Reliance Infrastructure Limited (RELI) reported a 35.4% y-o-y increase in the sales for the quarter ended Q109.
Both businesses—energy and EPC—contributed to this growth and accounted for 80% and 20% of the total sales, respectively.
However, higher operating costs dented the profitability and resulted in a negative EBITDA of Rs242.3 million. Nevertheless, a favourable other income enabled the company to report a net profit of Rs2.2 billion (up 0.9% y-o-y).
For the near-term outlook, we believe that improved realizations and PLF will drive the energy business. Since RELI does not have any plans to increase its power generation assets, improved realizations and PLF are expected to drive the core energy business.
Though RELI generated a lower number of units due to reduced PLFs during Q1’09, we expect higher efficiency in the coming quarters as the company’s power plants are using highly efficient equipments and processes.
With a 28.3% y-o-y growth in sales and almost double operating profit, the EPC business is gaining momentum. Management expects this segment to earn revenue of Rs30 billion by 2010 from Rs14 billion in FY08.
This target seems possible as the company has an order book of Rs210.4 billion, which is 14.8x FY08 EPC revenues. Moreover, RELI is bidding for overseas contracts as well, which should enhance its order book substantially.
NK and DS toll road projects have achieved a physical progress of 60% and are likely to be completed in Q3’09. The Mumbai metro project and Delhi metro project are going as per schedule. Moreover, the designs for the other three road BOT projects have also been prepared.
RELI’s stock price has seen appreciation in excess of 30% over the last two months, and as per our valuation, the stock is currently fairly priced. Hence, we downgrade our rating to HOLD.