Reliance Infrastructure (R-Infra), whose stock underperformed the broader markets for most of 2011, has seen a spurt in activity at the counter. While the change in sentiment is akin to other infrastructure-related stocks, there are other factors as well, that point to an improvement in company prospects. Strong growth in the EPC (engineering, procurement, construction) business and commissioning of new projects are expected to help it report healthy growth in profits in 2012-13 and thereafter, against nearly stagnant profits in the recent past.
Since many projects are under construction or in the early stage of commissioning (or recently commissioned), with long gestation periods, analysts prefer to value the stock on a sum of parts basis rather than purely on earnings, as financial performance could tend to be uneven. From that perspective, despite the 50 per cent jump in share prices over the past month, they believe the stock at Rs 626 is trading at a fairly attractive price/book value of 0.6 times.
Strong revenue growth
Meanwhile, on Tuesday, R-Infra, which is into the entire power chain (generation, transmission and distribution), road and other infrastructure projects (metro rail, etc) and EPC, reported strong growth of 64 per cent in consolidated revenues for the December 2011 quarter, helped by good performance of its EPC division.
| STABLE MARGINS | ||||
| In Rs crore | FY11 | % ch y-o-y | 9MFY12 | % ch y-o-y |
| Net sales | 15,127.75 | 3.87 | 17,050.34 | 49.47 |
| Ebitda | 2,473.27 | 5.47 | 2,288.90 | 44.60 |
| Ebitda margin (%) | 16.35 | 24.77 bps | 13.42 | -0.46 bps |
| Interest | 634.96 | 20.91 | 795.08 | 78.39 |
| Net profit | 1,229.00 | 2.61 | 1,175.34 | 3.04 |
| Consolidated numbers Source: Capitaline, company and analysts reports | ||||
This division largely undertakes construction of in-house projects (including those of Reliance Power, a 38 per cent subsidiary) and is benefiting from a large number of projects being under construction.
| SUM-OF-THE-PARTS | |
| Rs / share | |
| Parent company | 293 |
| Reliance Power | 472 |
| Distribution businesses | 62 |
| Transmission business | 22 |
| Metro & roads infra assets | 124 |
| Real estate | 21 |
| Other investments | 88 |
| Total | 1,082 |
| Source: BofA Merrill Lynch | |
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However, profit growth was flat (as in the previous two-three quarters), thanks to a 55-110 per cent jump in interest costs and higher tax outgo. Since recently commissioned projects are in the early stages (revenue generation is typically lower and interest costs are expensed in the profit and loss account), this is taking a toll on the profitability. Thus, during the December quarter, interest cost more than doubled to Rs 327.7 crore, while net profit remained flat at Rs 408 crore.
This is also a reason for the lower return on equity and capital are lower. However, if the infrastructure business is excluded, the return on capital is 18-22 per cent in both the EPC and electricity businesses. About Rs 4,200 crore of capital is employed in the infrastructure business, which is making a loss at the Ebit (earnings before interest and taxes) level.
Most of these projects have been bid at an internal rate of return of 18-22 per cent. Even at a mere 10-12 per cent return, these can contribute Rs 420-500 crore to Ebit, which was Rs 2,080 crore in the nine months ending December. The management expects the infra segment to start contributing to profits over the next two years. Analysts, too, expect overall profitability to improve, with profit growth pegged at 12-14 per cent in 2012-13.
Picking up momentum
With projects in both the power and infrastructure space reaching the implementation stage, the company is booking higher revenues from the EPC and infrastructure segments, which account for a little over half of revenue. About Rs 10,000 crore worth of capital work is under progress, most of which is relating to the infrastructure segment, which ensures strong revenue visibility for the EPC division (it has an order book of Rs 21,155 crore or over two times its estimated FY12 revenues).
In the infrastructure business, the 23-km Delhi Metro line (commissioned in February last year) has witnessed an increase in commuters to 20,000 (daily), expected to increase. It has also closed deals for 30,000 sq ft of retail space in the station area with leading companies. R-Infra also has 11 road projects of 4,640 lane-km, of which five are operational, having total length of 1,940 lane-km. These projects are still at the early stages and are expected to contribute to profitability once they reach a certain stage of revenue, after which the related costs like interest expenses could be absorbed.
The management is expecting five more road projects to go on stream over the next three months and start contributing to revenue. Similarly, there are projects in the construction stage such as the 11-km Mumbai Metro-I, likely to start by December 2012 or early 2013. The 32-km Mumbai Metro-II project is also expected to start in 2012, both of which will start contributing in 2013-14.
Power also gains
Apart from these two segments, the prospects of the electricity business (almost half of revenue) are also improving. At end-2011, its Mumbai Area distribution licence was extended for another 25 years. Additionally, the regulator approved recovery of Rs 2,320 crore (from existing consumers), as well as levy of cross-subsidy charge on migrated customers. For its Delhi Distribution business, the regulatory body approved a 22 per cent rise in rates, a positive from the turnaround perspective. The company then injected Rs 500 crore into the two Delhi distribution companies to deal with liquidity. These measures should help in a turnaround. Meanwhile, Reliance Power has also seen new capacities go on stream, which should add to the consolidated financials of R-Infra.