>RELIANCE POWER (RELIANCE EQUITIES)

Power-packed play

■ Ambitious plan to add 32+ GW capacity by FY18
Reliance Power (RPWR) has a power portfolio of over 32 GW capacity at various stages of implementation. The project portfolio is well diversified across fuels, off-take and geography, which helps in minimising counterparty risks, and RPWR benefits from higher realisation in power-deficit areas.

■ DCF-equity to value projects + CERs upside
We have used the DCF-equity of individual projects to value the company, using a cost of equity (Ke) of 15%, which gives us a value of Rs 171/share (FY11E). This includes Rs 146/share for projects that have not achieved financial closure. If we assume a Ke of 12.5%, our fair value goes up to Rs 229/share. It is pertinent to note that a major part of power sales done through competitive bid/merchant power makes the valuation highly sensitive to assumptions of CoD, tariff, fuel cost, loan repayment schedule, interest rates, exchange rates, etc. RPWR could also benefit from sale of CERs (carbon credits) by using fuel-efficient and environment-friendly technologies, and we value CERs at Rs 10/share.

■ Margin of safety (MoS) led by conservative gas price assumptions
We have assumed availability of natural gas from RIL’s KG D6 gas basin at a price of US$4.2/mmbtu. However, if we assume availability of natural gas at US$2.34/mmbtu for the Dadri power project, the project value increases by ~Rs 38/share. This provides MoS to our valuation as the potential downside risk of other projects is protected by the upside risk in Dadri project.

■ No additional equity required till FY13E
We estimate a equity funding gap of ~Rs 21bn in FY13 and ~Rs 15bn in FY14. RPWR can use debt at the corporate level to fund the equity gap and can repay the debt in FY15E from the cash flow generated from projects.

■ Key risks: Delays in CoD and fuel availability/pricing issues
(1) Any delays in CoD will lead to escalation in project costs, concurrently leading to lower equity IRRs. (2) Business model of ~92% of planned capacity is non-regulated, exposing RPWR to significant pricing and off-take risks.

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