Monday, December 21, 2009


Improved outlook. The outlook for Reliance Infrastructure (R-Infra) has improved on several fronts over the past nine months: 1) orderbook and new order prospects for its EPC business; 2) EPC margins from lower commodity prices; 3) increased profit contribution from Mumbai and Delhi power businesses; 4) R-Infra’s 45% stake in RPower has appreciated 30%; 5) redemption of a majority of deposits with other corporates has eliminated an overhang. At current valuation (9.1x FY11e EV/EBITDA), the risk/reward trade-off is now more attractive.

Growth driven by EPC and power business. R-Infra’s EPC division has a strong order backlog of cINR196bn and we expect robust order inflow from R-Power and other nonpower sources. We also expect lower commodity prices to drive a 90bp EBITDA margin improvement (earlier 40bp) in FY10. The profit contribution from distribution and transmission should grow on the back of additional capex in Mumbai and increasing its stake in the Delhi distribution business to 49% from 26%.

R-Power value. R-Infra’s 45% stake in R-Power is valued at INR695 per share, or 65% of the company’s market cap. This comes to INR556 when we factor in our 20% discount to the current market value, up from INR336 in our previous target price. The increase is due to improved visibility on a number of R-Power’s projects.

ICD redemption. R-Infra redeemed INR37bn of inter-corporate deposits (ICDs) in FY09 – the equivalent of c15% of the company’s market cap. This is positive given the valuation overhang they represented.

Upgrade to N(V). We raise our FY10 profit estimate by 13.5% on increased contribution from EPC (c4% increase), improved profitability of Delhi power distribution (c2%) and power business (2%) and higher interest income (5%). Our EPS estimates are 14% higher than consensus for FY10 and in line for FY11. We increase our valuation for the core business (power and EPC) to INR372 (from INR290) and raise the value of R-Power to INR556 (from INR336). We raise our target price to INR1,146 for 11% potential return.

To read the full report: RELIANCE INFRASTRUCTURE