Friday, April 22, 2016

Reliance Infrastructure Ltd: Buy
CMP: Rs.550.20
The Union budget 2016-17,  allocated a huge amount for public investment into infrastructure. 

The budgetary outlay is around Rs.2.21 trillion in infrastructure. The government did this while maintaining the fiscal deficit to ensure that government bond yields come down and the borrowing rate of the government is within manageable limits.

India's infrastructure output grew an annual 5.7 percent in February, its fastest pace in at least 13 months, mainly driven by a surge in production of cement and fertilizers, government data showed on Thursday.

Infrastructure accounts for nearly 38 percent of India's industrial output.


Cement production last month was up 13.5 percent from a year earlier. Fertilizer output grew an annual 16.3 percent, the data showed.

European cement manufacturers with a presence in India are likely to benefit if the Indian government's plans to ramp up infrastructure spending come to fruition in the next 12-18 months, says Moody's Investors Service today in a new report. India's 2016 Union Budget, announced on 29 February, contained plans to hike public infrastructure spending, especially on roads, which could revive stagnant cement demand in the country.

According to the Indian government's 12th Five Year Plan (2012-17) investment in infrastructure should increase from 7.6% of GDP in 2014 to 9% in 2017. However, cement demand for government-funded projects has been weak in the last four years with many construction schemes delayed or put on hold. As a result, while infrastructure investment will be a key growth driver, the timing of such investment remains uncertain.

Meanwhile, there were media reports in February, 2016, that Birla Corp. Ltd is set to buy the cement assets of Anil Ambani-controlled Reliance Infrastructure Ltd for about Rs.5,000 crore. In November, 2015, Reliance Infrastructure told stock exchanges that it will sell its 5.6 million tonnes per annum (mtpa) cement business and related assets through a formal process.

The company said that it had shortlisted seven bidders for the asset.


Private equity firms Carlyle Group, Blackstone Group and Baring Private Equity Asia, and cement companies JSW Cement, JK Lakshmi Cement Ltd, Birla Corp.and Chinese cement maker China Resources Cement Holdings Ltd were the shortlisted bidders, Mint reported 4 December.

Reliance Cement’s capacity is spread across four states: an integrated unit in Madhya Pradesh and grinding units in Uttar Pradesh, West Bengal and Maharashtra.

Reliance Infrastructure is looking to sell the cement and roads businesses to focus on its new defence business, and the company is keen to reduce debt that has been incurred on account of these businesses.

Also, the company may sell its entire road operation in the next 45 days, according to a CNBC TV report.


In another significant development, in one of the biggest joint ventures between an Indian Company with any original equipment manufacturer (OEM), Reliance Defence Ltd, a 100% subsidiary of Reliance Infrastructure Ltd and Rafael Advanced Defence Systems Ltd have decided to set up a joint venture company in India in the highly specialized areas of Air to Air Missiles, Air Defence Systems and Large Aerostats.

The Joint Venture will provide big thrust into the field of indigenous production and development of High Precision and state of the art Weapon Systems in India. The Strategic Partnership with technology power house and one of the world leaders in Defence Technologies, Rafael Advanced Defence Systems Ltd of Israel will mark the entry of Reliance Defence in the complex field of Air to Air Missiles and Air Defence Systems manufacturing in India.

Reliance Rafael joint venture will have 51% holding from Reliance Defence and 49% by Rafael as per the current guidelines of the Government of India. The joint venture company will be located at Pithampur, Indore in the state of Madhya Pradesh and will generate more than 3000 highly skilled jobs. The project will have an initial capital outlay of more than INR 1,300 crore, without including the cost of technology.

Rafael has already provided large aerostat systems to the Indian Air Force for meeting its surveillance, reconnaissance, communication and intelligence needs.

The two companies, through the Joint Venture, will offer the entire range of products in these fields to the Indian Armed Forces. Rafael is also willing to offer solutions through the joint venture company even for the ongoing "Buy Global" programs where it is currently competing, in line with "Make in India" initiatives of the Indian Government.

Based on the current requirements, the joint venture company will address multiple Programs valued at more than INR 65,000 crore over next ten years.

Reliance Infrastructure Ltd made a peak of Rs.2,425 in January 2008, hence it has a long way to go from the CMP of Rs.550.20. Once known as momentum counter, Reliance Infrastructure is now showing a fresh lease of life as it approaches the support zone of Rs.547 - 556.

Therefore, buy the shares of the company at Rs.550.20 for a short term target of Rs.760. SL - Rs. 539.
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