>RELIANCE INFRA: Improvement in Mumbai/Delhi

■ Raising target price — Our 19% TP increase to Rs722 factors in (1) EPS increases of 54% & 19% in FY12E & FY13E, (2) increase in parent target EV/EBITDA to 7x (from 6x) on better op performance, (3) R-Power at 20% discount to mkt price of Rs110 (from Rs85). R-Infra’s 3Q12 cons BVPS was Rs945. Even if we knock off investments in pref shares/ICDs and regulatory assets in Delhi/Mumbai and add back recoveries, the adjusted cons BVPS is Rs703. This provides valuation support. We remove the High Risk rating as regulatory overhang in Mumbai and Delhi distribution now eliminated.


■ Parent PAT +151% YoY, Cons PAT +4% YoY — Parent 3Q12 PAT at Rs4.2bn was up 151% YoY led by 181% YoY growth in EPC sales, and higher margins in power and EPC. 9M12 parent recurring PAT at Rs11.6bn is +99% YoY. Cons PAT at Rs4.1bn grew at slower rate of +4% YoY on elimination of internal EPC sales/profits and losses in infra projects at PBIT level. 9M12 Recurring PAT at Rs10.2bn is down 8% YoY. The company has bought back 4.43mn shares for Rs2.34bn thru 14-Feb-2012.


■ Update on regulatory assets — In Mumbai, distribution R-Infra has accrued regulatory assets of Rs22bn. According to mgmt, MERC has approved recovery of Rs48bn over six years; NPV works out to Rs35bn. In Delhi, distribution R-Infra has accrued regulatory assets of Rs82bn and has made claims for recovery of Rs144bn. The company has also infused Rs5.2bn in Delhi and currently has a stake of 51%.


■ Improvement in Mumbai/Delhi — Renewal of distribution license for 25 years has removed uncertainty. Regulations are clear that distribution license and assets are different and R-Infra can decide to let any other distribution licensee (except Tata Power) use its network on commercial terms. With decline in load from 1.3GW to 1GW, power purchase costs have come down and regulator has approved levy of crosssubsidy charge on customers migrating to Tata Power. In Delhi, R-Infra has infused Rs5.2bn and Delhi Government has infused Rs5.0bn. A package of Rs51bn has been approved by IDBI Bank and tariff has been hiked 22%.


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