The Reliance Infrastructure Ltd (R-Infra) stock has underperformed the broader market by around 65% in the past two years. During this period, a number of large brokerages put out “buy” reports on the firm, on the premise that the large number of infrastructure projects being commissioned will lead to a re-rating. While the infrastructure business has grown manifold in size, both in terms of revenue and order book, the re-rating still hasn’t happened.
Lately, the shares have been hit because of the consent order by the Securities and Exchange Board of India (Sebi). In January, Sebi settled a case with the Anil Ambani-led Reliance Group, which allegedly involved routing money raised through overseas bonds to the stock market in 2007, for Rs 50 crore and barred some officials of the group as well as R-Infra from investing in listed firms for a year. R-Infra’s shares have underperformed the market by about 28% since the order was passed.
In the past three years, the firm has increased its presence in the infrastructure space and expanded considerably. In the past year, the order backlog in the EPC (engineering, procurement and construction) business has grown 54% to Rs 29,600 crore. R-Infra told analysts it expects sales of Rs 6,800 crore from this business in the current fiscal ending March 2012 (FY12), which is ahead of Street estimates. The firm is involved in five transmission projects, three Metro projects, a large number of road projects, a sea-link project and airports in non-metro areas, where the total outlay is estimated to be Rs 35,000 crore.
Analysts at Citigroupestimate the EPC business will grow at a compounded average rate of 20% in the next three years on the back of the strong order book.
In FY11, consolidated earnings before interest, tax, depreciation and amortization (Ebitda) grew by 26%, thanks to the growth in profitability of the core electrical energy business. Pre-tax profit, however, was more or less flat as other income fell by a third.
A results review report by Citigroup states that “the biggest cause for worry is that Ebit margins of infrastructure projects fell to 15.4% in FY11, from 51.6% last year, raising question marks on the profitability and IRRs (internal rate of return) of the projects that have been commissioned so far”.
Even so, the fact that a number of its infrastructure projects are beginning to generate revenue means that consolidated results would soon begin to look better. The current market capitalization of Rs 15,200 crore, however, barely accounts for R-Infra’s stake in Reliance Power Ltd and the cash on its books. The core business is being valued at a pittance, which reflects the regulatory overhang on the group.
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