Dadri dampener

Reliance Power’s stock fell 3.2% on Monday to Rs145.25 per share on fears the Allahabad High Court order may delay its Dadri project. On December 4, the high court had ruled that the measures followed by Uttar Pradesh government to acquire 2,500 acres for Reliance Power’s 7480 mega watt (mw) gas-based Dadri project were inappropriate. The high court repealed the state government’s earlier notification for using emergency powers to buy land for the project, side-stepping a provision inviting objections from land owners.

About 85% of the land is already in Reliance Power’s possession. The company had compensated landowners of about 2100 acres. However, landowners of the remaining 400 acres refused to accept the compensation and went to the high court.

The development bodes ill for Reliance Power. “We now estimate the Dadri project will come on stream in FY2013 versus FY2012 before, assuming availability of gas supplies from KG D-6 block over medium term,” Durga Dath of Goldman Sachs wrote in a note to clients on Monday.

Delay in commissioning of the project is expected to put further pressure on the company’s future cash flows. “We forecast no meaningful cash inflow from projects under construction; for instance, we do not expect Sasan to generate positive cash flows till FY2014; and the Dadri project will not likely benefit from near-term strength in merchant rate, as we forecast it to normalise at Rs 3.50 per kilo watt hour post FY2013,” Dath wrote.

Reliance Power’s stock has underperformed the broader markets in the last one month, gaining just 1% to the BSE Sensex’s 5%. Analysts are negative on the stock and investors should wait for outlook to improve to consider it. The main concerns for the stock include lack of historical track record and underlying execution risks, though new project wins and clarity on availability of gas would be positive triggers going forward.