R-Power: Low voltage

Uncertainties persist regarding the long-term nature of projects and supply of gas

The weak listing of the Reliance Power stock on the BSE on Monday compared to the issue price of Rs 450""the stock closed at Rs 372.50""could be an indication of how overpriced the issue was, even accounting for the fact that investor sentiment is currently weak. However, even after Monday's fall in share prices, power stocks appear to be overvalued.

In the case of Reliance Power, analysts say uncertainties remain with regard to the long gestation period of the power projects.

Analysts also have concerns with regard to the availability of fuel, especially gas. R-Power has planned gas-based power plants with a capacity of about 10,280 mw and has tied up with RNRL, a group company for gas supplies. However, there is still no clarity with regard to gas supplies.

Based on Monday's closing price of Reliance Power, Reliance Energy's stake in R-Power is valued at nearly Rs 1,300 a share after accounting for the holding company discount of 20 per cent. At the upper end of the IPO price band of Rs 450 REL's stake in R-Power is valued at Rs 1,550 a share,again,after considering the holding company discount.

The sum of parts valuation for Reliance Energy is estimated at Rs 2,200 a share, taking into account its existing businesses and cash. However, the stock appears to be expensive at the current price, with REL trading at 33.8 times estimated FY09 earnings.

At Rs 1174, the multiple for Tata Power too is a fairly high 32.6 times estimated FY 09 earnings. In the past three months, power stocks have run up sharply. Reliance Energy gained 42.3 per cent, while Tata Power saw a rise of 48.7 per cent.

While Monday's correction has helped bring down power sector valuations to more reasonable levels, they are still expensive given the long-term nature of the projects and the statutory fixed returns on investments prescribed by the government.

M&M: Top line troubles

It's been another subdued quarter for utility vehicle and tractor maker Mahindra & Mahindra. The company, which is the market leader in both segments, has managed to grow its net profit before extraordinary items by just 3 per cent.

The problem lies in the top line, which was up just 14.1 per cent y-o-y to Rs 2,940 crore""the growth in Q3FY07 had been a more robust 16.7 per cent y-o-y.

While UV volumes were strong at 20 per cent y-o-y, revenues were dragged down by a fall in tractor volumes by about 7 per cent. The poor sales of tractors, which are inherently more profitable than UVs, resulted in a fall in the operating profit margins by 70 basis points y-o-y to 11.3 per cent.

Consequently, the growth in operating profit at just over 7 per cent was disappointing. Numbers for the consolidated entity were somewhat more reassuring, with the profit after tax (after minority interest but before exceptional and special items) rising 24.4 per cent to Rs 400 crore.

M&M has plans to de-risk the business by increasing the overseas sales to 20 per cent of revenues from 10 per cent at present, over the next three years.

Meanwhile, the outlook for the automotive market at home remains somewhat unclear. Given that M&M's operating margins in the June and September quarters were even lower than 7 per cent, it is unlikely to end FY08 with a margin of more than 5 per cent.

M&M has only recently forayed into the three-wheeler market, a highly competitive space. Going by the current indications, the UV business is likely to grow at about 13-14 per cent over the next couple of years, while tractor sales could be in the region of 7-8 per cent.

The company will need to incur about Rs 9,000 crore over the next three years on capital expenditure. At the current price of Rs 597, the stock is inexpensive at 8.5 times consolidated FY09 earnings, because of the value of its many subsidiaries.