Reliance Power: project execution fears assuaged

Reliance Power Ltd’s earnings for the three months ended March beat brokerage expectations for the second quarter in a row, but they are really a mixed bag. While net profit gained 24% from a year ago to Rs 231.3 crore, it was helped to a certain extent by a tax write-back.

Operating profit grew at a slower pace of 15.7% over a year ago. Operationally, things were not really hot for the company. Revenue in the March quarter grew 7.7% over a year ago, but that was owing to higher realizations. The flipside of higher tariffs is of course that demand could decrease. In the March quarter, Reliance Power’s output declined 9% from a year ago.

While plant availability factor at 92% was higher than the year-ago number, capacity utilization declined by some 6.4 percentage points, suggesting that the Uttar Pradesh State Electricity Board proved reluctant to buy power at higher costs.

That said, the plant availability factor, or capacity utilization, was higher than in the December quarter. Secondly, other income grew at 17%, lower than brokerage estimates, but that suggests the company is deploying the money in building capacity. The company has used some 95% of the proceeds of its 2008 new share sale in building factories.

Thirdly, while Reliance Power’s long-term borrowings at the end of March have increased some two-and-a-half times from a year ago, its finance costs have remained stable. That could be partly because the loan repayment for its Samalkot factory starts only from 2015.

With Rosa-II (Uttar Pradesh) commissioned, Samalkot (Andhra Pradesh) ready and coal extraction from Sasan (Madhya Pradesh) likely to start from the next quarter, Reliance Power seems to have assuaged investor concerns about its project execution.

However, concerns still remain. Prime among them is the question of fuel availability for the gas-fired Samalkot factory. Secondly, while the Butibori plant in Maharashtra is expected to be commissioned the next quarter, there are some concerns about its assured fuel supply from Coal India Ltd, as only a part of its output is tied up under a long-term power purchase agreement, says Emkay Global Financial Services Ltd.

Note that Reliance Power’s leverage may, too, go up sharply as it has guided for Rs 12,000 crore of capital expenditure this fiscal, three-fourths of which will be funded by debt.

Reliance Power has sued HT Media Ltd, publisher of Mint, in the Bombay high court over a 12 May 2010 front-page story in Mint that it disputed. HT Media is contesting the case.

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