CHANGE IN NUMBERS
COMPANY REPORT EQUITIES RESEARCH HOW WE DIFFER FROM THE STREET
RPWR IN BNPP Consensus % Diff RELIANCE POWER Target Price (INR) 56.00 88.79 (36.9) INDIA / INDEPENDENT POWER PRODUCERS EPS 2014 (INR) 2.64 3.54 (25.4)
EPS 2015 (INR) 2.62 3.69 (29.0) TARGET INR56.00 PRIOR TP INR68.00 Positive Neutral Negative REDUCE CLOSE INR66.30 Market Recs 7 2 12 UNCHANGED UP/DOWNSIDE -15.5%
INDUSTRY OUTLOOK ççèè KEY STOCK DATA Horizon remains cloudy YE Mar (INR m) 2014E 2015E 2016E Revenue 51,349 64,412 84,872 CHANGE Rec. net profit 7,397 7,352 11,487 We cut estimates and TP and reiterate our REDUCE rating Recurring EPS (INR) 2.64 2.62 4.10 We cut our earnings estimates for Rpower significantly as we factor in Prior rec. EPS (INR) 4.13 10.95 - delays in the start of its Sasan UMPP and Samalkot projects. We cut our Chg. In EPS est. (%) (36.1) (76.1) N/A DCF-based TP by 17.6% from INR68 to INR56 and reiterate our REDUCE EPS growth (%) (22.6) (0.6) 56.2 rating on the stock. We believe consensus estimates are optimistic and Recurring P/E (x) 25.1 25.3 16.2 will be cut. Dividend yield (%) 0.0 0.0 0.0 CATALYST EV/EBITDA (x) 21.1 16.0 10.1 Non-availability of gas and execution delays to hurt Price/book (x) 1.0 0.9 0.9 With no visibility on gas supplies, we assume Rpower’s 2.4GW Samalkot Net debt/Equity (%) 120.5 126.0 119.2 power plant starts only in FY17 versus our earlier expectation of FY15. We ROE (%) 3.9 3.7 5.6 also assume a quarter’s delay in the start of Sasan UMPP which leads to Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 lower contracted tariffs for FY14E and FY15E as well as lower generation. 22 113 12 103 2 93 (8) 83 (18) VALUATION 73 (28) DCF-based TP reduced to INR56 (from INR68) 63 (38) 53 (48) Our TP is based on project-wise free cash flows over 15 years discounted 43 (58) (INR) Reliance Power Rel to MSCI India (%) at a 10% WACC (9.7% earlier). We value 8.3GW of generation capacities, Share price performance 1 Month 3 Month 12 Month excluding Sasan II, Chitrangi, Tilaiya, hydro power plants, Indonesian coal Absolute (%) (14.7) (12.0) (31.1) mines, and CBM assets as all need government clearances and/or land. Chitrangi also faces the overhang of a long drawn legal di spute). Relative to country (%) (11.5) (9.8) (46.2) Next results August 2013 COMMENT Mkt cap (USD m) 3,207 Non-valued capacity represents key upside risk to our target price 3m avg daily turnover (USD m) 12.9
Contribution from capacity that we exclude from our valuation (as listed Free float (%) 25 above) presents the key upside risk to our target price. In particular, Reliance Infrastructure Major shareholder including Sasan II and Chitrangi increases our fair value by 71% to INR96, Limited (37%) and including Tilaiya increases it by 12.5% to INR63. Further downside 12m high/low (INR) 110.35/59.15 risks include: 1) further delays in execution of Sasan UMPP; 2) delays in 3m historic vol. (%) 41.7 resetting Sasan UMPP tariffs to pass through increased costs; and 3) ADR ticker - delays in approvals to convert Butibori into a regulated plant. ADR closing price (USD) -
Issued shares (m) 2,805
Sources: Bloomberg consensus; BNP Paribas estimates
Girish Nair [email protected] +91 22 33704380
BNP Paribas Securities (Asia) Ltd. research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the back page.
PREPARED BY BNP PARIBAS SECURITIES ASIA THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX 17 JUNE 2013 Reliance Power Girish Nair
We now assume the start-up of Samalkot in FY17 (vs FY15 earlier)
Rpower is constructing a 2.4GW gas fired power plant at Samalkot in Andhra Pradesh. It has so far commissioned six gas turbines of 240MW each, totalling capacity of 1,440MW. The plant can run in open- cycle mode but is not yet operational due to non-availability of gas. Three steam turbines of 320MW each are yet to be installed as Rpower is awaiting domestic gas allocation from the government. The government was not in a position to allocate any gas, as gas supplies from Reliance Industries’ (RIL IN) KG basin fell when they were expected to substantially rise. An Empowered Group of Ministers (EGOM) is set to meet to decide on whether current gas supplies from RIL’s KG basin could be redistributed among various sectors so that the allocation to the power sector is increased. However, our talks with industry experts indicate that the reallocation will be for existing gas plants which are facing gas shortages and that there is no proposal to provide gas to new power plants. The Ministry of Petroleum and Natural gas has also indicated that there will be no incremental domestic gas production until FY16.
Rpower is considering setting up an LNG terminal to import gas to fuel the Samalkot plant. However, assuming it goes ahead with this plan, we believe gas would not be available until FY17 at least.
We had previously assumed that Samalkot plant starts operations in FY15. With no visibility on a source of gas, we now assume it remains stranded until FY16 after which we assume it generates an ROE of 8% for FY17 and FY18, and 16% in and from FY19. Consequently, our valuation for Samalkot comes down from INR10/share to INR1/share. In the worst case (unlikely in our view) that Samalkot is stranded for the foreseeable future, our fair value would fall 16% from INR56 to INR47 – this is made up of the value of the project (INR1/share) plus estimated debt (INR8.2/share) which would have to be repaid.
Delay in Sasan UMPP leads to our estimate cuts
RPower declared commercial operation (COD) of 660MW U-1 of Sasan UMPP on 31 Mar 2013. However, Sasan UMPP’s customers have contested Rpower’s claim of COD on the grounds that, while the commissioning test had to be carried out at 95% of the contracted capacity for 72 hours, the independent engineers’ test certificate was for only 101.28MW versus 627MW. The Western Regional Load Dispatch Centre had granted permission to Sasan UMPP to ramp up capacity on 30 March 2013 but Rpower did not avail of the capacity. Also, no testing was done on super-critical parameters despite the project being based on super-critical technology.
In its defence, Rpower claimed that the testing was done at 100MW due to grid restrictions imposed by WRLDC and that, by the time WRLDC had granted permission to ramp up, about 60 hours of testing had already been carried out. The Central Electricity Regulatory Commission (CERC) has ordered Rpower to carry out another test on super-critical parameters as soon as possible. To ensure that there is no delay, CERC has directed Rpower to carry out tests after providing advance notice of one week. RPower is challenging the rejection of COD by its customers at CERC.
We had previously assumed 660MW U-1 of Sasan UMPP to start COD in Q4FY13. We now expect it to start in Q1FY14 – a delay of one quarter. We assume a delay in the start of other units as well. Consequently, apart from lower generation, our estimate of Sasan’s contracted tariff goes down from INR0.703/kwh to INR0.699/kwh in FY14 and from INR1.314/kwh to INR0.703/kwh in FY15. This results in Sasan being loss making in FY14 and FY15, on our estimates. We also note that, as per Sasan UMPP’s power sale contract, Rpower should have declared U-1 commercial by 6 May 2013. Since this matter is under dispute, we conservatively assume that U-1 COD is delayed and therefore that: 1) customers will retain performance guarantees worth INR3b given by Rpower; and 2) liquidated damages of INR10,000/day/MW are imposed on the power plant. Assuming U-1 COD by 30 Jun 2013, we estimate INR363 m (INR1.2/share) of penalties, which is subtracted from our valuation in deriving our target price. Lower contracted tariffs and penalties will not materialize if CERC accepts 31 Mar 2013 as the date of COD for U-1 of Sasan UMPP.
Sasan’s request for tariff reset valid, in our view
Rpower has requested CERC to increase its competitively-bid tariffs for the Sasan UMPP to pass through an increase in costs arising from a change in law. As per Sasan UMPP’s long-term power sale contract, any increase in costs arising from change in Indian law can be passed onto consumers. Specifically, Rpower has requested a pass through of escalation in costs due to the following changes in Indian laws:
1 Increase in water charges, pursuant to a notification of 21 Apr 2010 issued by the Water Resources Department, Government of Madhya Pradesh. Water charges at the time of the bid were IRN1.8/cu m, and have been increased to INR5.5/cu m.
2 Increase in rate of royalty on coal from 5% of sale price + fixed charge of INR55-180/ton to a flat rate of 14% of sale price.
2 BNP PARIBAS 17 JUNE 2013 Reliance Power Girish Nair
3 Levy of clean energy cess of INR100/tonne by the government of India wef 1 Apr 2010.
4 Imposition of excise duty of 1% of sale price of coal by GoI wef 1 Apr 2012.
5 Increase in Minimum Alternate Tax rates from 10% to 18%.
6 Increase in merit rate of excise duty from 5% to 6% by the government of India .
7 Reduction in Central State Taxes from 3% to 2% as per notification of 30 May 2008 issued by the Ministry of Finance, GOI.
8 Increase in VAT rates from 4% to 5% for Schedule II Part II goods and from 12.5% to 13% for Schedule II part IV goods as per notification of 1 Aug 2009 issued by Commercial Tax Dept, GoMP.
We believe CERC will approve an increase in Sasan UMPP’s tariffs as RPower’s claims appear valid under the “change in law” clause as per its power sale contract. Management has indicated that if Rpower is allowed to pass on all of these costs, the tariff would go up by INR0.2/kwh. Our tariff and cost estimates for Sasan UMPP do not factor in the impact of these notifications. A CERC order allowing a pass-through of all additional costs would have no impact on our TP. However, our TP and estimates would be negatively impacted in the unlikely event that CERC does not provide a pass-through of the additional costs.
No case for pass-through of increase in costs due to forex variations, in our view Rpower has filed a separate petition to pass through an increase in costs due to unforeseen and unprecedented variation in the exchange rate. We believe that Rpower might not have a case here as Rpower did not exercise the option to bid with forex variations as a pass-through.
Rpower did not quote capacity charges in USD/kwh when it had the option to do so. The exchange rate used in the conversion of dollar component of tariff into INR for the purpose of monthly billing is based on the average of foreign exchange rates for 15 days prior to the month of billing. Hence, any variation in forex rates would have been a pass-through. By quoting capacity charges in INR/kwh, it appears that the company was planning to raise domestic debt or was willing to absorb the entire forex variation risk.
Butibori – awaits regulatory approval for conversion into regulated power plant
Rpower is set to complete its 2x300MW Butibori Power plant in FY14. One 300MW unit was meant to be a captive power plant for a group of industrial customers in Nagpur while the other 300MW unit was meant to operate as a merchant power plant. However, as per Rpower, as the industrial customers did not want to take power from the 300MW unit of Butibori, Rpower has requested the Maharashtra Electricity Regulatory Commission (MERC) to convert the 600MW Butibori power plant into a regulated power plant earning a 15.5% ROE. Rpower has signed a long-term power sale agreement with Reliance Infrastructure’s Mumbai power distribution business to supply 600MW power from Butibori starting 1 Apr 2014 and is seeking MERC’s approval for the contract.
MERC has accorded in-principle approval for converting 300MW U-2 into a regulated power plant. It is awaiting a No Objection Certificate (NOC) from Maharashtra Industrial Development Corporation (MIDC) before according approval to U-1. MIDC board is awaiting legal opinion on this issue before issuing the NOC.
Rpower would source coal from Coal India (COAL IN) for Butibori. Until 1 April 2014, Rpower plans to sell power under short-term contracts at market prices if it has to use imported coal only and at regulated prices if it gets coal from Coal India at a discount to market prices.
We assume that Butibori will source imported coal during FY14 and sell power from Butibori in the merchant power market at a tariff of INR4.5/kwh. We assume Butibori gets domestic coal from Coal India and sells power under regulated tariffs starting FY15 (i.e. April 2014).
Including Chitrangi and Sasan II could provide 71% upside to our TP
Instead of building a 3,960MW coal-fired power plant at Chitrangi near its Sasan Ultra Mega Power Project (UMPP), Rpower plans to build 1,980MW at Sasan itself (Sasan II) and 1,980MW at Chitrangi. Rpower emerged as the lowest bidder to supply 1,241MW of power to Madhya Pradesh Power Trading Corp (MPPTC) at INR2.45/kwh. The company also emerged as the lowest bidder to supply 2,640MW of power to the Uttar Pradesh Power Corporation (UPPCL) at an effective tariff of INR3.6/kwh. Rpower is yet to sign a PPA for these bids.
The company claims that it is awaiting environmental clearance before starting construction of Sasan II. The expansion can be fuelled, according to management, by excess coal production from the Moher and Moher Amroli captive coal mines allocated for Sasan I.
3 BNP PARIBAS 17 JUNE 2013 Reliance Power Girish Nair
The company also claims that it is awaiting Stage II forest clearance for its Chattrasal captive coal block (allocated to Sasan UMPP) before starting construction of the 1,980MW power plant at Chitrangi. Management indicated that one of the conditions imposed by the government for granting Stage II forest clearance is that Rpower should, apart from paying compensatory afforestation money, acquire land for compensatory afforestation. Rpower is contesting the land acquisition condition on the basis that such a condition should be waived for a coal mine attached to a UMPP.
In addition, Tata Power’s (TPWR IN, REDUCE) case against the Indian government is pending in the Supreme court. Tata Power is claiming that the government’s decision to allow Rpower to divert surplus coal from Sasan’s coal mines to other power projects vitiated the bid process for Sasan UMPP. Tata Power has argued that, had it known that the surplus coal could be used for other projects, it would have bid lower for the project and, as such, the government’s decision is against the public interest. The high court dismissed Tata Power’s petition in 2009 saying that Tata Power did not have locus standi in the case. Tata Power’s appeal against the order in the Supreme Court has been pending for the past three years. However, we believe Tata Power’s case is weak considering that CERC, despite concluding that Tata Power had no case, ordered the formation of a committee to determine a compensatory tariff for its loss-making Mundra UMPP, which we view as vitiating the bid process for the Mundra UMPP.
Given the host of issues associated with Sasan II and Chitrangi projects, we do not include these projects in our valuation. Had we included the two projects, our fair value would go up by 71% from INR56 to INR96. However, given the issues Rpower has faced in the execution of projects that it recently completed (coal shortages at Rosa, execution delays at Butibori and Sasan and no gas availability for samalkot), we believe investors ought to be wary of including them in valuations even if all hurdles are cleared and the company starts construction of the power plants.
Excluding Tilaiya UMPP and Indonesian coal mines until visibility improves
We haven’t included the Tilaiya UMPP in our valuations as the company is yet to complete land acquisition for the power plant and its captive mine awaits forest clearances. If we include Tilaiya UMPP in our valuations, our fair value would increase by INR7 to INR63 (assuming the company acquires land for Tilaiya UMPP by Sep 2013 and assuming a 40-month construction implying that the first 660MW unit starts on 1 Jan 2017 with the remaining five units coming up successively in intervals of four months).
We have also not considered Rpower’s Indonesian coal mines in our valuation. The company has finished JORC reports for all three mines but it is yet to disclose the mines’ coal reserves. The company is in the process of finalizing a Mine Development Operator (MDO). So the mining costs are yet to be ascertained. Rpower initially plans to transport the coal through barges as land transportation is an issue. The company estimates a maximum of 7.5m tonnes of coal can be dispatched using barges and is negotiating with potential buyers to sell 6m-7m tonnes of coal. To ramp up production to 30m tonnes, the company plans to develop the transportation infrastructure for the mines. We would include the Indonesian coal mines in our valuations on finalization of coal mining costs, funding of transportation infrastructure and production ramp-up timelines.
Lowering our estimates significantly; TP down by 17.6% to INR56
We cut our earnings estimates on Rpower for FY14 by 36.1% and for FY15 by 76.1% as we factor in delays in the start of it Sasan UMPP and Samalkot power plant for the reasons laid out earlier (see Exhibit 1).
We have excluded the Sasan II, Chitrangi, Tilaiya projects, Sumatra coal mines, planned hydro power plants and Coal Bed Methane assets from our valuations as either land has not yet been acquired or government clearances are pending for these projects (see Exhibits 2, 3 and 4).
Our DCF-based TP falls 17.6% from INR68 to INR56 on the back of lower estimates and a higher WACC. Our valuation considers 8.3GW of power generation capacities (operational and under construction) which also includes 185MW of renewable projects. We add up estimated project-by-project free cash flows for the next 15 years and discount them at a WACC of 10% (9.7% earlier). Our WACC assumption is based on a cost of equity assumption of 15.2% (14% earlier) and cost of debt assumption of 9% (unchanged), a tax rate of 30% (unchanged) and a D:E ratio of 58:42. (56:44 earlier). Our cost of equity of 15.2% is based on a risk free rate of 8%, risk premium of 5% and beta of 1.44 (up from 1 earlier) (see Exhibit 5).
4 BNP PARIBAS 17 JUNE 2013 Reliance Power Girish Nair
EXHIBIT 1: Change in estimates
------FY14E ------FY15E ------FY16E
New Previous Change New Previous Change New
(INR m) (INR m) (%) (INR m) (INR m) (%) (INR m)
Revenue 51,349 63,761 (19.5) 64,412 148,858 (56.7) 84,872
Cost of Sales incl. Fuel Expenses 28,109 28,378 (0.9) 31,771 74,539 (57.4) 34,053
Operating Costs 3,722 6,245 (40.4) 5,813 10,592 (45.1) 7,311
Total Expenditure 31,831 34,624 (43.6) 37,584 85,131 (68.5) 41,364
EBITDA 19,518 29,138 (33.0) 26,827 63,726 (57.9) 43,508
Depreciation 4,628 9,027 (48.7) 9,441 15,880 (40.5) 11,466
EBIT 14,890 20,110 (26.0) 17,386 47,846 (63.7) 32,041
Interest expense 9,563 14,955 (36.1) 11,908 24,015 (50.4) 19,669
Other Income 3,919 8,623 (54.6) 3,712 10,897 (65.9) 1,987
PBT 9,246 13,779 (32.9) 9,190 34,728 (73.5) 14,359
Tax (1,849) (1,240) 49.1 (1,838) (3,126) (41.2) (2,872)
PAT 7,397 12,539 (41.0) 7,352 31,603 (76.7) 11,487
% Tax 0 0 0 0 0 PAT after minority interest 7,397 11,573 (36.1) 7,352 30,710 (76.1) 11,487
EPS 2.64 4.13 (36.1) 2.62 10.95 (76.1) 4.10
Sources: Company; BNP Paribas estimates
EXHIBIT 2: Projects considered in our valuation
Year-end 31 Mar Fuel 2010 2011 2012 2013 2014E 2015E 2016E 2017E
(MW) (MW) (MW) (MW) (MW) (MW) (MW) (MW)
Capacity considered in valuation
Rosa Ph 1 Linkage coal 600
Rosa Ph 2 Linkage coal 600
Butibori Linkage coal 600
Sasan UMPP Captive coal 2,640 1320
Samalkot Gas 2400
Solar PV Project, Rajasthan Solar 40
Solar CSP Project, Rajasthan Solar 100
Vashpet Wind 45
Capacity considered – total 600 - 640 - 3,385 1,320 - 2,400
Cumulative capacity considered 600 600 1,240 1,240 4,625 5,945 5,945 8,345
Sources: Company; BNP Paribas estimates
5 BNP PARIBAS 17 JUNE 2013 Reliance Power Girish Nair
EXHIBIT 3: Capacity Not considered in our valuation
Fuel Capacity
(MW)
Capacity not considered
Sasan II Captive Coal 1980
Chitrangi Captive Coal 1,980
Krishnapatnam UMPP Imported Coal 3,960
Tilaiya UMPP Captive coal 3,960
Kalai II Hydro 1,200
Siyom Hydro 1,000
Tato II Hydro 700
Emini Hydro 500
Amulin Hydro 420
Urthing Sobla Hydro 400
Mihundon Hydro 400
Purthi Hydro 300
Teling Hydro 94
Shangling Hydro 44
Sumte Kothang Hydro 130
Lara Sumta Hydro 104
Renewable Projects Solar/Wind 815
Total 16,007
Sources: Company; BNP Paribas estimates
EXHIBIT 4: Coal Mines under development
Estimated Peak Production Mine Location Mine Type Reserves Production start
(mtpa) (mtpa) Date
Moher, Moher Amlohri Extension Madhya Pradesh Open Cast 575 20 2012 (for Sasan UMPP) Chattrasal (For Sasan UMPP) Madhya Pradesh Open Cast 132 5 2013
Kerandari B & C (for Tilaiya UMPP - Not Jharkhand Open Cast 1,229 40 2015 in our valuation) Musi Rawas, South Sumatra Indonesia NA 30# Not known (Not in our valuation)
Source: Company
EXHIBIT 5: DCF Assumptions
DCF Assumptions
Cost of Equity (%) 15.2
Cost of Debt (%) 9.0
Debt (%) 58.0
Equity (%) 42.0
Tax Rate (%) 30.0
WACC (%) 10.0
Terminal Growth (%) 3.0
Enterprise Value (INR m) 421,106
Less: Net Debt (INR m) 252,780
Market Cap (INR m) 159,325
RNRL Mcap 0
No of shares (m) 2,805
Target Price (March 2014) (INR) 56
Source: Company
6 BNP PARIBAS 17 JUNE 2013 Reliance Power Girish Nair
RISK EXPERTS l Macro RELIANCE POWER REDUCE RPWR IN UNCHANGED
-----Base------Best------Worst----- Key Earnings Drivers & Sensitivity FY14 FY15 FY14 FY15 FY14 FY15
Key earnings drivers include completion of new power Utilization * base base 5% 5% 5% 5% projects, utilization/availability of power plants and fuel costs case* case increase increase decline decline EPS (INR) 2.64 2.62 2.84 4.14 2.41 0.90 Change (%) 7.68 58.10 (8.77) (65.75)
*utilization assumptions different for different plants
Source: BNP Paribas estimates
Reliance Power and Reliance Infrastructure (3M and 6M Realised-Vol) Regression – Reliance Power to Reliance Comm
Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Reliance Comm -32.00% -22.00% -12.00% -2.00% 8.00% 18.00% 28.00% 38.00% 200 26.00% 21.00% 150 16.00% 11.00% 6.00% 100 1.00% -4.00% -9.00% 50 -14.00% -19.00%
Reliance Power 0 (%) Reliance Power - 3M Realised - Vol Reliance Power - 6M Realised - Vol Reliance Power = 88 + 0.2284 * RCOM IN Equity R Square = 0.546 Reliance Infrastructure - 3M Realised - Vol Reliance Infrastructure - 6M Realised - Vol Regression based on 261 observations of 5 years weekly data. Please refer to Appendix 1 for the explanation of R-square Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas India Sector Correlation Matrix at 28 February 2013
Engineering & Metals & Autos Banks Construction Mining Oil & Gas IT Services Telecom Utilities Property Autos 1.00 0.66 0.62 0.64 0.47 0.32 0.32 0.55 0.55 Banks 1.00 0.78 0.77 0.55 0.39 0.44 0.68 0.75 Engineering & Construction 1.00 0.72 0.51 0.33 0.43 0.62 0.70 Metals & Mining 1.00 0.60 0.39 0.41 0.64 0.72 Oil & Gas 1.00 0.38 0.34 0.52 0.51 IT Services 1.00 0.22 0.35 0.30 Telecom 1.00 0.40 0.43 Utilities 1.00 0.66 Property 1.00
Source: BNP Paribas Sector Strategy
The Risk Experts Long/Short Chart
Our starting point for this page is recognition of the macro Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 factors that can have a significant impact on stock-price 2.01 1.81 performance, sometimes independently of bottom -up factors. +2s 1.61
With our Risk Expert page, we identify the key macro risks 1.41 +1s 1.21 that can impact stock performance. Mean 1.01 This analysis enhances the fundamental work laid out in the 0.81 -1s
0.61 rest of this report, giving investors yet another resource to -2s 0.41 use in their decision-making process (x) Power Grid - Reliance Power Sources: Bloomberg; BNP Paribas
Sources: Bloomberg; BNP Paribas
7 BNP PARIBAS 17 JUNE 2013 Reliance Power Girish Nair
Financial statements Reliance Power
Profit and Loss (INR m) Year Ending Mar 2012A 2013A 2014E 2015E 2016E
Revenue 20,192 48,786 51,349 64,412 84,872 Cost of sales ex depreciation (11,354) (29,472) (28,109) (31,771) (34,053) Gross profit ex depreciation 8,838 19,314 23,240 32,641 50,818 Other operating income 0 0 0 0 0 Operating costs (2,599) (2,665) (3,722) (5,813) (7,311) Operating EBITDA 6,239 16,649 19,518 26,827 43,508 Depreciation (1,215) (2,851) (4,628) (9,441) (11,466) Goodwill amortisation 0 0 0 0 0 Operating EBIT 5,024 13,798 14,890 17,386 32,041 Net financing costs 4,499 (2,282) (5,644) (8,196) (17,683) Associates 0 0 0 0 0 Recurring non operating income 0 0 0 0 0 Non recurring items 0 480 0 0 0 Profit before tax 9,524 11,997 9,246 9,190 14,359 Tax 0 (1,882) (1,849) (1,838) (2,872) Profit after tax 9,524 10,115 7,397 7,352 11,487 Minority interests 0 0 0 0 0 Preferred dividends 0 0 0 0 0 Other items 0 0 0 0 0 Reported net profit 9,524 10,115 7,397 7,352 11,487 Non recurring items & goodwill (net) 0 (556) 0 0 0 Recurring net profit 9,524 9,559 7,397 7,352 11,487
Per share (INR) Recurring EPS * 3.40 3.41 2.64 2.62 4.10 Reported EPS 3.40 3.61 2.64 2.62 4.10 DPS 0.00 0.00 0.00 0.00 0.00 Growth Revenue (%) 91.4 141.6 5.3 25.4 31.8 Operating EBITDA (%) 145.0 166.9 17.2 37.5 62.2 Operating EBIT (%) 226.7 174.6 7.9 16.8 84.3 Recurring EPS (%) 15.5 0.4 (22.6) (0.6) 56.2 Reported EPS (%) 15.5 6.2 (26.9) (0.6) 56.2 Operating performance Gross margin inc depreciation (%) 37.8 33.7 36.2 36.0 46.4 Operating EBITDA margin (%) 30.9 34.1 38.0 41.6 51.3 Operating EBIT margin (%) 24.9 28.3 29.0 27.0 37.8 Net margin (%) 47.2 19.6 14.4 11.4 13.5 Effective tax rate (%) 0.0 15.7 20.0 20.0 20.0 Dividend payout on recurring profit (%) 0.0 0.0 0.0 0.0 0.0 Interest cover (x) - 6.0 2.6 2.1 1.8 Inventory days 34.5 43.1 67.9 62.5 64.1 Debtor days 90.6 74.3 97.0 89.4 87.5 Creditor days 43.5 24.0 30.3 28.3 29.0 Operating ROIC (%) 2.8 4.1 3.6 4.0 6.9 Operating ROIC - WACC (%) (10.1) - - - - ROIC (%) 2.0 3.6 3.3 3.7 6.5 ROIC - WACC (%) (10.9) - - - - ROE (%) 5.5 5.3 3.9 3.7 5.6 ROA (%) 1.5 2.6 2.5 2.8 5.2 *Pre exceptional, pre-goodwill and fully diluted Revenue By Division (INR m) 2012A 2013A 2014E 2015E 2016E Power Generation & others 20,192 48,786 51,349 64,412 84,872
Sources: Reliance Power; BNP Paribas estimates
8 BNP PARIBAS 17 JUNE 2013 Reliance Power Girish Nair
Reliance Power
Cash Flow (INR m) Year Ending Mar 2012A 2013A 2014E 2015E 2016E Recurring net profit 9,524 9,559 7,397 7,352 11,487 Depreciation 1,215 2,851 4,628 9,441 11,466 Associates & minorities 0 0 0 0 0 Other non-cash items 0 0 0 0 0 Recurring cash flow 10,738 12,411 12,024 16,793 22,953 Change in working capital (4,198) (5,983) (503) (3,925) (5,804) Capex - maintenance 0 0 0 0 0 Capex - new investment (107,746) (112,027) (29,200) (36,000) (23,000) Free cash flow to equity (101,206) (105,599) (17,679) (23,132) (5,851) Net acquisitions & disposals 0 0 0 0 0 Dividends paid 0 0 0 0 0 Non recurring cash flows 44,420 13,754 0 0 0 Net cash flow (56,786) (91,846) (17,679) (23,132) (5,851) Equity finance 0 0 0 0 0 Debt finance 72,622 121,000 11,875 12,611 (3,949) Movement in cash 15,837 29,154 (5,804) (10,522) (9,800)
Per share (INR) Recurring cash flow per share 3.83 4.42 4.29 5.99 8.18 FCF to equity per share (36.08) (37.65) (6.30) (8.25) (2.09) Balance Sheet (INR m) Year Ending Mar 2012A 2013A 2014E 2015E 2016E Working capital assets 28,827 39,587 40,038 44,264 50,256 Working capital liabilities (31,633) (36,409) (36,357) (36,658) (36,846) Net working capital (2,806) 3,177 3,680 7,606 13,410 Tangible fixed assets 283,556 392,731 417,304 443,863 455,396 Operating invested capital 280,750 395,909 420,984 451,468 468,806 Goodwill 135 134 134 134 134 Other intangible assets 0 0 0 0 0 Investments 50 0 0 0 0 Other assets 51,859 38,132 34,556 31,337 25,543 Invested capital 332,793 434,175 455,674 482,939 494,483 Cash & equivalents (28,163) (48,754) (46,527) (39,224) (35,218) Short term debt 3,892 25,373 0 0 0 Long term debt * 142,627 242,146 279,394 292,005 288,056 Net debt 118,356 218,765 232,867 252,780 252,837 Deferred tax 0 0 0 0 0 Other liabilities 38,664 29,220 29,220 29,220 29,220 Total equity 175,696 185,811 193,207 200,559 212,046 Minority interests 15 15 15 15 15 Invested capital 332,793 434,175 455,674 482,939 494,483 * includes convertibles and preferred stock which is being treated as debt
Per share (INR) Book value per share 62.63 66.24 68.88 71.50 75.59 Tangible book value per share 62.59 66.19 68.83 71.45 75.54 Financial strength Net debt/equity (%) 67.4 117.7 120.5 126.0 119.2 Net debt/total assets (%) 30.1 42.1 43.2 45.2 44.6 Current ratio (x) 1.6 1.4 2.4 2.3 2.3 CF interest cover (x) - 3.8 3.0 2.6 2.0 Valuation 2012A 2013A 2014E 2015E 2016E Recurring P/E (x) * 19.5 19.5 25.1 25.3 16.2 Recurring P/E @ target price (x) * 16.5 16.4 21.2 21.4 13.7 Reported P/E (x) 19.5 18.4 25.1 25.3 16.2 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 P/CF (x) 17.3 15.0 15.5 11.1 8.1 P/FCF (x) (1.8) (1.8) (10.5) (8.0) (31.8) Price/book (x) 1.1 1.0 1.0 0.9 0.9 Price/tangible book (x) 1.1 1.0 1.0 0.9 0.9 EV/EBITDA (x) ** 38.8 21.3 21.1 16.0 10.1 EV/EBITDA @ target price (x) ** 34.2 19.6 19.6 14.9 9.4 EV/invested capital (x) 0.9 0.9 0.9 0.9 0.9 * Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income
Sources: Reliance Power; BNP Paribas estimates
9 BNP PARIBAS 17 JUNE 2013 Reliance Power Girish Nair
History of change in investment rating and/or target price
Reliance Power (RPWR IN)
Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Date Reco TP 213.00 13-Jun-09 REDUCE 114.00 193.00 7-May-10 HOLD 140.00 173.00 25-Nov-10 REDUCE 142.00 153.00 27-Jan-11 HOLD 142.00 133.00 22-Aug-11 REDUCE 69.00 113.00 93.00 73.00 53.00 (IN R) Reliance Pow er Target Price
Girish Nair started covering this stock from 11-Aug-2008 Price and TP are in local currency Valuation and risks: We have a DCF-based TP. Contribution from capacity that we exclude from our valuation presents the key upside risk to our target price. Downside risks include: 1) further delays in execution of Sasan UMPP; 2) delays in resetting Sasan UMPP tariffs to pass through increased costs; and 3) delays in approvals to convert Butibori into a regulated plant. Sources: Bloomberg; BNP Paribas
10 BNP PARIBAS 17 JUNE 2013 Reliance Power Girish Nair
Disclaimers and Disclosures ANALYST(S) CERTIFICATION Girish Nair, BNP Paribas Securities India Pvt Ltd, +91 22 33704380, [email protected].
The analyst(s) or strategist(s) herein each referred to as analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, relate to the specific recommendation or views expressed herein; and (iii) is not aware of any other actual or material conflicts of interest concerning any of the subject securities, companies or issuers referenced herein as of the time of this certification. Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/ or FINRA regulations .
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IMPORTANT DISCLOSURES The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report:
Company Disclosure (as applicable)
- -
BNP Paribas represents that: 1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees. 2. It had an investment banking relationship with this company in the last 12 months. 3. It received compensation for investment banking services from this company in the last 12 months. 4. It beneficially owns 1% or more or the market capitalization of this company. 5. It makes a market in securities in respect of this company. 6. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in securities issued by this company or derivatives thereof. 7. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company.
Additional Disclosures Within the next three months, BNP Paribas may receive or seek compensation in connection with an investment banking relationship with one or more of the companies referenced herein. Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in our most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of this note or your BNP Paribas representative. All share prices are as at market close on 14 June 2013 unless otherwise stated.
12 BNP PARIBAS 17 JUNE 2013 Reliance Power Girish Nair
RECOMMENDATION STRUCTURE
Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B) . The upside is 10% or more. HOLD (H) . The upside or downside is less than 10%. REDUCE (R) . The downside is 10% or more. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. * In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Industry Recommendations Improving (é): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Neutral (çè): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (ê): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months. Country (Strategy) Recommendations Overweight (O) . Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Neutral (N) . Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Underweight (U) . Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.
RATING DISTRIBUTION (as at 14 June 2013)
Total BNP Paribas coverage universe 649 Investment Banking Relationship (%)
Buy 345 Buy 8.4
Hold 206 Hold 2.4
Reduce 98 Reduce 4.1
Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report. © 2013 BNP Paribas Group
13 BNP PARIBAS 17 JUNE 2013