Reliance Infrastructure (RELI) posted a 42.5% y-o-y increase in its net revenues in Q4’09. However, the net profit increased only 3% y-o-y in Q4’09 to Rs3.7 billion.
This was because the company’s net non-operating income fell by 96% y-o-y, as a result of higher interest expenses and provision for losses on foreign exchange derivative instruments and other contingencies.
Reliance Power (in which RELI holds a 45% stake) achieved the financial closure of Rs194 billion for the Sasan UMPP.
Rpower has, so far, bagged three UMPPs, which are expected to earn higher returns compared to the regulated returns generally earned by the power project developers. Nonetheless, we believe that Rpower’s stock is currently overvalued at a P/B multiple of 2.15x.
Our valuation model for Rpower suggests a fair value of Rs95 and we have assumed the same for deriving the value of Rs426/share for RELI’s stake in Rpower.
RELI’s current EPC order book stands at 8.5x its FY09 revenues. Currently the Company is implementing only 7,200 MW of about 32,000 MW projects that has been lined up by Rpower.
As Rpower completes the financial closure of its other projects, we expect more EPC orders for RELI in the near future.
The regulated power generation, distribution and transmission businesses should continue to remain cash generative in the future.
As RELI has increased its stake in the two discoms in Delhi from 26% to 49%, our combined valuation for the power businesses in Delhi and Mumbai now stands at Rs126/share.
RELI’s stock is currently trading at a forward P/E of 12.6x and 13.0x for FY10E and FY11E, respectively.
Our SOTP-based valuation gives a fair value of Rs. 856 for the Company’s stock. This indicates a potential upside of 23% from the CMP of Rs. 695.20.
We maintain our BUY rating on the stock.