After the Supreme Court’s verdict on the gas dispute between RNRL and Reliance Industries, the fate of Reliance Power’s two gas-based power projects — the 7,480-Mw plant at Dadri and the 2,800-Mw one at Shahpur — has become uncertain.
That apart, analysts have also turned cautious about the progress of other projects, which has led them to lower their valuations for the company.
Concerns over gas-based projects...
The Dadri power plant, for which the company has got land and environmental clearance, is critical for Reliance Power’s portfolio, considering its huge size. Earlier, the plant was to be commissioned in a phased manner starting from the financial year 2013 to FY15. But now, given the Supreme Court ruling, Reliance Power is likely to get the gas at $4.2 per million British thermal unit (mBtu) against the earlier $2.34 an mBtu. Additionally, analysts believe the company will incur another $1-1.2 a mBtu towards transporting gas from the KG-D6 basin to Dadri, which could result in a higher cost of generating power.
While the cost of gas, whenever it gets allocated, is likely to be in line with that of other power companies, Reliance Power – to deal with the situation – might also relocate the plant. Nevertheless, for now, analysts don’t sound confident about the viability of these gas-based projects.
“We believe RNRL is unlikely to get gas cheaper than the government determined rate of $4.2 an mBtu, increasing concerns over viability of Reliance Power’s 10,200-Mw power projects. Given that these projects are not backed by PPAs (power purchase agreements) and landed gas cost is expected at $5.5-6 an mBtu, we eliminate these projects from our valuations owing to viability concern,” ICICI Securities Analyst Prakash Gaurav Goel says.
...and others as well
Meanwhile, Reliance Power has over 35,000 Mw of power generation capacity at different stages of implementation. However, at the ground level, it recently commissioned its first power plant, namely Rosa-I (300 Mw), in March 2010. It will be adding another 300 Mw soon.
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As new capacities have just been added, the company did not generate revenue from operations (except Rs 360.28 crore from other income) in 2008-09. But it is expected to report revenues of Rs 615 crore and a net profit of Rs 545 crore in 2009-10.
Further, the company will be adding new capacities every year (see table) and, accordingly, its revenues should also increase. But here, too, analysts are concerned about the progress of other ongoing projects.
For instance, for the 4,000-Mw Krishnapatnam-based ultra mega power project (UMPP), the company is yet to secure fuel supplies. Its other project of 3,960 Mw at Chitrangi in MP is yet to conclude a PPA and financial closure. Also, a large part of the capacity addition is expected only after 2012 and any delay could further create uncertainties.
Citing these concerns, analysts have lowered their valuations of the company. “We remove the Dadri and Shahpur projects from our probability-based valuation as we have no visibility on gas supplies for these projects. These projects accounted for about Rs 29 per share to our previous target price of Rs 140 for Reliance Power,” says Girish Nair, who tracks power sector at BNP Paribas Securities. Goel, too, has lowered his target price to Rs 124 from Rs 140 earlier.
Nair also says that, at Rs 140, the stock is expensive at an 2011-12 EV-Ebitda (Enterprise value-Earnings before interest, taxes, depreciation and amortisation) of 27.5 times compared to Adani Power at 6.8 times and NTPC at 9.8 times.
In the present scenario, most analysts value the stock in the range of Rs 110-120 per share.