Reliance Power - A 'Resource Giant' in the making - Elara Capital

Sustainable power portfolio with relatively better fuel security Having won 3 of the 4 UMPPs Reliance power has secured fuel linkage for 84% of its planned capacity. In the wake of existing coal shortage, this comes as a shot in arm of Reliance Power. Add to this, competitively bid leveled tariffs of INR 1.19/unit for SASAN and INR 1.77/unit for Tilaiya and we have a sustainable model which is immune from any receivables issue in the future. Currently, ROSA being a completely cost plus model, insulates the company from rising fuel prices.

A low cost generator of power

Standardization of equipment, economies of scale, just-in-time inventory management and proximity to coal mines ensure that its O&M costs are close to INR1mn/MW, which is almost half of the normative requirement. Being the only power company to have secured massive ECB funding (nearly $15bnMOUs in place) from ADB and Chinese EXIM, it saves on financing charges as well Long position in Indonesian Mines – blessing in disguise ID-1, ID-2 and ID-3 in South Sumatra, Indonesia add to the mining flavour in the stock. Though originally planned for Krishnapatnam, these mines have all clearances in place and possess nearly 2bn tons of reserves with peak production capability of 30MMT annually. This level of production can ideally support a capacity of close to 8,000MW. We believe that one should view this suspension of Krishnapatnam project as a blessing in disguise, given the option of benefitting from international coal prices

ROEs to bottom out by FY13, more of 'Operational' PAT ahead We expect the ROEs to bottom out by FY13. We expect that the commissioning of Butibori, Solar CSP, SASAN and Samalkot by FY16E, would add to the 'operational' content in PAT as against treasury income which we have experienced all this while.

Valuation

P/BV multiple of the stock has corrected from nearly 4x in 2008 (IPO) to as much as 1.5x currently. Though the ROEs are expected to bottom out by FY13 end, the real jump in ROEs can be expected only by FY15 when SASAN runs at full capacity profitably, followed by FY16 when Samalkot is expected to become operational. We have valued Reliance Power on SOTP basis. DCF based approach has been employed for project level valuation. Our cost of equity (COE) assumption stands at 13% factoring in business risks emanating out of increasing capital intensity, viability of Samalkot project and delay in commercialization of Butibori plant.

Source : Equity Bulls

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