On the back of a strong order book, mainly in-house construction projects, Reliance Infrastructure Ltd (R-Infra) was able to grow fast in the last few quarters. However, it is now felt by analysts that the pace of growth will come down as a result of low order book and expected slowdown in execution.
During the June quarter, despite 14 per cent growth in electrical business, the company’s overall consolidated revenue grew by just four per cent as the EPC (engineering, procurement and construction) business, which accounts for half of the revenues, remained almost flat. Given the order book and weak macro-environment, analysts believe the trend could continue this year.
They also expect some pressure on profitability in the near term and hence, are estimating net revenues to decline in 2012-13 and profits to come in the region of Rs 1,350-1,400 crore, compared with Rs 1,587 crore in 2011-12. Part of these concerns is already reflecting in the share price, which at around Rs 515 is discounting 2012-13 estimated earnings by nine times. However, given the muted near-term outlook, the stock is likely to lag broader markets.
June quarter: Power saves the day
Though revenue growth during the June quarter was lower than the Street’s estimates, operating profits were better than expectations due to lower fuel cost and other expenditure. Nevertheless, the profits at the net level grew by just 1.6 per cent as a result of higher interest and depreciation costs.
| NOT EXCITING | ||
| In Rs crore | Q1' FY13 | % chg y-o-y |
| Electricity | 3,491.8 | 14.0 |
| EPC | 1,751.1 | 0.1 |
| Infra. business | 98.2 | 48.8 |
| Other op. inc. | 41.9 | -85.8 |
| Total revenue | 5,383.1 | 4.0 |
| Ebitda | 671.8 | -10.2 |
| Ebitda margin (%) | 12.5 | -2.0 |
| Finance cost | 361.4 | 65.0 |
| Net profit | 412.0 | 1.6 |
| Source: Company | ||
The company’s power business witnessed higher traction led by addition of new customers in the Delhi and Mumbai circles. During the quarter, Delhi Electricity Regulatory Commission (DERC) approved a rate hike of 21 per cent in addition to eight per cent surcharge effective July 1. This is positive for the division as it will reduce under-recoveries and improve liquidity. For the Mumbai power distribution business, the rate revision process is under way and the company is shortly expecting approval from the Maharashtra Electricity Regulatory Commission (MERC) to recover the regulatory assets, which again will ease the liquidity and profits.
While the power business is still on a strong footing, pickup in the construction business and contribution from the infrastructure business are essential to drive overall growth of the company. The capital employed in the infrastructure business is Rs 7,800 crore and revenue generated in FY12 was Rs 320 crore. This is also a reason for the company’s low return on equity of just 6.6 per cent in FY12. Most of the projects, including the metro projects, have been completed or are at the final stage. However, significant contribution from these assets will take time to materialise. As a result of completion of projects and lack of any major inflow of new projects, the company’s order book has come down to currently at about Rs 15,560 crore compared with Rs 17,300 crore in the March 2012 quarter.
Outlook
Several projects in the transmission segment are operational. Out of the 11 road projects, seven are operational and the remaining three will get operational in the current financial year. While these projects will add to revenues, the contribution to consolidated revenues will be marginal due to their size. However, they will add more to the consolidated interest and depreciation cost and hence, are expected to restrict profit growth, believe analysts.
The revenue visibility is also coming down (order book is less than 1.5 times its EPC revenue of FY12). The company had earlier guided for construction business to generate revenues of about Rs 12,000 crore in FY13. However, the management has now lowered the same to Rs 9,000-10,000 crore, which analysts believe is still on the higher side.