Buy Reliance Power - TP Rs.155 - Emkay

Buy, Target Price Rs 155 Most sustainable IPP business model

One of the cheapest power generator with fuel security: Access to huge captive coal reserves of about 3bn tones makes it one of the cheapest coal based power generator in India (low fuel cost in the range of Rs0.4/unit). Ample fuel security with potential to produce 95mn tones annually in next 5-7 years.

Impressive project execution and superior operating performance: Significant progress achieved in under-construction plants and coal mines development with few progressing ahead of schedule. Superior operating performance (Rosa-current operational plant) compared to other IPP lead to +15% earnings upgrade vs -25% downgrades in other IPP.

Business model with minimal risk: Excellent strategy of putting only captive coal based plants on merchant capacity. External coal based plants mostly on cost pass-through model, reducing risk of cost overruns to impact profitability. Even in Krishnapatnam, the Indonesian law impact is likely to be insignificant in the worst case scenario.

Immune to problems faced by other private IPPs: None of the current problems of private IPPS are applicable - fuel availability (access to captive coal reserves), merchant price fluctuation (merchant capacity only in captive fuel plants), SEB bad health (cheap supplies to enhance offtake) and likely drying up of long term case-I bids (13,500MW PPAs).

Near term catalyst and earnings performance: Mid-term triggers - a) COD of 4,260MW by Dec'12 (incl. 1 unit of Sasan), b) coal production in Sasan - 2Q13 and c) production start in Indonesian mines (3Q13). Value of base case projects (Rosa, Butibori, Sasan and Indonesian mines) plus net cash is about Rs85/Share. We foresee RPL as the most sustainable private utility. Have positive bias with Fair value of Rs155/Share.

Source : Equity Bulls

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