure of projects. Failure to tie-up gas supply for Dadri plant would impact estimates as this project alone adds Rs39 per share in our base case value of Rs140.

To see full report: RELIANCE POWER