)
Reliance Infrastructure, which fell after recent carnage in mid cap space and broader selling pressure in the markets, has seen some accumulation at lower levels considering that valuations have become attractive.
It fell sharply from around Rs 550 per share in January this year to around Rs 300 levels and bounced back to current levels at Rs 362 per share. Currently the stock is trading 0.4 times its book value and discounts next year's earnings by 7 times.
Interestingly value of its 36.5% stake in Reliance Power alone works out to be Rs 268 per share, which is almost 74% of the current share price of Reliance Infrastructures. This indicates that the market is willing to ascribe very little value to its core business of power generation, engineering, procurement and construction (EPC) and infrastructure assets.
Its standalone business of and EPC and power, which did a revenue of Rs 17,906 crore and made net profit of Rs 2000 crore in FY12 is valued at Rs 2,442 crore (market cap excluding value of its stake in Reliance Power).
Concerns priced in
Investors and analysts have earlier shown their concerns over the issues at metro projects, falling order book in EPC business, lower execution and issues in power generation and distribution business. Most of these verticals are facing challenges, but at the same time the company is coming out of worst situation as things are improving.
Also most of these issues have already made a dent in performance and factored in share prices. Even in worst case scenario, BofA Merrill Lynch believes that assuming 50% discount to parent DCF for writing off 100% of group treasury, 50% discount to subsidiaries value and no value to Delhi discoms and realty assets to factor-in risks. It has price objective of Rs 453 per share.
The biggest worry stems from construction and engineering (EPC) business. Thanks to shrinking capex in infrastructure segment and delays in ordering of power projects from Reliance Power, its order book in EPC business has fallen from Rs 17,300 crore at end of March 2012 to about Rs 10,000 crore currently, which is less than one time its EPC revenues in FY12.
Since this segment accounted for chunk of its revenue (over 50%), it is bound to have impact on revenues and earnings. Though the issue of visibility may not get resolved in the near terms but if the company is able to get EPC work (company is expecting to get in near future) for the Chitrangi and Krishnapatam (both 8,000 MW) power project undertaken by Reliance Power that alone could improve the visibility given the size of work for these projects to the tune of Rs 25,000-30,000 crore.
Both these projects are currently facing challenges over fuel issue.
Krishnapatam project if the case is settled by CERC like in the case of Adani Power and Tata Power over the issue for imported coal. EPC work from infrastructure arm is also shrinking due to lack of orders in construction.
Though there is absence of construction work, the company's assets in infrastructure verticals such as Delhi Metro Project (resumed operation) and Mumbai Metro-I (reaching completion) and 8 operational road projects (out of 11) should now start contributing to revenues.
"As the Infrastructure business gains footing, we expect the share of the company in the total sales to improve from 2% present to 15-20% in FY16," said Rupa Shah, who tracks the company at Prabhudas Lilladher. Similarly investors also fear lack of tariff hike in Delhi and Mumbai business. In Delhi this has led to accumulation of Rs 14,800 crore dues or regulated assets.
Recovery of such regulatory assets is still pending but any progress on this will lead to improvement in cash flows and earnings.
