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Reliance Infrastructure Ltd’s (Rs.546.35) Mumbai power distribution business (known as Reliance Energy Ltd) distributes power to nearly three million residential, industrial and commercial consumers in Mumbai’s suburbs, covering an area of 400 sq km, and catering to a peak demand of over 1,800 MW, with revenues of Rs.7,700 crore in FY2014-15. The Mumbai power distribution business is R-Infra’s biggest, in terms of topline, and accounts for 44% of the company’s consolidated turnover, which stood at Rs.17,198 crore in 2014-15.

Photo: The Economic Tmies

The Reliance Infrastructure earlier signed a non-binding term sheet with Canadian pension fund Public Sector Pension Investment Board (PSP Investments) to sell 49% stake in the company’s Mumbai power generation, transmission and distribution business. While the proposed transaction is subject due diligence and regulatory approvals, the deal is likely to fetch the company Rs.3,500 crore, if concluded by H1FY16.

Moreover, though the company is yet to conclude the acquisition of Pipavav Defence and Offshore Engineering, the stake sale of Mumbai power business would boost Reliance Infra’s valuation. 

In other words, successful completion of the deal will help the Anil Ambani-led company substantially de-leverage its balance sheet while retaining control of the business with a 51% stake.

There were earlier media reports that at least half the debt on the company’s books is on account of the Mumbai power transmission and distribution assets, which will be transferred into the new SPV to be formed (along with these assets).

With the cash component that R-Infra will receive as part of the deal, it may further pare debt at the level of the parent company.

The equity research firm, Edelweiss however last year commented: “After the proposed deal the listed entity will be left with the engineering procurement construction (EPC) business, the Mumbai metro and Delhi distribution businesses all which have limited growth visibility.”

Besides, Reliance Infrastructure few months back announced its intention to exit cement, road and other non-core businesses. This, coupled with the PSP deal points to the company’s increasing focus on the defence business. The company is expected to get Rs.8000 crore to Rs.9000 crore from its 11 roads. Analysts believe the firm is transitioning itself from a services-based entity to a manufacturing entity focusing on defence. 

According to an Economic Times news briefing: These days, the ADA Group boss, Anil Ambani spends more than 70% of his working hours on what is seen as a sunrise sector for Indian industry. In the past year, he visited at least two global defence equipment manufacturers every month and signed partnerships with several of them. In between, from Paris to Dubai, Moscow and Abu Dhabi, he hasn't missed any major defence and aerospace shows.

A country that spends more than $40 billion every year in defence, India is still largely dependent on imports to meet military requirements.

The government's Make in India campaign to boost domestic manufacturing has opened up opportunities for Ambani's Reliance Infrastructure, but he will also have to compete with more established players like the Mahindra and Tata groups and Larsen & Toubro. 

Under its Reliance Defence unit, Reliance Infra floated a cluster of companies and made a host of high-profile hiring, from the former India head of US defence contractor Lockheed Martin to top-ranked retired officers of the armed forces. It is seeking to rapidly set up manufacturing infrastructure — primarily two defence parks to make aircraft to armoured vehicles and air defence systems, and a shipyard on the east coast. 

In another significant development, The Economic Times today wrote: "Global headwinds are likely to keep the domestic stock market volatile, but cement is one sector which analysts feel could outperform the broader market in the near term supported by improvement in demand, capacity expansion as well as better realisation. 

In February this year, Reliance Infrastructure, sold its cement business to Birla Corp. The deal valued 5.08 mtpa cement business at Rs.4800 crore, at USD 140 per tonne.

Reliance Infra said the proceeds from the sale will be utilised for debt reduction. Total debt on the books of Reliance Infra stands at around Rs.20000-25000 crore. The deal is EPS accretive for shareholders, according to the analysts.

After this deal is through, Reliance Infrastructure will be able to focus on its core business of infrastructure, while the debt in the cement subsidiary will be transferred to the acquirer -- Reliance Infra’s highly leveraged balance sheet will get some relief.

Last month Reliance Infrastructure brought in Braj Kishore from SBI Life to Head Corporate Communication fot taking the perception of Reliance Infrastructure to newer heights through optimally harnessing various communication tools – traditional and new age.

Meanwhile, Reliance Capital, Reliance Industries, Reliance Infrastructure and Reliance Power along with 70 other stocks have seen no change in their market lot size for derivative contracts; according to a recent NSE filing.

Therefore, buy the shares of Reliance Infrastructure Ltd at Rs.546.35, for a short term target of Rs.600-plus. SL- Rs.537.