Reliance gets high rating, target price of Rs 880
New Delhi, Sept 3 (UNI) Anil Ambani-owned Reliance Energy has got a high rating from the global equity research firm Lehman Brothers Inc for being conducive to investors wishing to capture growth from the rapid expansion of the Indian power sector and has set a 12-month target price of Rs 880.
Lehman states that the 15 per cent upside potential is because Reliance Energy offers a unique vehicle to capture growth, not only in the Indian power sector (through generation projects and EPC-Engineering, Procurement and Construction contracts) but also from potential forays into other areas of infrastructure, like toll roads and MRTS.
However, the research firm adds that delays in key generation projects and deployment of its large cash balance (cash and inter-corporate deposits constitute nearly 64 per cent of the balance sheet and 70 per cent of its market cap) continue to be an overhang on the stock.
As potential opportunities emerge, Lehman said, like Ultra Mega Power Projects (UMPPs), and as the hurdles to existing projects are removed, the excess cash will be deployed, resulting in an improvement in Return on Equity (ROE).
With Reliance looking to expand its generation capacity 15-fold to 15,000 MW in five years, Lehman believes its core business is likely to achieve strong earnings growth as generation projects have a government guaranteed 14 per cent post-tax ROE.
Reliance aims to secure two Ultra Mega Projects; with the Sasan project (4,000 MW) secured, Lehman its focus would now be on bidding for the Krishnapatnam project (4,000 MW).
Lehman estimates Sasan to add Rs 60 per share, assuming 11-12 per cent ROE.
The cash and inter-corporate deposits (2.7 billion dollar) representing nearly 64 per cent of total assets and 70 per cent of market cap, Lehman believes the stock could see a significant re-rating once it deploys this cash.
Apart from pure generation projects, Reliance Energy's infrastructure projects are favourable in the Lehmans view as projects liks toll roads and MRTS, provide alternate earnings streams.
Risks, Lehman says include the slow pace of reform, regulatory uncertainty (the likelihood of moving from a post-tax ROE regime to one based on competitive bidding) and competition in the engineering, procurement and construction (EPC) space.
UNI