>RELIANCE POWER (GOLDMAN SACH)

Benefits of court ruling are already in price; re-iterate Sell

What's changed
The Bombay high court ruled today (June 15) that Reliance Natural Resources (RNRL) is entitled to receive 28mmmsmd of gas supplies from Reliance Industries (RIL) operated KG D-6 block at US$2.34/mmBtu for a period of 17 years. We believe RNRL is likely to re-sell the gas to Reliance Power (RPWR) which has10.3GW of planned capacity using gas as fuel.

Implications
The court ruling will benefit RPWR’s upcoming gas based power plants in Dadri (7.8GW) and Shahapur (2.6GW) which constitute about 32% of RPWR base case NAV and operate partly on merchant mechanism. While we have assumed availability of gas supplies for operation of these
plants, we did not reflect the benefits of lower gas price (US$2.34/mmbtu against our assumption of US$4.2/mmBtu) in our base case valuation primarily due to 1) uncertainties relating to price at which RNRL will supply gas to RPWR; and 2) pending gas sales agreement between RIL-RNRL.
Our calculations indicate that our base case NAV would increase to Rs140 from Rs105/share in the event RPWR gas based plants will receive gas at US$2.34/mmBtu.

Valuation
We re-iterate Sell (Conviction List) on RPWR with 12-m TP of Rs105 (earlier 90) implying 48% downside. We rolled forward our TP to FY11E and decreased our cost of equity assumptions to 13% from 15% to reflect low funding risk. RPWR share price is implying near perfect execution of its 32GW of power projects in the pipeline which will come on-stream over the next 7-10 years. With most of the positives already in the price, we believe RPWR share price has more downside risks with delays in achieving its project milestones. RPWR is trading at FY11E P/B of 3.4X, 20% premium to Indian peers.

Key risks
Completion of projects milestones ahead of timelines we expect.

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