Reliance Infrastructure Reports Muted Net Profit Growth

Its income from the electricity business grew by 20 per cent. However, its share in total revenues has decreased from 51 per cent to 20 per cent on a YoY basis. On the other hand, its EPC and contracts business grew by a whopping 177 per cent and its share in the total income has increased from 29 per cent to 48 per cent within a year’s time. 

On the cost front, the company reported a rise of 26 per cent in the expenditure incurred on fuel and electricity. Meanwhile, its cost of material and sub-contracts almost tripled from Rs 843 crore to Rs 2,477 crore on a YOY basis. This high rise in its expenses has overshadowed the declined depreciation cost as well as the mere 2 per cent rise in its employee cost. As a result of this, its EBITDA margins have come down from 18.6 per cent (December quarter FY11) to 15.58 per cent in the quarter under review. 

The interest expense during the quarter doubled to Rs 327 crore while its tax expenses also increased by 3.6x to Rs 207 crore. The topline of Reliance Infrastructure on a stand-alone basis has witnessed an increase of 73 per cent. Due to 20 per cent decline in the cost of electricity purchased, its net profit zoomed up by 2.5x to Rs 415 crore. 

The company is an active player in the infrastructure space. In the power infrastructure segment, the company is developing projects worth Rs 24,300 crore. Its current generation capacity is 941 MW and it has distribution set-ups in Mumbai and Delhi. Besides, it also has business interests in transmission and power trading. 

The company has a total debt of Rs 14,980 crore as per its half yearly results and a debt to equity ratio of 0.6x, which we think is comfortable. With many infrastructure bonds tapping the market recently, there is ample scope for growth of the infrastructure business of the company. Also, with the interest rates expected to come down, its margins may see an upward boost. 

In spite of having a significant order book from Reliance Power, its EPC business has shown good growth in all the three quarters. Its order book in the EPC business by September 2011 was Rs 26,000 crore, providing revenue visibility of about 2.5 to 3 years. The company is also expecting about ten road projects to become operational by FY13 which will start adding to its revenues. Currently its revenues from road projects add Rs 350 crore to the topline. According to the management, this figure will grow to Rs 1,000 crore by FY13. 

On an YTD basis its share price has appreciated by 70 per cent in this year alone. With the revenues expected in FY13 we believe that there is good scope for appreciation of the share price. The share of power generation is decreasing in its overall income which we believe is de-risking the business. Investors may take low exposure to this stock during the dips.