After announcing its March quarter results, which were above the Street’s expectations, most analysts have a ‘buy’ rating on Reliance Infrastructure Ltd, given attractive valuations. At Rs 450, the stock is trading at less than half its book value of Rs 918 per share, and seven times FY13 estimated earnings.
Earnings visibility is decent as most of its infrastructure projects will become operational in the current financial year and cash flow from existing businesses will be stable. The commissioning of new projects will keep interest costs at elevated levels and cap profit growth and upside for the stock in the near term. Hence, only those investors with a long-term perspective should consider the stock.
Benefits of execution
The company’s engineering, procurement and construction (EPC) business, which mainly caters to in-house and group (Reliance Power) projects, was the key driver of consolidated revenue, which jumped almost 90 per cent in the March quarter. The EPC business reported a 433 per cent increase in revenue, which also saw its contribution to total revenue jump from 20 per cent in the year-ago period to almost 58 per cent in the March quarter, aided by increased execution of projects.
Power generation and distribution (about 40 per cent of revenue), however, did not see much uptick, but the infrastructure segment grew 85 per cent as new road projects and the Delhi metro project started contributing to revenue. However, the impact of the latter on overall revenue was marginal, given that the segment contributed only 1.3 per cent to total revenue.
Contrary to the growth in revenue, consolidated profit remained flat as a result of a 110 per cent year-on-year rise in interest cost. That’s because interest burden of some of its infrastructure projects, which were commissioned recently, is yet to be absorbed by corresponding revenue from such projects. Till the time these projects start generating significant revenue, the pain on the interest cost front may not ease.
The road ahead
As construction revenue is up significantly, analysts are concerned about the depleting order book (backlog) to revenue ratio. The company’s order book at Rs 17,300 crore is just about 1.7 times revenue from the construction business in 2011-12, compared with about 10 times in 2010-11 (order book of Rs 29,635 crore and revenue of Rs 2,994 crore).
| INTEREST COSTS DRAG | |||||
| In Rs crore | Q4FY12 | % chg y-o-y | FY11 | FY12 | % chg y-o-y |
| Net sales | 7,000.4 | 90.5 | 23,640.7 | 15,127.8 | 56.3 |
| PBIDT | 718.7 | 19.5 | 3,543.7 | 2,488.4 | 42.4 |
| PBIDT (%) | 10.3 | -610 bps | 15.0 | 16.4 | 146 bps |
| Interest | 419.3 | 109.9 | 1,335.9 | 645.5 | 107.0 |
| Net profit | 411.5 | 0.1 | 1,586.8 | 1,551.6 | 2.3 |
| Source: CapitaLine Plus | |||||
“The order backlog at Rs 17,280 crore has limited the revenue visibility. Reliance Infra needs new order intake of about Rs 5,000 crore per year that we expect (to be) a difficult task in this challenging environment. Management guided same range of EPC revenue for FY13 also,” says Ankush Mahajan, analyst at KR Choksey, in his recent report.
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In this backdrop, most analysts expect EPC revenue to tapper down. This is also a reason that in 2012-13, they are expecting a marginal growth of 8-10 per cent in consolidated revenue, which is largely on account of the growth in generation and distribution business that factors in an upward revision in power tariff sand recovery of regulatory assets (past arrears from customers).
Thanks to its small size, infrastructure will contribute marginally to overall revenues, but expect it to grow at a robust pace as three new road projects get operational this year taking its road portfolio of 11 projects.
Additionally, projects in the transmission sector and metro rail projects at Delhi and Mumbai will be the key contributors to revenue growth. The company has already seen improvement in passenger traffic at its Delhi metro project and is working towards signing retail and advertising deals along with monetising the available land. Mumbai Metro, too, is coming closer to completion (92 per cent is complete) and is expected to commence operations in the current financial year. However, these could have some impact on interest costs in the initial period, till revenues grow to break-even levels, and keep a tab on profit growth.