Buy Reliance Infra; target of Rs 652: Nirmal Bang

“Reliance Infrastructure reported revenue growth of 4% YoY at Rs53.8bn (lower 14.6%/5.0% from our/Bloomberg estimates, respectively) for 1QFY13, primarily due to lower project execution in the EPC segment. EBITDA fell 10% YoY to Rs6.7bn, but was 7%/11% higher than our/Bloomberg estimates, respectively, due to reduction in fuel costs and other expenditure. However, higher other income and lower tax, which got partially offset by higher interest costs, led profits to grow 2% to Rs4.1bn (32% and 48% higher than our/Bloomberg estimates, respectively). We have cut our FY13E/FY14E earnings estimates by 15.9% and 14.7%, respectively, to factor in slower project execution and maintenance shutdown of Delhi metro rail project. We have cut our target price on the stock from Rs682 to Rs652 due to earnings downgrade. However, we have retained our Buy rating on it.”

“For 1QFY13, EPC revenue growth moderated to remain flat at Rs17.5bn YoY due to lower project execution run rate following completion of some of the active projects. The company completed major power projects like Butobori, WRSS scheme (six out of nine power transmission lines commissioned) and two road projects. EBIT margin of the EPC segment improved to 9.9% up190 bps YoY, 420 bps QoQ. The current order book stands Rs155.6bn (1.4x FY12 EPC revenue) comprising six power projects (9,900MW), one power transmission project (1,500 km) and six road projects (570 km). Revenue from infrastructure business improved 49% YoY to Rs914mn driven by commencement of operations of three road projects. EBIT has turned positive during the quarter to Rs 364mn against loss of Rs55mn in 1QFY12. Currently, seven road projects are revenue operational and we expect three additional road projects to get commissioned in FY13. The Delhi metro rail project temporarily suspended operations from 8 July 2012 due to defective bearings and civil structure problems. As much as 95% of civil works of the Mumbai metro rail project has been completed, which is expected to be operational by the end of FY13. In FY12, the company commissioned six out of nine power transmission lines of the WRSS project and expects it to get fully operational by FY13.”

“We have downgraded our target price for Reliance Infrastructure from Rs683 to Rs652 based on SOTP valuation, primarily due to downward revision in our earnings estimates for FY13 and FY14. However, looking at positive developments like revision in power tariff (which leads to reduction in under-recovery), recovery of regulatory assets and gradual completion of infrastructure projects, we believe the stock would outperform. Therefore, we retain our Buy rating on it,” says Nirmal Bang research report. 

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