RESEARCH: MACQUARIE
RATING: UNDERPERFORM
CMP: RS138
Macquarie initiates coverage on Reliance Power with an `Underperform’ rating and a target price of Rs 117 per share. Considering that RPWR has spent only about 5% of the potential capex required to roll out its large 33,780-MW growth pipeline and that financial closure has been achieved for only 17% of its projects, there is still a long way to go regarding execution. The risks for the 7,480-MW Dadri Gas Project, RPWR’s largest project, have been increasing. Even after factoring in 50% of the value of the project, Macquarie prefers to have some clarity on this before attributing more value - even if that means missing out on some high-risk upside. The tariff structure of RPWR’s ultra mega power projects allows little or no pass-through of the tariff for either inflation or energy costs. Thus, higher-than-expected inflation or energy costs could eat away at earnings margins. While the company might successfully navigate its way through the risks that lie ahead, Macquarie does not suggest that investors pay for this upside now. Macquarie thinks it has the ability to pass through costs and is in a strong position to fund growth.