Will Reliance Power be able to deliver on its promises?

Reliance Power (RPL) came up with an IPO in 2008 that was oversubscribed more than 71 times. The company garnered Rs 11700 cr, with a promise of building 12 power projects of a total capacity of about 24200 MW. This was the biggest IPO ever issued until Coal India came up with a Rs 15000 cr IPO in 2010. After nearly 4 years, the stock has lost 74% in value from its issue price. In the year 2011 itself, it lost about 55%.

Recently, RPL’s power projects have been facing various hurdles. The list of problems is quite lengthy and creates doubts about whether the company will be able to deliver the original promise of 12 power projects. Reliance Power currently has an installed capacity of 900 MW.

Reliance Power’s Current Capacity Addition Programmes

Urthing Sobla a 400 MW hydroelectric project located in Uttarakhand that was scheduled to be commissioned in Mar 2014 as per the prospectus, is still in the land acquisition phase. It will now open in 2016.

In what could be a big setback and a diversion from its original plans, RPL wants to scrap the Shahapur project that features 1200 MW coal fired and 2800 MW gas fired plants. Ironically, the Maharashtra govt. already had asked RPL to scale down the Shahapur project due to unavailability of a major gas pipe line in that area. (Business Standard, dated Apr 10, 2007)

Its 7,480 MW Dadri project in Uttar Pradesh was hit by major setbacks when the Allahabad High Court cancelled the land acquisition. As if that was not enough, this project also faced problems associated with gas supply.

Recently RPL also stopped work at its 4,000MW Krishnapatanam Ultra Mega Power Project (UMPP) due to a change in coal pricing norms by the Indonesian govt.

With so many power projects being cancelled or delayed, the original capacity addition programmes seem to have taken a back seat.

Reliance Power's Generation Mix

In the latest corporate presentation (Nov 2011) uploaded on its website, RPL reiterates its target of commissioning 5000 MW capacity in 2012. We doubt this programme too, because as per the presentation, only 2 projects, i.e. Rosa Phase II and Butibori with total capacity of 1200 MW, will be commissioned in the next 13 months' time. Commissioning of the Samalkot Gas based project with a total capacity of 2400 MW is also doubtful, as the company is yet to achieve financial closure for this project. Above all, gas supply from KG-D6 is depleting, and this may hurt units of GMR, Lanco Infratech and Deepak Fertilisers. Thus, the Samalkot gas allocation is under severe doubt. On the renewable energy front, the company has 340 MW of capacity under construction for which environmental approval has not yet been received.

In its prospectus as well as in the recent corporate presentation, RPL mentions that the company will be able to achieve low cost generation. Here again, one must take note that low cost generation is not possible with coal prices increasing in the international markets. In fact, the domestic coal prices are also set to increase, which will eat away into the profits of power generators dependent on domestic coal supply. We are of opinion that the company will not have any significant competitive advantage over others as far as low cost generation is considered.

As per its half yearly results, RPL has a debt of Rs 10283 cr. According to the Wall Street Journal, the company is in talks with banks in USA and China to raise another Rs 44000 cr funds, of which it has already received about Rs 5500 cr from Chinese lenders. With such a hefty loan, its debt-to-equity ratio will increase to over 3, which will have a negative impact on its profitability.

We believe that while bringing out the IPO in the market, the company didn’t fully consider the problems associated with land acquisition, coal and gas supply in the country. In fact, when the state-owned NTPC, the largest power company, has a capacity expectation of around 36,014 MW in FY12, it was overly optimistic of RPL to expect a huge 24,200 MW capacity. We, at DSIJ, are of the opinion that with its long chain of problems and a very high degree of uncertainty over its core projects, one must stay away from investment in RPL.