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Reliance Infrastructure - Mumbai tariff order to improve cashflows - Edelweiss
Posted On : 2013-09-13 23:11:50( TIMEZONE : IST )
MERC has approved a total regulatory asset of INR34bn for Reliance Infrastructure (RELI) which is to be recovered over a six-year period including carrying costs as part of the multi-year tariff (MYT) order for FY13-16 period. Since RELI follows an accrual based accounting system for its regulated distribution business, there will be no earnings impact of the order except recovery of ~INR2.8bn of carrying costs for six years. Hence, the resultant annual receipt of ~INR9.3bn would result in positive cash flows. With the recent order, we expect improvement in cash flows which would lead to debt reduction. Maintain 'BUY' with a revised TP of INR509/share (INR489 earlier) due to accretion in cash reserves.
Tariffs likely to go down in FY15 and FY16
MERC has approved the regulatory asset recovery along with a carrying cost of 14.5%. It has also approved an overall increase in average tariff of 0.18% for FY14; the tariff is expected to decline by 12% and 11% respectively in FY15 and FY16 due to lower cost of power purchase.
Cross subsidy charges also increased
The order, which is applicable from September 1, 2013, has revised the cross subsidy charges too from INR1bn to INR8.2bn per annum. This will result in RELI's tariff being lower in all industrial and commercial categories. RELI expects that this will lead to reversal of customer migration who had earlier switched over to Tata Power. However, this will neither impact cash flows or earnings.
Outlook and valuations: Attractive; maintain 'BUY'
The current order will strengthen RELI's balance sheet and enhance cash flows. With majority of the infra asset becoming operational, we expect improvement in operating cash flows from the asset ownership business. However, declining EPC revenue visibility due to plunging order book is a concern. Enhancement in cash reserves has led us to revise our target price upwards to INR509/share (INR489 earlier). Maintain 'BUY/Sector Outperformer'.
