Sunday, September 27, 2009


Some progress made, but key risks still exist; off Conv list, still Sell

What happened
We remove Reliance Power (RPWR) from our Conviction Sell list and raise our TP to Rs128 (from Rs105) primarily to reflect financial closures of Rosa, Sasan & Butibori over last 3 months. Though we believe financial risk has been mitigated to some extent, we think risks relating to fuel, land and offtake of output still exist for several RPWR key projects. Retain Sell with 22% potential downside, as valuations do not reflect risks for its key projects, in our view. The stock is up 26% since we added it to Conv list on May 13, 2009 vs. 35% for Sensex; the stock rose after the election outcome in May. Last 12 months: -3% vs. Sensex +16%.

Current view
While the execution of the Sasan, Butibori and Rosa projects has improved, uncertainty related to fuel, land and off-take of output for RPWR key projects such as Krishnapatnam, Chitrangi, Dadri and Shahapur remains. Krishnapatnam (4GW): No visibility on time frame and pricing of
coal supplies from its mines in Indonesia. Chitrangi (3.9GW): The acquisition of land is still not complete and the off-take is not tied up. Dadri and Shahapur (10.3GW): Progress on these projects hinges on the resolution of the court dispute between RIL and RNRL.

Based on our scenario analysis of the RIL-RNRL court case, we see 48% potential downside to RPWR’s share price in the event it does not receive gas supplies. (For details see our Sept 16 Reliance Infrastructure note, Balance sheet leverage to drive future growth; initiate with a Buy.)

We derive our new NAV-based 12-m TP for RPWR after quantifying the risk associated with the projects by assigning a 10% discount for six individual milestones yet to be achieved. With just 3.1% ROE for FY11E, the stock is trading at 2.7X FY11E P/B, vs. peers’ 2.5X but average ROE of 13%. Note that we lower FY10E-12E EPS by 1%-6% on higher minimum alternate tax of 16% vs. 11% previously. Key risks: 1) Resolution of court case in favor of RPWR; 2) completion of project milestones ahead of our estimated timelines.

To see full report: RELIANCE POWER