Reliance Infrastructure Ltd: Buy

CMP (Cash): Rs.439.50

CMP (Futures): Rs.443.50

Book Value: Rs.948.49

P/E: 9.50

Industry P/E: 14.51

EPS: Rs.46.40

Face Value: Rs.10

Dividend Yield: 2.04%

1st Target: Rs.460 for Futures

Triggers:

#Reliance Infrastructure (RInfra) recently said it won a Rs.3,647 crore contract from

Photo: The Hindu BusinessLine

Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO) for work related to Uppur Thermal power project. With this contract, Reliance Infrastructure Limited's EPC order book now stands at over Rs.15,000 crore.

#With a clear focus to position itself in India's growing infrastructure sector, and a number of projects in the offing, in areas as diverse as power, metro rails, nuclear power plants, air quality control, marine, railways, ports, and mega infrastructure projects, RInfra is targeting EPC opportunities worth Rs.2 lakh crore and increase the EPC order book to Rs.50,000 crore by FY19, the management of the company said earlier.

#Reliance Infrastructure earlier said in a statement that its consolidated net profit is Rs.410 crore ($64 million) in December,  '17 quarter against Rs.375 crore in the year-ago period, registering an increase of 9%, prior to Indian Accounting Standards (Ind AS) adjustment in the third quarter. The Total income FY18 went down marginally to Rs.6,345.97 crore from Rs.6,484.45 crore in the year-ago period. 

The company expects Delhi-Agra and Pune-Satara projects to be completed in 2018. About Mumbai Metro One, it said its revenue was Rs.76 crore in Q3FY18, registering an increase of 27% year-on-year.

#Defence business: The company said it has strategic partnership agreement with Dassault Aviation. The Dassault Reliance Aerospace Ltd JV has 51% stake of Reliance. The JV will play a major role in meeting the offset obligation of Rs.30,000 crore for “Rafale 36” contract. The foundation stone was laid for the manufacturing facility in Mihan, Nagpur (Maharashtra). The JV will also represent unequalled Foreign Direct Investment (FDI) of over €100 million by Dassault- largest Defence FDI in one location in India. It also said Reliance Infra has won Delhi Metro arbitration award against DMRC worth Rs.5,000 crore including interest. The Delhi high court has reserved order for the above arbitration claim. It also won arbitration award for two road projects i.e. NK Toll Road & DS Toll Road worth Rs.170 crore.

#The Competition Commission of India had already given approval for the proposed 100% sale of Reliance Infrastructure’s integrated Mumbai power business to Adani Transmission. In December, 2017, Gautam Adani-led Adani Transmission has signed a definitive agreement to acquire Anil Ambani-led Reliance Infrastructure’s power generation and distribution business in Mumbai in a deal valued at Rs.13,251 crore. While there will be an upfront payment of Rs.13,251 crore, Reliance Infrastructure will also get regulatory assets under approval estimated at Rs.5,000 crore and net working capital on closing estimated at Rs.550 crore, making the total consideration around Rs.18,800 crore. Transaction is expected to be completed by March 2018. 

#RInfra will utilise the proceeds of this transformative transaction entirely to reduce its debt. This is the largest ever debt reducing exercise by any corporate. This monetisation is a major step in RInfras deleveraging strategy for future growth.  RInfra will focus on upcoming opportunities in asset light EPC and Defence businesses, the management of the company said.

With this deal, RInfra, which is sitting on a debt of nearly Rs.20,000 crore, would become debt-free, with up to Rs.3,000 crore cash surplus, the company said. 

#The Global research firm JPMorgan maintained its overweight stance on the stock with a target of Rs.630. It said that the implied equity value of the deal is Rs.6,250 crore i.e. two times regulated equity base.

#“Our focus is on defence sector. Yes, there is competition in defence sector. Yes, government is the customer. But we are completely committed to succeed in the defence sector,” Ambani in September, 2018  said. He told shareholders that with the acquisition of Pipavav Defence & Offshore Engineering and the subsequent tie ups with international companies makes Reliance Infrastructure one of the two companies in India which are strategically positioned to participate in the government’s programme to build submarines. 

“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-bullet train project. 

#Reliance Naval and Engineering Limited, a subsidiary of Reliance Infrastructure Ltd is the first private sector company to build warships. The company created history in July 2017 by tandem launching two Naval Offshore Patrol Vessels (NOPVs)," the statement said.  At present, Reliance is one of the two private sector shipyards in India to undertake large and tactical programmes of the Indian Navy and Indian Coast Guard like indigenous aircraft carriers, landing platform docks, frigates and P75I submarines.
Reliance Infrastructure Limited, Reliance Infrastructure Limited, through its subsidiaries, is actively pursuing various defence businesses. Reliance Naval and Engineering Limited has a large ship building/repair infrastructure in India. The company is the first private sector company in India to obtain the licence and contract to build NOPVs (Naval offshore patrol vessels) for the Indian Navy.

#Motilal Oswal Securities believes the correction in midcaps has made stock picking a bit less challenging. The brokerage believes that the recent weakness offers a good opportunity to accumulate quality stocks where valuations had turned expensive. 

Conclusion: Buy the stocks of Reliance Infrastructure Ltd in futures for a very short term target of Rs.460. The stock has medium term targets of Rs.570--597.

Bibliography:
i) The Economic Times
ii) The Business Standard
iii) Business Today
iv) The Hindu BusinessLine, etc