Will R Infra's proposed sale of Mumbai power biz help it create value?
The deal, if it goes through, would not only reduce the significant amount of debt but it will also release a significant amount of equity.
Jitendra Kumar GuptaMoneycontrol Research
Selling of Mumbai-integrated power business could be a big deal for Reliance Infrastructure considering the size and valuations of the business. Reliance Infrastructure has divested businesses like cement, road assets and part of the power distribution assets in the past. This had helped the company reduce its gross debt by about Rs 4000 crore to Rs 26,556 crore. But there is more room considering that company’s FY17 profits (before interest and tax) of Rs 6593 crore narrowly covered interest costs of Rs 5,650 crore.
Valuation of Mumbai power business
Analysts peg the valuation of Mumbai power business (which is having a sales turnover of about Rs 6,000 crore) at an enterprise value of around Rs 10,000-13,000 crore. Reliance Infrastructure announced that the company has entered into discussions with the Adani Transmission for the proposed sale of Mumbai electricity assets comprising the 500 MW power plant at Dahanu near Mumbai and power distribution assets. In Mumbai the company distributes about 1800 MW of power to close to 30 lakh customers.
Why the deal?
Since these assets are fairly old and established the component of debt is expected to be less. To put it in perspective, the consolidated debt of Reliance Infrastructure stood at Rs 26,556 crore whereas the standalone debt is merely Rs 16,321 crore. The deal, if it goes through, would not only reduce the significant amount of debt but it will also release a significant amount of equity, which could possibly be used as growth capital for some of its other focused businesses like defence and EPC construction business.
Capital allocation key monitorable
While the deal could provide growth capital, what needs to be seen is how prudently the company is going to allocate this capital. In FY17, the company reported that assets worth Rs 15,136 crore were employed in the infrastructure business, which reported a segment profit of Rs 173.5 crore or about 1.14 percent return on the assets employed in the segment. While EPC and contract business made slightly better contributions, the segment profit is still a mere 4.9 percent of the assets worth Rs 5483 crore employed in the business.
A possible reduction in debt post the deal could reduce interest costs and improve profitability and return ratios. Mumbai power business is a cash cow and make a large contribution to the overall profitability. Absence of such business will impact profitability. For the same reason, markets will be keenly waiting for an update on how the company intends to use the proceeds or funds raised through this deal.
Any update on the valuations and structure of deal in terms of debt-to-equity will have a bearing on Reliance Infrastructure’s valuations, which are currently depressed. Reliance Infrastructure is currently having a market capitalisation of Rs 12,373 crore, which is about half of its consolidated net worth or 0.5 times its book value.Moneycontrol Research Page.