Hostile climes for Reliance

Though the third quarter numbers of Reliance Infrastructure came in a tad below expectations on account of slower execution in the engineering, procurement and construction  (EPC) segment, the diversified infrastructure player is expected to show stronger growth next fiscal as a large number of its projects start contributing to revenues starting next quarter.

Consolidated revenues for the quarter grew 14% to Rs3,744 crore, led primarily by higher growth in revenues from engineering, procurement & construction (EPC) and contracts segment to Rs1,061.3 crore, even as utility segment revenues declined almost 3% due to lower volumes in Mumbai area. Though the growth in EPC revenues was strong at 91%, analysts were expecting much higher revenues from the segment.

On the operating front, the segmental earnings before interest, taxes, depreciation and amortisation (Ebitda) in its EPC segment were `101 crore thanks to an almost 220 basis points (bps) improvement in Ebit margins to 9.5%. The segmental operating profits from electrical energy segment also increased 22%, accompanied by a 260 bps improvement in Ebit margins to 12.6%.

As a result, the consolidated company’s Ebitda grew 34% and adjusted net profits also rose 10% to Rs405 crore.

The company, which is developing 25 projects with a total asset capitalization of `40,200 crore, currently has three built operate and transfer (BOT) road projects in operation and expects to see eight of its total 11 road projects start contributing to revenues in FY12.

Out of three metro projects, the company expects to complete the Delhi Metro project this quarter, while in its transmission portfolio of 5 projects, the Western Region Strengthening Scheme transmission project will get operational this quarter.

The company’s other infrastructure projects include a sea link in Mumbai and five regional airports in Maharashtra.

Reliance Infra, which owns 38.5% stake in Reliance Power, would also benefit from aggressive additional power generation capacities planned by the group in the long run. Reliance Power aims to have 5,000 mw operational capacity —- out of its total portfolio of 34,313 mw under various stages of development and operation — by 2012, up from around 1,033 mw now.

Though analysts maintain a buy rating on the Reliance Infra stock, considering its cheap valuations following the recent correction, the company’s investment practices and transparency record pose a risk.

“While the traction on infrastructure projects and benefits from R Power (both EPC order and investment) are a positive, group-related issues are a key risk, which we believe could dent effective utilisation of cash and growth opportunities,” Shankar K and Subhadip Mitra, analysts at Edelweiss Securities, said in their results update of February 16.

“A return of risk appetite, cheap valuations and the proposed buyback might support the stock. However, there are some fundamental concerns on the business like competition in Mumbai distribution, EPC profitability, execution of power and infra projects as well as recent question marks over its investment practices,” Shilpa Krishnan, Sumit Kishore and Deepika Belani, analysts at JP Morgan India, said in their company update of February 15.

At Monday’s closing price of Rs621.25, the stock has shed nearly 22% in the last two months on negative news flow and trades at less than 0.8 times its book value. The stock may not see much downside from here in the near term as the management has proposed to buy back shares worth Rs1,000 crore at Rs725 per share to retain investor confidence. Investors with longer term view may consider the stock at current levels.
Nitin Shrivastava (s_nitin@dnaindia.net)