Reliance Infrastructure Limited Conference Call Q1FY10 Results
July 31, 2009
MODERATORS: MR. LALIT JALAN – CEO AND WHOLE TIME DIRECTOR, RELIANCE INFRASTRUCTURE LIMITED. MR. S. C. GUPTA – DIRECTOR, RELIANCE INFRASTRUCTURE LIMITED. MR. MADHUKAR MOOLWANEY – SENIOR VICE PRESIDENT, RELIANCE INFRASTRUCTURE LIMITED MR AMIT JAIN – HEAD, INVESTOR RELATIONS, RELIANCE INFRASTRUCTURE LIMITED MR. SHANKAR K. – SENIOR ANALYST, EDELWEISS SECURITIES LIMITED Reliance Infrastructure Limited July 31, 2009
Moderator: Ladies and gentlemen good morning and welcome to the Reliance Infrastructure Limited’s Q1FY10 results conference call, hosted by Edelweiss Securities Limited. As a reminder for the duration of this conference, all participants’ lines will be in the listen-only mode and there will be an opportunity for you to ask questions at the end of today’s presentation. If you should need assistance during the conference call please signal an operator by pressing * and then 0 on your touch-tone phone. Please note that this conference is being recorded. At this time, I would like to hand the conference over to Mr. Shankar K of Edelweiss, thank you and over to you sir.
Shankar K: Thank you Melissa. Welcome friends, first of all I would like to sincerely thank the management of Reliance Infrastructure for providing us an opportunity to host this call. We are joined by from the management side Mr. Lalit Jalan, CEO and whole-time Director, Mr. S.C. Gupta, Director and Mr. Madhukar Moolwaney, Senior Vice President. Mr. Lalit Jalan would take us through the broad operation and financial highlights of the quarter, post which we will have the question and answer (Q&A) session. Without wasting further time, I will hand it over quickly to the management. Over to you sir, thanks.
Lalit Jalan: Thank you. And thank you to all of you for taking time off to be part of this Reliance Infra conference call. And let me start with the results that we announced last evening.
We had an encouraging 1st quarter. Our top-line has grown 12% Y-o-Y. This is on a standalone basis. Our net profit is at INR 317 crores versus INR 253 crores, which is a growth of 25%. We have had an earning per share growth of 30% and this is owing to the reduction of number of shares owing to buyback done last year. So the annualized EPS is 56 versus 43. Our sales of energy increased by 9% and we continue to be cash-rich with cash and cash equivalents of about INR 9,000 crores.
The transformation, which began in 2003 with the takeover of the erstwhile BSES to Reliance Energy and then to Reliance Infrastructure, is well on way. When we took over BSES in 2003, it was predominantly Mumbai distribution utility and we took three years to transform this one city utility into a complete player in the generation, transmission,
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distribution, and EPC player, making it the largest electric utility player in the country.
In 2006, looking at the huge potential that the infrastructure sector was bringing and our complementary strengths in this field, the board has decided to take this opportunity of plunging into the infrastructure space. And in a short period of three years, I am very happy to say that we have emerged as the largest Indian infrastructure company. Keeping our new focus on infrastructure where anyway power is the largest segment, we decided to change the name to Reliance Infrastructure.
Talking a little bit about our infrastructure piece, we are currently developing 11 projects, totaling INR 13,500 crores. And these projects do not include our generation, which is being done through Reliance Power or our running distribution businesses or our real estate businesses. These projects are across the road sector, the metro sector and the transmission sector. And these are projects which are under construction. Two of these projects have been completed and we are awaiting COD which could happen any day. We have also emerged as the preferred bidder in four projects, totaling INR 20,000 crores and we expect award of those projects to us shortly and these are the Mumbai Metro Line II, Western Freeway Sealink, NCR Eastern Expressway and five regional airports in Maharashtra.
We continue to be placed on a very financially sound footing. And last year, which all of us saw, was a huge financial contagion in the world. Our group achieves financial closure of INR 32,000 crores across power and infrastructure projects, out of which, three projects worth around INR 7,000 crores were closed by Reliance Infrastructure, including the two metro projects and one transmission project.
Furthermore, earlier in the quarter, promoters have agreed to subscribe to 43 million equity warrants, convertible into shares, which will increase our net worth from more than INR 12,000 crores to more than INR 16,000 crores. This, with our borrowing capacity on a conservative basis of 2:1, gives us a borrowing capacity of INR 32,000 crores. So, together with the cash-in-hand and the space in our borrowing capacity, it gives us a INR 40,000 crores headroom of money available to fund our various infrastructure projects. This does not include internal accruals.
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To give you a brief overview on some of our businesses, we are developing the three transmission projects and these are under construction and we are already prequalified to bid for seven other transmission projects which would be bid on competitive tariff totaling to around INR 9,000 crores.
Reliance Infra is the largest private sector distribution company having almost 7 million customers across its three distribution utilities. And we have bid for four cities in Bihar, the bids for which are due to be opened shortly. And opportunities in UP, Madhya Pradesh and Maharashtra have opened up for which we are qualified. And we will bid for them as they become available to us. We are developing the six road projects and we won the seventh road project about a fortnight back, which increases our total road portfolio to more than 500 kilometers, making us one of the largest three players in this space. And we aspire to have road portfolio of more than INR 20,000 crores over the next three years.
As mentioned, we are the preferred bidders for the Western Freeway Sea- Link project. In this project, while we will develop the Worli-Haji Ali, which will complete in 42 months, we will also buy out the Worli-Bandra link. So, as a result, the entire concession of the 12 kilometers freeway between Bandra and Haji Ali for 40 years would remain with R-Infra.
Both our metro projects in Mumbai and Delhi are on track, as mentioned to all of you in the previous con-calls also. And we have also emerged as the preferred bidder for the second-line which is from Charkop via Bandra to Mankhurd it is a 32 kilometer line above the road with the project outlay of INR 11,000 crores. We have also emerged as a preferred bidder for all of the five regional airports in Maharashtra. We have to develop these airports and manage them for a period of 95 years.
Our company has been empanelled by PFC for providing consultancy to the State Electricity Boards (SEBs) and also to help its implementation. And we are at an advance stage of completing our assignment with Karnataka which should finish shortly. And the entire Karnataka team led by the managing directors had visited Mumbai to look at the State of the Art distribution infrastructure, the processes, and the ITs that we have setup in Mumbai. And we are soon going to bid on the implementations space for Rajasthan and Andhra Pradesh, this two implementation projects would be totaling to about INR 1,500 crores. This quarter, we will
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be developing the cement business of the group, and we aspire to develop 20 million tonnes over the next five years. It becomes a natural backward integration for an infrastructure company like ours which requires huge amount of cement.
On the cash levels, we have cash and cash equivalent of over INR 9,000 crores. We have a gross debt of around INR 6,000 crores, which makes our net debt zero. And there has been further reduction of ICDs during the quarter.
And coming to the distribution business, we serve two out of three homes in Mumbai and Delhi, serving 7 million customers, which makes us the largest private sector distributor of power in the country. If you look at Mumbai, it continues to be the most efficient utility company in the country with AT&C losses of around 10% when the national average is more than 40%. We add about 100,000 customers every year. And we have added 18,000 customers in the last quarter. We have recently got approval from MERC to go for competitive bidding for our long-term and medium-term power. And both the bids have now been advertised, so we are in the market now for 1,500 MW of long-term power starting 2014 and 1,150 MW of medium-term power between now till 2014. And we expect to close this process by end of September and so that the consumers of Mumbai can look to cheaper power in the long term.
In Delhi distribution, we have had an increase of 16% in the aggregate total income. During last year, both the companies were in the incentive zone and continue to be there now also. The share of incentive last year for the two Delhi companies was at INR 136 crores because of the overachievement of the AT&C losses. Our AT&C losses have reduced from over 55% in 2002 to less than 20% now. There has been a substantial investment in the distribution infrastructure of INR 3,700 crores in seven years to provide high quality power and services to the consumers of Delhi. The Delhi Government has saved a total sum of more than INR 20,000 crores over seven years owing to distribution privatization of the three circles, to private sector. And the annual savings to the Delhi Government is to the tune of INR 5,000 crores, which is 25% of Delhi’s annual budget.
Last year, we increased our stake from 26% to 49% in both the Discoms and our regulated equity, which was INR 550 crores at the time of
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takeover, is now in excess of INR 1,200 crores on which we get the regulated returns and incentives . Success of the Delhi privatization has demonstrated the benefits in creating financially viable and sustainable distribution businesses. And this is now pushing the other states to adopt this model. And as I mentioned earlier in my speech that Maharashtra, UP, Bihar, Madhya Pradesh have shown extreme keenness and some of them have already put out circles or districts or even companies for bidding under franchisee model.
On the transmission projects, all the three projects are under execution. We got the last approval on our Western Regional scheme which is the approval for getting right-of-way and the execution is already on. And we are on track, to complete it in time.
On the trading business, in the 1st quarter, we have traded 776 MUs of electricity versus 262 MUs last year, which is a growth of almost 195%. And we are one of the largest players of the exchanges trading, traded about 167 MUs through the IEX.
I will handover to Mr. Gupta to brief you on the operations of our existing generating plans and our EPC business,
S. C. Gupta: Good morning to all of you and my name is S.C. Gupta and I am Director – Operation here. As you know that we are operating four power plants, totaling 941 MW. I am glad to indicate that the Dahanu Thermal Power Station, which is 2 x 250 MW coal based station, has clocked 105% PLF in Q1FY10 and more than 100% PLF in the past five years. This continues to be the star performer not only for Reliance ADAG Group, but for the entire country. In all of the parameters, whether the PLF, Auxiliary consumption or heat rates, it has really become a model for the country to follow.
The other three gas-based plants at Samalkot, Goa and in Kerela are also doing extremely well. We have a very big portfolio through our company Reliance Power, where R-Infra owns 45% of the shares. The investment amount of more than INR 1,700 crores in R Power has grown over ten times in a short span of time. In addition to performing very well in the operation of the existing four power stations, we are picking up and doing extremely well in the EPC space. Our turnover for the quarter has grown to INR 552 crores in comparison to INR 434 crores last year, providing a
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growth of 27%. The order book position as of now is exceeding INR 20,000 crores, hence, this order book position is swelling everyday.
We have hardcore professionals in our EPC group, including the Centre of Engineering Excellence exceeding 1,500 professionals appointed 850 executives during the last one year. I am proud to say that the intellectual capital base in our EPC in the Centre of Engineering Excellence has grown vertically. Currently, we are working on seven projects, implementing over 7,200 MW - largest is 4,000 MW Sasan Ultra Mega power project of R-Power. We have completed Yamuna Nagar plant, a 600 MW coal based. Other projects at Hisar, DVC Raghunathpur are going on schedule.
The company has taken initiatives in many important areas, which includes creating a Center of Engineering Excellence, where we are increasing the knowledge capital base and also handling all these projects, providing reduction in schedule, enhancing the quality, and implementing the project at optimized costs. The remote surveillance of project sites has been implemented through IP Camera System at Butibori and Raghunathpur project system. Recently, for the first time in the country, we have introduced the contract management system through SAP. We have put a special emphasis on fly-ash utilization and created a separate cell including R&D works to enhance the fly-ash utilization in all our projects to reduce the cost of implementation. I will handover to my colleague Mr. Lalit Jalan for further deliberations.
Lalit Jalan: Yeah thank you Mr. Gupta. And coming now again to the infra projects, we have the road projects, which are the six road projects, which are under execution. Two of which are complete and the balance four are scheduled to be completed in the year 2011 which is all on schedule. We have also been the preferred bidder for the NCR Eastern Expressway and also the Jaipur-Reengus Road, where we are expecting the award shortly, for both these NHAI projects and the Western Sea Link which I mentioned earlier. Both the Metro Projects are on track. And as many of you who have seen the construction in Mumbai and Delhi, both the projects will be completed in the times mentioned. And on the line 2, where we are the preferred bidder we expect the award shortly.
Our de-merger plan into our various 100% owned subsidiaries where we simplify structure, make it tax sufficient, simple to understand, where we
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can align the incentives of our executive to the businesses is progressing smoothly. We have got the high court approval. There are certain other regulatory and other approvals which we expect to get shortly. And over the next few weeks, we expect that the de-merged structure would become a reality. With these words, I will now open the floor or Q&A.
Moderator: Thank you sir. Ladies and gentlemen, we now begin the Q&A session. Anyone who wishes to ask a question may press * and 1 on their touch- tone telephone. If you wish to remove yourself from the questioning queue you may press * and 2. Participants are requested to use handsets while asking a question. Anyone who has a question may press * and 1 at this time. The first question is from the line of Abhishek Tyagi from CLSA. Please go ahead.
Abhishek Tyagi: Good morning sir. Sir one question regarding your Mumbai license area, the company had a regulatory asset of close to INR 10 billion at the end of FY2009, so what is the regulatory asset at the end of 1st quarter. And will the company be making any provisions given that MERC has put stay on the tariff hike?
Lalit Jalan: No, we have made provisions in our accounts of about INR 320 crores up to now, but we are absolutely confident that the stay on the tariff orders. would be revoked. It is essentially a political subject because the elections is in September end and has nothing to do with the tariff orders. We do not expect any dilution of the regulatory assets that we have, but in terms of conservative accounting, we have made more than INR 320 crores of provisions, but we do not expect any dilution whatsoever.
Abhishek Tyagi: Sir what was the provision done in the 1st quarter?
Lalit Jalan: We do not disclose separately on that.
Abhishek Tyagi: Okay. And sir can you give the breakup of the other income that you have booked in the quarter. And what exactly is the other operating income what actually is the component…?
Lalit Jalan: Yeah, we can give you the details offline, but basically the other income includes the interest income and everything to do with any derivatives or whatever and be mark-to-market everything through the P&L every quarter. And the operating income would relate to businesses. So, whatever business related other income that would come.
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Abhishek Tyagi: Thanks. And sir one more question was regarding, what was the reduction in the ICDs in the 1st quarter?
Lalit Jalan: I cannot give you the exact number but I think it is about INR 300 crores.
Abhishek Tyagi: Okay sir, thanks.
Moderator: Thank you Mr. Tyagi. The next question is from the line of Venkatesh P. of Citigroup. Please go ahead.
Venkatesh P: Hello yeah, sir congratulations on a decent set of numbers. I had a few questions, firstly at the start of financial year 2009 you had an EPC order backlog of roughly around INR 7,800 crores. At the start of the current financial year, your order backlog has been roughly around INR 200 billion, which is more than double, but your 1st quarter EPC income has grown only 27%, now why is the reason, why the EPC income, has there been delays in execution in some of your projects? And secondly what kind of EPC revenues do you expect to book in the current year?
S. C. Gupta: Actually, the order book position has increased to more than INR 20,000 crores and this is predominantly on account of the new orders which we have received recently. And all our EPC projects are on schedule, and there is absolutely no delay.
Lalit Jalan: And basically you will find some lumpiness in the project build, you know our book-to-bill ratio is typically four years and for a smaller project we do it in three year and for a larger project it will take four years, so everything is on track and these are normally little back-ended so you will find this growth going forward of the existing order book.
Venkatesh P: So what kind of revenues do you expect to do this year on the EPC side sir?
Lalit Jalan: We had indicated a growth of 40% last year call and we are confident of maintaining it.
Venkatesh P: Okay. 40% on your FY2009 EPC business you expect to do?
Lalit Jalan: That is right.
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Venkatesh P: Okay. Sir the second question is in Reliance the annual report is already out, now Reliance Infra International, this particular entity the investments in the redeemable preference share have gone up from INR 2,000-2,900 crores. Now, firstly what we understand is it was mentioned that the idea is to reduce the redeemable preference share and reduce the ICDs and bring the money back into the company, why has this amount gone up significantly. And, secondly, what does Reliance Infra International do, that it needs so much money?
Lalit Jalan: No, this is the arm which does procurement overseas and we have not increased from the time that we mentioned in the call in October we have not made any increase in investment. And our total investment in ICDs and fresh capital have reduced substantially from that time. Also, the other increases are mark-to-market so the Rupee-Dollar it is marked to the Dollar today.
Venkatesh P: Okay sir. The next question is if you see the segmental results, there if you see un-allocable income last time, 1st quarter it was INR (-9) crores. This time it is around INR 200 crores, so what is there in this un-allocable income and why should it grow so much? I mean has this got to do with the fact that last year 1st quarter, there were derivative losses and there are no derivatives losses in this quarter?
Lalit Jalan: Yeah.
Venkatesh P: Okay. Sir last question from my side, what was the average share buyback price in this quarter and what is the price of conversion for the promoter warrant sir?
Lalit Jalan: We bought about INR 45 crores worth of shares, the total amount of share bought from beginning were 1 crores 12 lakhs shares, I could give you the exact number later on
Venkatesh P: Sir we just want what is the average price at which you bought back this quarter?
Lalit Jalan: This quarter would have been bought in the range of 575. I will give you the exact number. The promoter is issued warrants at the SEBI determined formula price.
Venkatesh P: Which is around 925 or something right?
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Lalit Jalan: Yeah.
Venkatesh P: Okay sir, thank you sir.
Moderator: Thank you. The next question is from the line of Kenin Jain of Voyager Investments. Please go ahead.
Kenin Jain: Good afternoon Mr. Jalan. Sir, it is mentioned that our Mumbai metro project is 2 years ahead of the commissioning date, so just wanted to get a sense that how it affects the viability of the project because when we would have looked at this project from the commissioning date we would have got some particular NPV or an IRR and since it has been advanced by two years, I just want to understand that you know how much lucrative this project has become A). B) And what has led to early commencement of this project?
Lalit Jalan: No, basically the concession is of 35 years combined period for construction and concession. And in their breakup they had presumed five year of construction and 30 years of concession, however, if you do the construction earlier than five years your concession period increases. So, the benefits to the shareholders are on two accounts one is on lower interest during construction and two is on higher concession period.
Kenin Jain: So the benefit would be large at the SPV level like if one looks at the present value or the value which could have accrued on completion of this project…?
Lalit Jalan: Yeah I mean it is a reasonable improvement and all of you are smarter than us to value that out.
Kenin Jain: Sir, another thing is that this INR 43 million warrant, which has been assigned to promoters has the entire money been brought in by the promoters till date?
Lalit Jalan: 25%.
Kenin Jain: Okay. 25% which is around INR 1,000 crores?
Lalit Jalan: That is right.
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Kenin Jain: Sir could you throw some light what can be the year end order backlog like as on March 2010 where the order backlog one could see which is currently at…?
Lalit Jalan: Is it for the EPC.
Kenin Jain: Yes sir.
Lalit Jalan: It is very difficult because see these projects are all lumpy projects it is not that we are doing a series of INR 200 crores projects that you know there is a project flow happening every week. So if we win UMPP project, it could be worth INR 1,2000 crores, so it is very difficult to give an estimate of a closing order book, but we promise to keep you apprised on a real- time basis.
Kenin Jain: Sir just one small question, I am sure like our group has an ambitious plan on the road side, where you mentioned that you intent to have a portfolio of INR 200 billion over the next three to four years and on the other side from the Central Government side also there is enough thrust on the road as in asset class and as an infrastructure theme. So, just to get a sense that how you personally are believing this sense that over three years that much quantum of the thing would be awarded A). B) What traffic rates you guys are really presuming and C) you know whether road as in asset class would really gained a must interest, some sense on that if you can throw?
Lalit Jalan: See as I said we have about INR 5,000 crores of road projects in hand, totaling more than 500 kilometers and one project where we are the preferred bidders, a INR 4,000 crores project. The honorable minister has announced in Parliament that he wishes to put out pretty close to INR 100,000 crores worth of projects in each of the next two years under PPP sector. And being one of the front runners, we think that we should be in a position to reach that number by 2012. This is one of the sectors which have opened and this is one of the critical sectors for our economy because most of the freight and most of the passengers move over the roads and the condition of which is not desirable. So, as these capacities on these roads and the quality of these roads improve this will then have a multiplier effect on the economy, so it is a win-win-win.
Kenin Jain: Okay fine sir, thanks a lot.
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Lalit Jalan: Thank you.
Moderator: Thank you Mr. Jain. The next question is from the line of Atul Tiwari from Citigroup. Please go ahead.
Atul Tiwari: Yeah, sir I had just one question on the Sealink project that you are bidding for in Mumbai. Sir, as we understand that you will be paying around INR 1,600 crores to buy out Bandra-Worli Sealink and after it has been commissioned the daily toll collections have been around INR 20 lakh, which comes to around INR 80 crores per year of revenue. So how do you propose to make money if you pay INR 1,600 crores to buy out the Link and how the revenue of only INR 80 crores per year. Is there something I am missing in the whole picture?
Lalit Jalan: No there are just two simple issues: 1) half of the bridge has opened, the other half is still under construction. And which is expected to open by end of December; 2) if you look at any of these marquee projects like these sealinks and all that, the traffic and the people to take cognizance and the traffic growth does take little time worldwide which has been seen; 3) also, the dispersal system at Worli are being improved, while we speak, so once the dispersal systems improve, you will find that the traffic will take up in real earnest. So we are very hopeful of a good traffic flow over the next one year.
Atul Tiwari: Sir again following up on that, so I mean while bidding, could you just indicate that what is your estimate of the annual toll collection, etc., which would make the project viable for you? I mean what kind of growth we could look at traffic as per your estimates?
Lalit Jalan: See you should just look simply that it is a 40 year concession period, okay. And if you take whatever is the base toll number that you take with both the sealinks opening, means both the tracks 8 lanes opening up and the traffic dispersal system improving, and you add to it a 5% traffic revenue growth and a 4% tariff growth, as is allowed in the concession so and then you have a 40 year thing and you can work out your numbers.
Atul Tiwari: Okay thank you sir.
Moderator: Thank you Mr. Tiwari. The next question is from the line of Subhadip Mitra from B&K Securities. Please go ahead.
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Subhadip Mitra: Good morning sir, Subhadip here. Sir my question was with regards to the power purchase cost for this particular quarter, it seems to be substantially lower than what it was last year, although the number of units have gone up, is there any particular reason for why the power purchase costs have come down so much?
Lalit Jalan: Yeah the costs have actually lowered this year compared with last year on account of the liquid fuel cost being down and also the traded power cost being down and which is reflected in the power purchase cost.
Subhadip Mitra: I see. And the revenue that we are booking the tariff that we are booking is on the lower tariff that, I mean after the MERC order came out?
Lalit Jalan: Yeah this is the tariff which existed in April, actually the regulator had given a 2% tariff increase for the year and he has said the 2% tariff so that is the only difference.
Subhadip Mitra: But the fuel adjustment charges are as per usual?
Lalit Jalan: Yeah whatever was the FAC, on April before the tariff increase, the same FAC we are charging.
Subhadip Mitra: Fine. So just one more question, this is with regard to the other income, the other income as of Q1 of 2009 if I look at the BSE release then it shows a figure of around INR 420 crores, whereas what we are showing right now is close to about INR 100 crores, has there been some regrouping of the other income, because of which there is a differential?
Lalit Jalan: This is I think as per the SEBI guidelines, these are regrouped.
Subhadip Mitra: So I mean was there some amount of extraordinary that was there last year which is not there this year, that is the reason it is appearing to be lower, that is what I want to ask?
Lalit Jalan: Yeah we can give it to you offline, where you can speak to our CFO.
Subhadip Mitra: Not a problem sir. Thanks a lot. That is all from my side.
Moderator: Thank you Mr. Mitra. The next question is from the line of Bhavna Jagwani from HDFC Securities. Please go ahead.
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Bhavna Jagwani: Hi good morning sir. My first question pertains to your other expenditure, it has gone up by about 87% to INR 200 crores does this contain any one time provision?
Lalit Jalan: Yeah it includes the provision, as we mentioned that we have made provision towards conservative accounting, so we have made provision in this quarter also.
Bhavna Jagwani: So could you put a number to that?
Lalit Jalan: We do not disclose the actual number.
Bhavna Jagwani: And it is safe to assume that in last year’s quarter 1, this provision was not there?
Lalit Jalan: Yeah.
Bhavna Jagwani: Right and now with respect to our other operating income there has been a sharp fall of about 58% year-on-year to about INR 39 crores versus 92 last year? Could you throw some light on the same?
Lalit Jalan: Yeah there was a one time street light maintenance income which was there in the last quarter which is not there this quarter.
Bhavna Jagwani: So that should account for the entire amount ?
Lalit Jalan: Yeah predominantly, that was an accrued income for I think four years.
Bhavna Jagwani: It was all booked in Q1…?
Lalit Jalan: It was given, those we book on actual receipt.
Bhavna Jagwani: On actual receipt?
Lalit Jalan: Those kind of income because it was some dispute with the BMC. So when we paid we booked that.
Bhavna Jagwani: Okay, but even compared to the previous quarters, it is lower like for example about INR 60 odd crores even in Q4 of last year so is it just based on such projects?
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Lalit Jalan: Yeah, I mean there could be some one off items here and there, but there is no real change otherwise.
Bhavna Jagwani: Right. And you had indicated of a CAPEX of about INR 2,000-2500 crores in FY10. How much of that have we spent in Q1?
Lalit Jalan: About say INR 400 crores.
Bhavna Jagwani: And we still stick to this CAPEX right?
Lalit Jalan: That is right, CAPEX plus investment.
Bhavna Jagwani: I just had a question about Reliance Cementation what is the current capacity?
Lalit Jalan: Zero.
Bhavna Jagwani: It is zero…?
Lalit Jalan: Yeah there is no operating plant. We have essentially signed MoUs with few states for licenses and land and other things, but there is no capital expenditure made so far.
Bhavna Jagwani: Right okay. And lastly under the open access regime, I am assuming we have not lost any customers as of now?
Lalit Jalan: Not so far, but now going forward what you will find is that we are allowing distribution open access which is different from the open access that was envisaged in the Act and what the regulator has said that if the other licensee wants to take a customer of mine, he will have to use my wires and pay my wire charges. So going forward, even if several customers were to move from the Reliance to the other licensee’s network, the entire wire charges would come to our company and today the regulatory returns is only on the wires. There is no return on the supply side. So the profitability of the Bombay distribution would be fully protected.
Bhavna Jagwani: Right so no other company would most likely do that?
Lalit Jalan: No, I mean somebody who has access to cheaper power can take the customer, but the wires would have to be paid to us.
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Bhavna Jagwani; Okay right. And could you give an update on your real estate projects, because there were two in Hyderabad and Mumbai is there…?
Lalit Jalan: Yeah there is nothing substantial to report, it is pretty much the same what we reported last quarter, there is no significant development, those projects are with us and looking at the real estate scenario we are not going aggressive on them and so that is where we are.
Bhavna Jagwani: Okay. And lastly, is there a particular reason we have paid lower tax in Q1 of last year?
Lalit Jalan: Yeah it was essentially MAT.
Bhavna Jagwani: We have paid less than that. We have barely paid about INR 5 crores.
Lalit Jalan: Yeah, but the adjustment would have been for previous years you know.
Bhavna Jagwani: So some previous year adjustments over here?
Lalit Jalan: Yeah.
Bhavna Jagwani: Alright, that will be all thanks a lot.
Moderator: Thank you Ms. Jagwani. The next question is from the line of Sumit Agarwal from HSBC. Please go ahead.
Sumit Agarwal: Yeah sir, congratulations for good sets of numbers. Sir I have few queries, one is about your cement business foray. Just wanted to know how much you have paid for this 51% stake. And as well as what has been the progress so far, you have mentioned that you have an aim of something like a 20 million tonnes if I have to look at on the ground realities or what has happened till date in terms of land acquisition and all that stuff. Can you just throw some more light on that side?
Lalit Jalan: No, basically this is a business that Reliance Infra would be developing. Until now essentially no capital expenditure has been spent. And we have only paid the actual cost which has been spent up to now which is the fixed cost. And essentially the plan is to develop these 20 million tonnes of cement in the three states. And this will use the resources of coal, fly-ash and power which is with our company Reliance Power and the cement
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could be integrated with the infrastructure needs of Reliance Infra. So that is how the structuring has been done for Reliance Infra.
Sumit Agarwal: Sir how much have you paid for this 51% stake?
Lalit Jalan: It is a marginal amount it is the cost incurred by RNRL up till now.
Sumit Agarwal: And 49% would be owned by RNRL?
Lalit Jalan: We have bought the majority.
Sumit Agarwal: Okay fine. Also sir just wanted to understand about these two projects NK Toll and the DS Toll. If I look at your last quarter that is FY09 press release, it said that you are expecting commercial operations, okay. And also this quarter also it says that you are awaiting commercial operation, any reason for this delays or what is preventing the commercial operation?
Lalit Jalan: No it is just getting of the actual COD certificate.
Sumit Agarwal: Because it is almost more than three months, how much time typically it takes to get a COD?
Lalit Jalan: I mean it has taken us that time. The roads are ready, you can drive there and in fact people actually stop at the tolling booth to pay toll and we tell them no that it is free.
Sumit Agarwal: Yeah that is what you …
Lalit Jalan: Please you go there and you check the roads and it is a 4 lane road with good greenery and no toll.
Sumit Agarwal: Okay. Sir what is the CBD Tower Private Limited that you have invested something like a INR 163 crores …?
Lalit Jalan: That is the Hyderabad real estate project.
Sumit Agarwal: But you have recently said that not much progress has happened…?
Lalit Jalan: No we have to pay for land, right.
Sumit Agarwal: Okay so…?
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Lalit Jalan: That is the reason yeah.
Sumit Agarwal: And sir just wanted to understand what is your expectation in terms of the recent tendering that you have come out with for the long term and the medium term power so what are you expectations, do we expect the power prices to increase as against what you are currently getting from various sources?
Lalit Jalan: See, today if you look at the Mumbai distribution business, if I look at last year actual, we had 40% of the power from our own Dahanu power plant, which was at INR 2.45 and 30% we bought from Tata’s at an average price of INR 4.83; the balance 30% we had to buy externally. And last year was a time of very, very high prices and that cost us INR 8.96. Going forward, we are trying to replace, all this high cost power with long-term low cost power. The experiences of the last two years have shown that long-term PPAs which have been done by the states have been closed between INR 2.50-3.20 paisa per unit. So, we are hopeful that for a utility like Bombay with the AAA customers, we should get a favourable rate.
Sumit Agarwal: Okay. Sir also you have mentioned that you have a total debt of something like a INR 6,000 odd crores on your books, can I just know the breakup in terms of how much is for the regulatory assets and how much is for the other businesses?
Lalit Jalan: We do not give that breakup.
Sumit Agarwal: Okay fine, thanks a lot sir, thanks.
Moderator: Thank you Mr. Agarwal. The next question is from the line of Parag Gupta from Morgan Stanley. Please go ahead.
Parag Gupta: Hi, good morning Mr. Jalan.
Lalit Jalan: Good morning.
Parag Gupta: Just two questions, firstly as far as the warrants money is concerned, did the 25% upfront payment come in the 1st Quarter or has it come subsequent to that?
Lalit Jalan: Subsequent in July.
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Parag Gupta: And what would be the exercise period of this warrants and when is that effective?
Lalit Jalan: Eighteen months from July.
Parag Gupta: Okay. And finally on debt, your debt number has come off since 4Q is it primarily again because of mark-to-market reductions or is it because of debt repayment that has happened during the quarter?
Lalit Jalan: Debt repayment.
Parag Gupta: Okay thanks sir.
Moderator: Thank you Mr. Gupta. The next question is from the line of Pankaj Sharma from UBS. Please go ahead.
Pankaj Sharma: Hi sir, good morning, as far as this Bombay Regulatory Business is concerned, I just wanted to know one thing that for the cost which have already been incurred till the end of FY2009 how much is the difference between what we had proposed to recover and what regulator has allowed, this is like considering the MERCs earlier order which was issued in June that has allowed some tariff hikes?
Lalit Jalan: See there are two things, suppose the total recovery required is INR 100. The regulator, one can say might allow you INR 90 so that is one piece of it. The other is the 90 they might say that please recover 20 this year and please recover the balance 70 over the next two years with carrying cost. So that is to smoothen the tariff and not to give a tariff shock. So disallowance is very marginal, but the INR 1,000 odd crores which was the regulatory asset was to be recovered over the next three years.
Pankaj Sharma: Okay. So basically you mean to say that, there is not significant difference like regulators has allowed almost everything?
Lalit Jalan: I mean because we have asked for reasonable things, because the biggest part of a distribution is the cost of power. If you look at about INR 100 tariff that we get from our customers, more than INR 80 goes towards cost of power. And cost of power is approved by the regulator. So, there is nothing to disallow in that. So the rest remaining is only INR 20. In the INR 20, you have a broad breakup of about INR 10 towards cost and INR 10 towards interest, equity and taxes. So the actual disallowance is not
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much, the option of disallowance over the hundred is only, really the INR 10 is a fair cost. And if they have approved your last year cost then it is only the 5% to 6% increase that you are asking.
Pankaj Sharma: Right, great. And the next question would be sir, like considering that now the customers in the Bombay circle would have an option to choose either you or another licensee, what do you see as your short-term and medium- term power sourcing strategy for REL because as you were saying that we want to procure at least 1,150 MW till next five years and then beyond FY2014 probably 1,500 MW?
Lalit Jalan: Yeah, it will be little dynamic situation, it depends on how this open access plays out and so depending on the flow of customers, because see as the customers flow from the Reliance network to the other licensee network, we stop buying that expensive INR 9 power for the customers which move out. And the other licensee will have to buy the expensive powers so his tariffs will go up in the next year. So there will be a natural equalization of tariff, which we will move to as we move forward. And going forward we will be replacing our high cost power with the lower cost power from what we have bid for. So it will be little dynamic for the next two to three years but on the long-term basis, we are very, very hopeful that we will be getting the low cost power and together with a world-class low cost distribution network, we will be able to get all our customers.
Pankaj Sharma: Right sir. So basically like from existing demand of let say 1,200 to 1250 MW, you expect a 2,000 MW kind of demand in FY2014 or so?
Lalit Jalan: Our current demand is almost like 1,500 and yeah we see the normal 5% to 6% growth in it year-on-year.
Pankaj Sharma: Sure sir, great, thank you very much.
Moderator: Thank you Mr. Sharma. The next question is from the line of Vishal Sharma from BNP Paribas. Please go ahead.
Vishal Sharma: Good morning sir. My question pertains to the objective behind issuing the warrants to the promoters because you are already having almost about INR 10,000 crores as cash. So what was the objective behind that issuance?
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Lalit Jalan: As a corporate, we always believe in being cash-rich of all times. And in the infrastructure businesses, the projects which come are very lumpy, like as I told you we have four projects which are INR 20,000 crores worth of investments, which might require up to INR 6,000 crores of equity from our side. And we want to take part in all of the opportunities in the space as they come. And that is the reason we always want to have ample liquidity with us.
Vishal Sharma: Okay. And so INR 6,000 crores is the number that we should be looking at in terms of equity infusion…?
Lalit Jalan: I mean I am talking typically on a 70-30 basis, if we can do it more aggressive then that extent that much equity will become less.
Vishal Sharma: Okay. Now this let us say on our 70-30 basis, this should be over and above the INR 2,000-2,500 crores that you have already committed?
Lalit Jalan: Absolutely.
Vishal Sharma: And approximately what part of that INR 2,000-2,500 crores should be pure CAPEX and what should be pure equity investments?
Lalit Jalan: About half and half.
Vishal Sharma: Okay, great, thank you so much.
Moderator: Thank you Mr. Sharma. The next question is from the line of Bhavin Mithlani from Enam Securities. Please go ahead.
Bhavin Mithlani: Good morning Mr. Jalan. My question is mainly on the Delhi distribution, I actually miss the regulated equity which you give? The other is what would be your regulated equity by the end of FY10 and given that we have already overshoot our targets, what could be the incentive from the Delhi distribution circle for Reliance Infra’s part in current fiscal?
Lalit Jalan: The total regulated equity as of end of FY09 is about more than INR 1,200 crores. These are in the regulator’s books. The incentives for the two years of MYT we are hopeful of getting more than INR 200 crores every year for the two Discoms and what was there a third question?
Bhavin Mithlani: And INR 1,200 crores is the 49% stake for Reliance Infra?
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Lalit Jalan: No that is the total equity of the Discoms.
Bhavin Mithlani: Okay. So we have to take effective stake in this case?
Lalit Jalan: That is right.
Bhavin Mithlani: Okay. And the third question is what the price of power at which, the average purchase price for the Delhi Discoms?
Lalit Jalan: Delhi Discom today is paying, of course it is slightly different for all of the three Discoms, but last year I would say that the average price that the Delhi Discom paid was about INR 2.85 paisa. And that is the reason why the tariffs in Delhi are so much lower.
Bhavin Mithlani: Okay. And from the long-term tender we have just floated, we believe that we can reduce the price of power for Mumbai from INR 6.5 what we are paying currently to roughly around INR 3 per unit?
Lalit Jalan: We are very hopeful, I mean looking at the last one year experience and given the fact that we would be a good customer for any generators in terms of credit risk, we think that we should get the best rates that are available in the market. And with the new generation capacities which are coming up, we are very hopeful of getting a good rate and this INR 6.5 plus that we are paying today for the mix of power today including our Dahanu Power should definitely go up to INR 3 in the next five years.
Bhavin Mithlani: Okay. And my last question is I have seen the PLF of the other power stations mainly the gas based station going up, would it be possible to quantify the increasing profits from these power station on account of increase in the PLF?
Lalit Jalan: Yeah we can give you offline, yeah because of the additional gas that we get it helps us also on the heat rate so it is a reasonable increase for us.
Bhavin Mithlani: Any, means if an all on a ballpark basis you can give a quantum proportion contributed to the increasing profits for the quarter ..?
Lalit Jalan: Just speak to Mr. Gupta, he will give you the exact number.
Bhavin Mithlani: Okay fine, thank you very much.
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Moderator: Thank you Mr. Mithlani. The next question is from the line of Madan Gopal from Centrum Broking. Please go ahead.
Madan Gopal: Good morning sir, thanks for taking my question. My question was relating to the recent speculation that the Alstom has denied Shanghai Energy Corporation to supply boilers outside China and we have an long-term agreement with SEC for supplying to our Reliance Power projects so what is our management’s take on this?
Lalit Jalan: We have been assured by our counterparts SEC that they have the requisite licenses to supply to India and we have seen the papers and we are quite assured.
Madan Gopal: Okay, thank you sir.
Moderator: Thank you Mr. Gopal. The next question is from the line of Shirish Rane from IDFC SSKI. Please go ahead.
Shirish Rane: Good morning sir.
Lalit Jalan: Good morning.
Shirish Rane: Sir just on this open access thing, whenever any other utility takes away your customer, there would be two charges as I understand, one would be the wire charges and there has to be cross subsidy surcharge, because as I understand in open access the other utility would target all your very good bulk customers. So in that sense has anything being notified or you think a cross subsidy surcharge will not come in the open access era?
Lalit Jalan: No, it is a very, very good question and I think I will take this opportunity to explain to all you people. See when we started the open access era that open access era was for the so-called large customers which were above 1 MW. We have 85 such customers in our Mumbai area. And the idea that they would seek open access from say another generator and get that power in and replace our power. So that time in a desire to make open access a reality, the regulatory body that time thought that since the marginal cost of power is INR 7-8 and the marginal tariff is also that time three years back was INR 7-8, he put in the order that there will be no cross subsidy charge because if INR 8 customer goes your INR 8 power purchase also goes with it. So that was the logic and in this order he had mentioned that if there is a large flow of customers which has an adverse
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impact on the utility, he will include the cross subsidy charge in subsequent orders. Most of the state utilities have put a cross subsidy charge. Now since the situation has changed and every single customer in our area which is 2.7 million customers are technically allowed distribution open access right the other utility does not have a choice to pick and choose. They will have to supply to each and every customer who applies to him in 30 days flat. We are also writing to the regulator to avoid any cash flow fits to us to include a cross subsidy surcharge include that now because this is a different time, because it is no longer only for the large customers and you can see only one or two or three or five customers moving away. Here you can have mass movements and it can happen that in the short period, more of the larger customers we move, so which can then have of course you will get it in the truing up but it can have a short-term cash flow impact to the incumbent utility. So we are applying to them for the cross subsidy surcharge.
Shirish Rane: The second part of the question which you rightly said that is there is a certain amount of customer moves then automatically your tariff comes down because you do not purchase the high cost power. I mean what kind of balance is this, I mean would it be about 200 MW of power to move out down so that your tariff will come down or you think you need about less then that of some customers moving out so that your average purchase power cost can come down. I am thinking purely from a tariff for the retail customer standpoint because that seems to be the biggest issue right now.
Lalit Jalan: See about 30% of our power is bought outside today. Secondly, you have customer which only buy it during the peak period, so you will have about 250 MW, about 20% of the consumption if they move out then that takes away all your expensive power.
Shirish Rane: So effectively you are saying it is theoretically 20% of customers were to shift to some other alternative utility. The tariff can be materially different from what it is today?
Lalit Jalan: Yeah and also the other utilities, tariff will go up.
Shirish Rane: Obviously I mean I understand.
Lalit Jalan: They have to buy this power from outside.
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Shirish Rane: Either it will depend on their access to the power basically.
Lalit Jalan: Nobody has access, see because all the power that we are buying for Bombay is bought by all of the utilities together. So it is not that we are buying something at INR 9 and somebody has access to INR 6 because if somebody had access to INR 6 power that INR 6 would have been available to us. So because we want to give 24x7 power to Mumbai, which in other cities and other urban areas the utility keeps the price low by resorting to load shedding, so they do not buy the high cost power even if you look at a utility like Calcutta, they do not have power they will not buy the power. So then the tariffs remain lower. But in Mumbai and Delhi, we provide 24x7 powers because the consumers wanted and they are willing to pay for the reliability. Also, if you look at the alternate side, if a consumer does not have two to three hours power and which is not also well-defined as to exactly what time he will not have the power, forget about the quality of life difference, if you look at every other city outside Mumbai, every household has got generator, invertors, lead acid batteries, voltage stabilizers and what have you. There is a huge cost to it, I have been to houses where they have huge UPS banks, put in their houses and so if you look at the environmental impact also if you have an inverter it consumes two units to give you one unit back. So there is a wastage of electricity you are also paying double the cost of electricity during the time when you are getting it from the inverters you are paying the AMC charges so it’s a huge cost.
Shirish Rane: Sir the last question is under…
Lalit Jalan: And I will just give you one more example in Delhi there is an area called Sainik Farms which was not allowed to be electrified by us owing to a court order. And the Sainik Farm which is almost 600 MW of demand, sorry 60 MW of demand, the consumers there were paying INR 14 a unit and they are still paying today INR 14 a unit in the middle of Delhi, where just outside Sainik Farm the consumer pays INR 4, but inside Sainik Farm he pays INR 14. And these are all run through diesel gensets by operators and they provide power to all these posh houses in Sainik Farms.
Shirish Rane: Good point sir, sir the last question is on the medium term procurement for the next say 4 to 5 years, as you rightly pointed out there does not seem to be any short term power available below the rates you, what I assume you have done the most efficient way of procuring the power. So do you
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think just by going through the medium term purchase root for 5 years would you get significantly lower cost of power or it is more from a regulatory standpoint you want to earlier medium term procurement guidelines?
Lalit Jalan: Very good question, I think both the points are right, one is the regulatory environment does not allow you to buy more than one year power without bidding so that is one part of it and the other part is we are seeing a spate of merchant power plants which are or new capacities which are coming up over the next two years, a spate of plant and all you people are covering several private utilities which are coming out with lots and lots of capacity which are untied. Now we provide a great opportunity for a power plant coming in say this year or early next year or middle of next year to supply us for two to three years of medium term power at a slightly better rate, and then they can apply also for long-term power supply, in the long term power belt, because long-term the INR 3 kind of benchmark is pretty much there but in this medium term, you had utilities today you know they are selling on a day-to-day basis, but they get a reliability of selling say at hypothetically whatever number INR 4.5 for reliable 24x7 power with the AAA wire, I mean they would look at it so if you see the short term rates have crashed again, these things fluctuates so widely, the last few days in monsoons we have been buying at INR 3.5.
Shirish Rane: Sure, just to complete this discussion, there has not been any medium term procurement in the country so far, this would be the first one, right?
Lalit Jalan: To my knowledge.
Shirish Rane: You said you will set a benchmark for it, I mean I am just trying to go by the way for a long-term purchase power there is a benchmark of around INR 3, is there something very similar for a medium term in any other utility which you know of?
Lalit Jalan: Yeah to my knowledge this is the first utility which has come out with the medium terms belt, also we have a first private distribution licensee which has come out with the long-term belt. It has taken us one year to get the approval from the regulator because they have to go through the public hearing process and everything but they now hope to close this process by September end.
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Shirish Rane: Sir and just one final question, sorry to ask too many questions, sir this MERC orders stay I mean I do not understand the legality of it because how can somebody stay his own order which was given about a month back, I mean is it, I mean is there a legal, you must have taken some legal opinions on it.
Lalit Jalan: Shirish I mean, you know everything so let us leave it at that.
Shirish Rane: Fair point sir, thank you very much sir.
Moderator: Thank you Mr. Rane. Ladies and gentleman that was the last question of today. I would now like to hand the conference over to the management for final comments. Please go ahead sir.
Lalit Jalan: No, I think we have covered everything. I would profusely thank all friends who have taken time off to be on our conference call. And we can assure you from the management side that we are working round the clock to create shareholder returns and we will apprise you of any development hopefully more positive then negative as they occur. And thank you once again.
Moderator: Thank you Mr. Jalan, thank you Mr. Shankar K. Ladies and gentleman. On behalf of Edelweiss Securities Limited that concludes this conference call. Thank you for joining us and you may now disconnect your lines.
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