Monday, January 01, 2018

Reliance Infrastructure Ltd: Some Points
CMP: Rs.553.75
#Reliance Infrastructure Ltd (RInfra) on Thursday said it has signed a definitive binding agreement to
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sell its Mumbai power business to Adani Transmission Ltd for Rs.18,800 crore. The deal will see the Adani Group taking over the distribution of over 1,800 megawatt (MW) of power to roughly 30 lakh customers in Mumbai and 500MW of thermal power generation capacity.

#Reliance Infrastructure said the entire proceeds from the sale will be utilized to repay debt, and post the deal, it will turn debt-free. As of September, the company owed lenders well over Rs.10,000 crore. “This monetization is a major step in RInfra’s deleveraging strategy for future growth,” the company said in a statement.

#The focus of the company, is now clearly on its engineering, procurement and construction (EPC) and defence portfolios. “Our main focus area for growth will be EPC and defence. Today, our EPC order book, including the ones where we have been declared L1, is in excess of Rs10,000 crore and in 2-3 years will build up to Rs.50,000 crore,” Reliance Infrastructure CEO Lalit Jalan told Mint. In the quarter ended September, EPC accounted for just 11% of Reliance Infrastructure’s revenue.

#The hiving off of the Mumbai power business, however, doesn’t mean the end of the road for RInfra’s power distribution dreams. “We have our Delhi distribution business, which is twice the size of Mumbai distribution,” Jalan said. R-Infra's power distribution assets in Delhi has nearly 40 lakh customers.

#R-Infra CEO Anil Jalan told TOI the deal will deleverage the company and leave Rs 3,000 crore surplus funds after clearing its standalone debt of Rs 15,000 crore. "It will help us focus more on construction, infrastructure projects...defence.
With zero debt, we will have easier access to cheaper funds. We are almost the second-largest construction company in the country with an order book worth Rs 10,000 crore," he said.

#Reliance Infrastructure Ltd develop projects through various special purpose vehicles in several high growth areas such as power, roads and metro rail in the infrastructure space and the defence sector. The company’s board recommended a dividend of Rs.9 per share for FY17. 

#In August, 2017, Lalit Jalan, CEO of RInfra said in the EPC business, the company is targeting an at least Rs.15,000-crore order book annually as it is gearing up to bid for projects worth at least ₹1 lakh crore. The main focus areas of this vertical are roads, metros and power projects. The company is also keen on expanding the operation and maintenance (OEM) business in these areas.

#Debt remains one of the concerns, although the company could reduce its debt to equity ratio from 1.5 in FY16 to 1.2 in FY17. RInfra’s debt on a consolidated basis is about Rs.29,000 crore, as of August 2017. The company expects to receive at least 75% of arbitration awards from Delhi Metro Rail Corporation (DMRC), which, including interest, amounts to Rs.4,725 crore. The company said there is ongoing arbitration for another five projects, and it is preparing to go for arbitration for four more.

#Anil Ambani-led Reliance Infrastructure is slated to win a Rs 1,000-crore order from Nuclear Power Corporation of IndiaBSE 0.68 % (NPCI) after emerging as the lowest bidder for an engineering and construction contract for the Kudankulam plant, people familiar with the development told ET. India and the former Soviet Union agreed in 1998 to set up the Kudankulam Nuclear Power Project with six units of 1,000 MW each. So far, two units have been commissioned, one in 2013 and the other in 2016. India is building the third and fourth units. India and Russia signed a pact in June for two nuclear reactors for the fifth and sixth phase of the Kudankulam plant, which is estimated to cost Rs.50,000 crore. 

#Reliance Infra is focusing more on cash contracts as a part of its strategy to be “asset light”. The company, which has built power and road projects, is looking to scale up it EPC order book, the management said recently. 

#Reliance Infrastructure Ltd last month bagged contracts worth Rs.5,000 crore in Bangladesh which includes setting up of the entire infrastructure for a 750 MW LNG-based combined cycle power plant. The company won the projects on international competitive bidding, Reliance Infrastructure (RInfra) said in a statement.
The award comes after bagging Rs.3,675 crore EPC order from NLC India for setting up two lignite-based CFBC thermal power projects. RInfra said its EPC division has also been shortlisted for projects like the Bandra-Versova sea link, Mumbai coastal road, and the Mumbai-Nagpur expressway.

#After the divesture, what remains with the company will be the Delhi distribution business, EPC, roads, Mumbai metro and defence businesses. In EPC, the company had Rs.2,492 crore of revenues in 2016/17.

#Now R-Infra is now transferring road projects to RInfra InvIT fund to monetise its investments. Its Mumbai Metro is still in the early stages and its plans in the past to undertake renovation of small airports have not met with much success.

#The RInfra's current biggest bet is on defence. Its JV with Dassault Aviation is likely to play major role in meeting the offset obligation of Rs.30,000 crore for "Rafale 36" contract, hopes the company. Its Reliance Defence and Engineering Ltd expects to get a good share of the Rs.38,000 crore naval programmes. Its JV with Rafael Advanced Systems  (Israel), to focus on Air Defence Systems including missiles and large aerostats, targets an opportunity worth Rs.65,000 crore over next 10 years. Its partnership with Antonov (Ukraine) for transport aircraft is estimated to be an opportunity worth Rs.35,000 crore over next 10 years. It is also targeting the large scale ammunition market globally worth Rs.65,000 crore over next 10 years.

#RInfra is planning to deleverage by another ₹2,500 crore through the Infrastructure Investment Trust (InvIT) route. In September, 2017, Anil Ambani said: “With regard to Reliance Naval, the mandatory requirement for change of ownership is what we’ve achieved with our 31% shareholding. We have the ability to increase our shareholding to 36%. We will be shortly announcing a rights issue and through the rights issue, we will have the ability to increase our shareholding,” Ambani said. He also said that Reliance Infrastructure is engaging with Japanese companies with the intention of participating in India’s ambitious Rs.1 lakh crore. 

#Promoters held 49.74% stake in the company as of September 2017. At the CMP of Rs.553.75 it has a market cap of only Rs.14,563.07, EPS of Rs.49.19 and Book Value of Rs.948.49.  It is trading at a P/E of 11.26 against the Industry P/E of 16.09. The face value of the shares of the company is Rs.10. Its subsidiary Reliance Naval and Engineering Ltd (Rs.49.30) has a market cap of Rs.3,632.64 crore. Reliance Naval and Engineering Ltd, formerly known as Reliance Defence and Engineering Limited / Pipavav Defence and Offshore Engineering Company Limited has the largest engineering infrastructure in India and is one of the largest in the world. It plans bids for six submarines worth Rs.50,000 crore, Ambani said in September, 2017.

#If some of these large deals including InvIT and Mumbai electricity business fructify they could unlock huge value. While the exact amount of the debt to equity structure of these assets is not known at this point in time, debt tied to these assets will go and equity would be released. 

#The debt reduction initiatives could also have a positive impact on valuations. Currently, the market does not attribute much value to some of these businesses, which is also reflected in valuations. The company has a reported net worth of Rs.23,348 crore in FY17, is valued at price to book value of about 0.58 times. However, this could get rerated as some of these businesses are divested at higher valuations. The standalone business or power business would certainly get higher multiples than the multiple given to the consolidated entity.

#The stock has given a break out on daily charts and with RSI around 75.50 and MACD in Buy Mode, it looks attractive for the BULLS. Only concern seems to be that its short term oscillators are slightly overbought. The scrip is trading above its 50D, 100, 150D and 200D EMAs. Its next targets are Rs.577 and Rs.610. Stay Invested with a SL at Rs.522.

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