Reliance Power Equity Research

Date of Research – 20 January 2016

Price – Rs. 48.35

About the Company

Founded in 1995, Reliance Power Limited (“Reliance Power” or the “Company”) is a part of the Reliance Group .The Company is engaged in the development, construction and operation of power generation projects both in India as well as internationally. The Company on its own and through its subsidiaries has a portfolio of over 35,000 MW of power generation capacity, both in operation as well as capacity under development.

The Company has 1,540 MW of operational power generation assets. The projects under development include seven coal-fired projects to be fueled by reserves from captive mines and supplies from India and elsewhere; two gas-fired projects; and twelve hydroelectric projects, six of them in Arunachal Pradesh, five in Himachal Pradesh and one in Uttarakhand.

Reliance Power has won three of the four Ultra Mega Power Projects(UMPPs) awarded by the Indian Government so far. These include UMPPs in Sasan( Madhya Pradesh),Krishnapatnam( Andhra Pradesh) & Tilaiya(Jharkhand).UMPPs are a significant part of the Indian government’s initiative to collaborate with power generation companies to set up 4,000 MW projects to ease the country’s power deficit situation.

Apart from this , Reliance Power is also developing coal bed methane (CBM) blocks to fuel gas based power generation. The company is registering projects with the Clean Development Mechanism executive board for issuance of Certified Emission Reduction (CER) certificates to augment its revenues.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations4,926.595,174.756,852.7410,670.13 10,395.65 
Expenses3,213.703,258.834,317.735,839.96 5,889.18  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)1,712.891,915.922,535.014,830.17 4,506.47  
Depreciation285.13363.87523.711,056.48 734.00  
Finance Costs585.33684.401,074.202,576.51 2,843.08  
Other income357.18371.16349.26368.37 496.03  
PBT1,199.611,238.811,286.361,565.55 1,425.42  
Tax188.15212.14258.04203.61 321.26  
PAT (before Minority Interest and share of Associates)1,011.461,026.671,028.321,361.94 1,104.16  
Profit/ (loss) attributable to Minority Interest– – 
Share of profit / (loss) of Associates– – 
Consolidated Profit / (Loss) for the year1,011.461,026.671,028.321,361.94 1,104.16  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio34.7737.0236.9945.27 43.35 
Net Profit Margin Ratio20.5319.8415.0112.76 10.62 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital2,805.132,805.132,796.632,805.132,805.13 
Reserves & Surplus14,764.4915,775.9516,671.8017,826.8718,102.60 
Net worth (shareholders funds)17,571.1218,581.0819,468.4320,632.0020,907.73 
Minority Interest1.501.501.50– 
Long term borrowings14,262.7124,214.5726,253.5128,220.5529,159.38 
Current liabilities3,552.546,178.247,442.2810,076.0310,637.84 
Other long term liabilities and provisions3,872.572,951.502,855.223,095.792,297.07 
Deferred Tax Liabilities6.971.39 
Total Liabilities39,258.9451,933.8656,020.9462,025.8763,003.41 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets28,369.0239,286.5746,093.6549,164.2949,131.89 
Noncurrent Investments5.00– 
Current assets5,699.048,834.076,355.948,150.3310,761.71 
Long term advances and other noncurrent assets5,185.883,813.223,571.354,711.253,109.81 
Total assets39,258.9451,933.8656,020.9462,025.8763,003.41 

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE1.964.004.195.199.65 
ROE / RONW4.935.445.274.986.51 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)4,926.595,174.756,852.7410,670.13 10,395.65 
Growth (%)143.99 %5.04 %32.43 %55.71 % (2.57 %) 
PAT (Rs. Cr.)1,011.461,026.671,028.321,361.94 1,104.16  
Growth (%)16.69 %1.50 %0.16 %32.44 % (18.93 %) 
Earnings Per Share – Basic (Rs. )3.613.663.684.86 3.94 
Earning Per Share – Diluted (Rs. )3.613.663.684.86 3.94 
Price to Earnings17.0523.4714.3510.15 11.88 

Dividend History

The Company has not been paying any dividend for the last 5 year. In Nov 2015, the Company declared its first interim dividend of  10 % i.e. Rs. 1.00 per share.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Reliance Power’s average current ratio over the last 5 financial years has been 1.45 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Reliance Power’s average long term debt to equity ratio over the last 5 financial years has been 1.03 which indicates that the Company is operating with a high level of debt and may find it difficult to withstand any economic slowdown. Also Read – Power Stocks : Deep Value or Junk Buying?

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Reliance Power’s average interest coverage ratio over the last 5 financial years has been 2.27 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Reliance Power reported a promoter holding of 75.00 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 10.21 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.