REL: Tripping costs

Purchase of power from third-party sources proves costly

Reliance Energy's performance in the September 2007 quarter was adversely affected by surging costs, related mainly to purchase of electricity from third-party sources.

A small cushion for its overall margins in the last quarter was provided by a decline in the cost of materials and sub-contract charges related to its EPC (engineering, procurement and construction) division.

As a result, operating profit (excluding other income) improved 5.7 per cent y-o-y to Rs 181.3 crore in Q2 FY08, while total operational income improved 10 per cent to Rs 1,541.73 crore.

Its operating profit margin also declined 48 basis points y-o-y to 11.75 per cent in Q2 FY08. The stock declined 7.5 per cent to Rs 1,762 on Wednesday. In the June 2007 quarter too, Reliance Energy's operating profit margin also declined 880 basis points y-o-y to 2.3 per cent.

Meanwhile, Reliance Energy sold 2,371 million units in Q2 FY07, a growth of 6.5 per cent y-o-y. Its realisations were also estimated at Rs 5.38 per unit in Q2 FY08 compared with Rs 4.11 a unit in the previous corresponding quarter.

However, purchase of power from external sources amounted to 1,296 million units in the September 2007 quarter, a growth of 12.9 per cent y-o-y.

The management has highlighted that the power purchased from third parties was at nearly Rs 5 a unit in the first half compared with Rs 2.8 in the previous year.

This resulted in the cost of electrical energy purchased rising a whopping 94.1 per cent y-o-y to Rs 649.22 crore in the September 2007 quarter.

Going forward, Reliance Power, an associate company of Reliance Energy, has filed a draft red herring prospectus for its proposed IPO of 130 crore equity shares.

Reliance Energy will hold 45 per cent in Reliance Power after the issue. Prior to Wednesday's trade, strong investor interest for the power sector had resulted in the Reliance Energy stock jumping an impressive 110 per cent over the past month compared with a 23 per cent rise in the Sensex. The stock trades at 45 times estimated FY08 earnings without considering its stake in Reliance Power.

Aban Offshore: Better utilisation

Aban Offshore had a good September quarter, with its standalone operating profit margin improving by 210 basis points y-o-y to 50.8 per cent. Revenues grew 28.3 per cent y-o-y to Rs 165 crore, while operating profit was up 34 per cent to Rs 84 crore.

These results are above analyst expectations. With demand for its vessels on a high, the company had better utilisation. It extended the Tahara contract with Hardy Exploration in July-end at repriced contracts. It also renewed its contract with ONGC for three rigs, which was at a higher rate.

The company managed to control costs at 23 per cent y-o-y increase in the quarter by lowering cost of repairs and insurance by over 30 per cent. If it weren't for the appreciating rupee, the company would have posted better margins.

In the June 2007 quarter, its operating profit margin declined 430 basis points to 53.3 per cent mainly owing to refurbishment cost of Rs 10 crore incurred for its rig Aban II, which has since been deployed at a higher rate.

The company is also leveraging the environment of better pricing for oil rigs and has purchased a semi-submersible rig for $211 million, which will be delivered this quarter.  The ONGC contract will bring the company Rs 2,000 crore over three years. Last week, it renewed its jack-up rig Aban-VI contract for six years, which will earn 62,450 million euros a day for the first three years. The global shortage of rigs is likely to result in better day rates going forward. The other upside will be the listing of Aban Singapore.  At its current price, the stock trades at an expensive multiple of 34 times estimated FY08 earnings, but the kicker of re-priced contracts will triple its earnings in FY09. Based on FY09 EPS estimates, the stock appears reasonable at a valuation of 10-11 times.