>RELIANCE POWER: Concentrated in three projects - Chitrangi, Sasan-II, Samalkot

■ Action: Execution risk has not subsided; maintain Reduce
The majority of RPWR’s long-term earnings and two-thirds of the FCFE based fair value remains concentrated in three projects (Chitrangi, Sasan-II, Samalkot), whose operational timelines and profitability remain subject to regulatory diktats and fuel supply risk. Besides, the Krishnapatnam UMPP remains a trouble-spot, irrespective of its operational status.


■ Catalyst: CMP reflects an ‘all is well’ picture, which is not the case, in our view
Ongoing lobbying by private IPPs with the government yielding favourable outcomes (which may not materialise) on near-term gas supply for Samalkot and Chhatrasal block clearance are reflected in the sharp 71% YTD run-up in the stock price, we believe. Further, our earnings forecasts are sharply below consensus, suggesting potential earning downgrades.


■ FY12F/13F EPS cut by 32%/60% as Samalkot likely to idle until FY16F
We assume: 1) the 2,400MW Samalkot facility will be idle up to March 2015 due to unavailability of gas; 2) RPWR will surrender the 3,960MW Krishnapatnam UMPP; and 3) Indonesian coal mining operations will begin in 4QCY12 and ramp-up to 7.5mtpa by FY15F.


■ Valuation: FCFE-based milestone risk-adjusted TP lowered to INR94 Our 12M TP is pegged to the milestone-adjusted FCFE value of RPWR’s 25.7GW generation capacity and coal mining operations in Indonesia (Phase #1, 7.5mtpa); at FY14F P/E of 30x and P/BV of 1.7x, the stock trades at a significant premium to its peers. Our unadjusted FCFE-based value is INR134, indicating a fairly 'low-risk' scenario is largely priced in.


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