>Reliance Infrastructure (CITI)

Buy: EPC – The Key Growth Driver Ahead

■ FY09 PAT up 5% YoY — R–Infra’s FY09 PAT at Rs11.4bn was up 5% YoY. FY09 PAT growth was muted due to (1) Rs1.7bn of derivatives losses, and (2) Rs3.2bn of contingencies provisions (classified under other expenditure). The company ended FY09 with an EPC backlog of Rs206bn, up 163% YoY.

■ Rs10.34bn of regulatory assets is a worry — In FY09 the company has created regulatory assets of Rs10.34bn (Rs3.56bn because of a revenue gap and Rs6.78bn because of un-recovered fuel adjustment charges). This has to be recovered through future tariff orders and is a key reason for worry, in our view.

■ EPC is the key growth driver ahead — At the end of FY08 the management had given a sales guidance for the EPC business of Rs26bn in FY09, Rs67.5bn in FY10 and Rs215bn in FY14. The company had also given an EBITDA margin guidance of 8–10%. The company has managed to more or less meet the same in FY09 with EPC sales of Rs24bn and EBIT margins of 8.2%.

■ Rs54bn of Rs100bn of cash in debt mutual funds — R-Infra had Rs100bn of gross cash/cash equivalent at the end of FY09. Out of this, Rs54bn is in cash/ debt mutual funds without exposure to equity markets. The company expects that a substantial portion of ICDs/preference shares would mature over the next 2–3 quarters and will then be parked as cash or in debt mutual funds.

■ Update on buyback — The shareholders of the company had approved a buyback of Rs20bn. To date the company has bought back 11.26mn shares at an average price of ~ Rs823 totaling Rs9.27bn.

To see full report: RELIANCE INFRASTRUCTURE