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Reliance Power fails to surprise

M.V.S Santosh Kumar | Updated on March 12, 2018

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Even as the first phase of the Rosa power project which was commissioned by the first quarter of June 2010 started adding to the revenues, Reliance Power managed to post only 7 per cent year-on-year growth in net profit for the December quarter. If one excludes the tax write-back of Rs 54 crore, the profits have actually declined. However, given that the preceding year December quarter profits were fully contributed by other-income component, the year-on-year growth is not comparable. The operating income of Reliance Power stood at Rs 251 crore during the December quarter.

The stock which spiked after results however gave up some of its gains, and ended the day with a rise of 2.5 per cent. The results were in line with the analysts' expectations compiled by Bloomberg.

The falling contribution of other income owing to cash (IPO proceeds) getting deployed into the upcoming power projects, higher depreciation costs on the back of commissioning of new projects and sharp jump in interest costs after commercialisation of the project were the reasons for the sedate profit growth. None of these are concerns for the company.

However, the sub-optimal load factor of the Rosa power plant is a major concern.

The Rosa phase-1 (600 MW) plant operated at 54 per cent plant-load factor for the December quarter and at 90 per cent of the target generation estimated by the Central Electricity Authority.

Higher generation would have aided profitability to some extent, but given that the coal power generation across all projects was lower than targeted during the December quarter, the results were along expected lines. The factor for Rosa phase-1 during January 2011 stood at 77.6 per cent.

The company's earnings were predictable given the cost-plus nature of the tariffs from the current projects. This hedged the company against rising fuel prices and falling merchant tariffs.

Long-term outlook positive

Reliance Power has a 1,033 MW of capacity with 600 MW coal-based project at Rosa and 433 MW of gas-based projects in Goa, Kochi and Samalkota.

Concerns such as dilution of equity because of RNRL merger, rising interest costs, delays in upcoming projects (especially ultra-mega power projects), etc., are already discounted in the stock's price. There have been media reports on the company planning to re-finance its debt raised for Krishnapatanam and Sasan ultra-mega projects. This will reduce the accumulated interest costs which the company has to pay once these projects get operational. Additionally, Reliance Power is raising overseas borrowings from Chinese banks and US EXIM Bank, which would also reduce the interest costs.

Fast-track commissioning of the brown-field expansion project (2,400 MW) at Samalkot, which is expected to come on-stream by the end of this calendar year, will prove the execution capabilities of Reliance Power. This project is expected to get gas from RIL's KG Basin. This may give clarity on the company's other gas-based projects as well. Rosa phase-2 and Butibori projects are the coal-based projects which are expected to get commissioned by calendar year 2012. A majority of the remaining projects are expected to be completed around 2013 and 2014.

Low profitability in the case of ultra-mega projects would be compensated by the excess coal the company has been allotted for these projects.

Reliance Power has the largest captive-coal reserve for a private sector company with excess of two billion tonnes in reserves. Excess-coal capacity will help run the Chitrangi (6,000 MW) plant, which will earn significantly high return on equity. Additionally, the company is planning to increase the three ultra-mega projects' capacity to 6,000 MW from 4,000 MW. However, these plans are likely to fructify only over the long term (three-four years).

Published on February 14, 2011

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