Thursday, March 25, 2010


What's changed
The consortium of Reliance Infrastructure (RELI) and Hyundai Constructions, per the Times of India, agreed to 1) buy the existing Bandra-Worli Sea Link for about Rs16.4bn and 2) and extend the sea link by 3.4km to connect to Haji Ali at the cost of Rs19.6bn. The concession agreement is expected to be signed in another two months and RELI will be eligible to collect a toll for the existing link after completion of financial closure of the project.

Sea link acquired; completion of Worli – Haji Ali stretch key; Buy

Our analysis of the project suggests that RELI’s investment in the existing sea link will likely have an equity IRR of about 10%, based on the existing toll structure of Rs50 for one way, 37,500 PCUs daily (as per MSRDC Oct 2, 2009) and debt equity structure of 70:30, compared with our estimate of 15% equity IRR for RELI’s Mumbai and Delhi metro projects. We believe improvement in equity IRR for this project hinges primarily on traffic growth (we estimate that 60,000 PCUs would be required for an equity IRR of 15%) on the back of the completion of the Worli-Haji Ali stretch (expected to take about 48 months for completion), which may provide more tangible benefits to commuters in terms of time saved on using the combined stretch of Bandra-Worli-Haji Ali sea link.

Though we assume the contribution from this project is not material to our SOTP value, we believe news flow on execution of road and metro projects and EPC order book will be key re-rating triggers for the stock. We reiterate our Buy rating on RELI with a 12-m SOTP-based target price of Rs1,370 which implies upside of 34%.

Key risks
1) Delays in commissioning of infrastructure projects under construction;
2) lower-than-expected EPC margins; 3) favorable decision of the court case between RIL-RNR.

To read the full report: RELIANCE INFRASTRUCTURE