Recommendation from Power Generation/Distribution Sector

This section gives a recommendation of a stock having stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

RELIANCE POWER LIMITED : ENERGISED TO PERFORM

HERE IS WHY
✓ Government’s focus on energy sector to yield rich dividends
✓ Strong portfolio of thermal and renewable energy assets

I ndia’s power sector is experiencing significant growth, driven by increasing electrification and rising energy demand. The country’s installed power capacity has reached 442.85 GW as of April 30, 2024, and annual power consumption surged by 9.5 per cent in FY23. The country aims to increase its renewable energy capacity to over 500 GW by 2031-32. Additionally, the government aims to replace coal-based power generation with renewable energy in 81 thermal units by 2026. These factors present significant opportunities for investment and growth in India’s power sector.

Owing to this, our low-price scrip recommendation for this issue is Reliance Power Limited. Incorporated in 1995, the company is part of the Reliance Anil Dhirubhai Ambani Group and focuses on developing, constructing and operating power projects domestically and internationally. The company is currently developing 13 medium and large-sized power projects with a combined planned installed capacity of 28,200 MW, one of the largest portfolios of power generation assets under development in India. The company’s strong portfolio of thermal and renewable energy assets, including the Sasan Ultra Mega Power Project and Rosa Power Project, provides a solid foundation for growth. Additionally, the company’s commitment to ESG principles and its ongoing development of hydroelectric power projects further strengthens its position. The company is developing various hydroelectric power projects of a capacity of 3,438 MW, located in Arunachal Pradesh, Himachal Pradesh and Uttarakhand.

Also, the recent signing of an MOU with the Government of Bangladesh for a 3,000 MW gas-based project highlights the company’s expansion plans. Furthermore,the improvement in its cash conversion cycle from 130 days to 76 days indicates enhanced operational efficiency. The adoption of advanced technologies and digital solutions can enhance operational efficiency, reduce costs and improve overall performance. Reliance Power’s focus on operational excellence, financial discipline and strategic investments will drive future growth.

In Q1FY25, on a consolidated basis, the company’s revenue increased by 4.07 per cent YoY to ₹1,992.23 crore compared to ₹1,914.33 crore from the previous year’s same quarter. On a sequential basis, its revenue decreased by 0.22 per cent. The PBIDT excluding other income increased by 5.74 per cent to ₹650.65 crore YoY as compared to ₹615.31 crore from the previous year’s same quarter, while sequentially increasing by 250.17 per cent. The loss of the company narrowed to ₹(-) 98.28 crore compared to ₹(-) 293.74 crore, a YoY improvement of 66.54 per cent, while sequentially improving by 76.33 per cent from ₹(-) 415.28 crore.

At TTM, the share of Reliance Power is trading at a PBV of 1.49 times, which is higher than its three-year median PE of 0.5 times and lower than the industry PBV of 2.30 times. The company has debt-to-equity ratio of 1.62 times and has a Piotroski score of 4. While the company’s current valuation and financial metrics are mixed, it’s important to consider its future outlook. Reliance Power’s growth prospects are tied to the broader Indian power sector, which is undergoing significant transformation. The government’s focus on renewable energy and infrastructure development presents opportunities. Considering all these factors, we recommend BUY.