Reliance Infra a good blend of stable cash flow:Nirmal Bang

The company is also a leading utility company having presence across the value chain of power businesses like generation, transmission, distribution, and trading. The company generates 940 MW of electricity through its five power stations and distributes power to over 5.6 million consumers in Mumbai and Delhi.

The company also provides EPC to develop power and road projects and has an order-book of Rs 173 billion. The company holds a 38% stake in Reliance Power, which plans to have a portfolio of 32 GW of generating assets.

The company’s electricity business includes Mumbai discom (generation, transmission and distribution) and Delhi distribution, which earns a regulated return on equity. The Maharashtra Electricity Regulatory Commission (MERC) has extended the company’s power distribution licence period in suburban Mumbai for the next 25 years and allowed charging cross-subsidy for migrated customers.

The company has submitted a plan for recovery of regulatory assets worth Rs 48 billion over a period of six years, of which assets worth Rs 23 billion have been approved. Cross-subsidy charge will reduce the migration of high-end customers and recovery of regulated assets will reduce debt and improve cash flow.

The company has a strong infrastructure portfolio that consists of 11 road projects, three metro rail lines and five power transmission projects worth Rs 346 billion. The execution of key infrastructure projects is on track and revenue from the infrastructure business has shown robust growth in FY12, driven by commencement of operations of Delhi metro rail project and three road projects during FY12.

The company is expected to complete five more road projects in FY13. Of these, three road projects would be commissioned in the next three months. It has witnessed healthy traffic at the Delhi metro rail project and closed retail deals of 60,000 sq ft.

During FY12, net sales of the company increased by 60% to Rs 242 billion, driven by 3.7x growth in revenue from the EPC segment. The EPC segment is expected to report flat revenue in FY13. Hence, we expect net sales to show a CAGR of 3% over FY12-14, to Rs 239 billion and Rs 255 billion, respectively. During FY12, EBITDA rose by 85% to Rs 27.8 billion and the EBITDA margin improved 160 bps to 11.5%. We expect EBITDA to show a CAGR of 20% to Rs 34.4 billion and Rs 40 billion for FY13 and FY14, respectively, driven by rising contribution of high margin infrastructure projects and revision in power tariff.

We believe that the company is a good blend of stable cash flow from the power distribution business and has strong growth potential from infrastructure assets. Positive  developments like expected recovery of regulatory assets, power tariff hike, coupled with commissioning of infrastructure projects like five road projects, Mumbai metro rail phase I and one transmission project in FY13E would re-rate the stock’s valuation.

Source: Nirmal Bang's Beyond Market

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