In an uncertain environment for Indian power players given concerns on fuel shortage and financial health of State Electricity Boards, we believe Reliance Power is favourably placed amongst its peers. RPWR's UMPPs have captive coal mines. Its UMPP tariffs are also the lowest, reducing risk of a SEB default. While concerns and uncertainty on coal for Krishnapatnam and Chitrangi remain, on conservative estimates, we arrive at a SOTP-based target of Rs115. Initiate with a BUY.
Fuel security: Out of 17.6GW of coal-based capacity under construction, 90% have captive coal blocks. For balance projects, CIL has assured a linkage of about 50%. Given most power capacities are facing delays and uncertainties due to coal concerns, we believe RPWR's projects will be on track.
Fears of SEB's ability to pay: With most of RPWR's projects tariffs being low, we believe it faces minimal risk of SEB default compared to peers.
Projects likely to earn IRRs in excess of 16%. Our analysis of RPWR's various projects indicates project IRRs in excess of 16% on conservative assumptions despite very low levelised tariffs.
Earnings CAGR of 25% over FY11-14: We expect the company's revenues to grow by 126% and earnings to grow by a compounded 25% over FY11-14. Most of the projects are currently in a construction stage and hence the company should benefit from a low FY11 base.
Valuations attractive, initiate with BUY: Serious concerns on fuel availability, regulatory uncertainties, availability of finance, and health of SEB's has resulted in de-rating of the sector. However, we believe RPWR's current low valuations are not justified. On conservative assumptions, our SOTP-based target comes to Rs115, an upside of 33% from current levels. We initiate coverage with a BUY rating.
The Reliance Power stock closed the day at Rs.88.80, up by Rs.1.95 or 2.25%. The stock hit an intraday high of Rs.90.10 and low of Rs.87.55.
The total traded quantity was 12.54 lakhs compared to 2 week average of 15.21 lakhs.
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