RInfra’s power biz sale seen positive but analysts advise discretion

Completion of its Mumbai power business sale to Adani Transmission, and the plan to cut debt sharply from ~220 billion to ~75 billion and become a debt-free company by next year, pushed the Reliance Infra (RInfra) stock higher by over 7 per cent to ~477levels on the BSE in intra-day trade on Thursday. The stock closed 5.54 per cent higher at ~463.10.

The rub-off effect was visible on the other Anil Ambani-controlled firms, with Reliance Power and Reliance Capital rallying over 7 per cent and 4 per cent, respectively, in intra-day trade on Thursday, ending with 3-6 per cent gains. However, Reliance Communications closed little changed and Adani Transmission slipped nearly 1.3 per cent to ~231-levels.

Though analysts see the development as a positive for RInfra, they do recommend ascertaining how profitable the other business segments of the remaining entity are before taking an investment call.

"The development is a positive for sure. From a debt of ~220 billion earlier, RInfra now aims to become debtfree by next year. That said, the rally in stocks on Thursday was a knee-jerk reaction to the development, and I expect the euphoria to settle over the next few sessions. Investors now need to ascertain how profitable the other businesses of RInfra are, and then invest," said G Chokkalingam, founder and managing director of Equinomics Research.

According to reports, RInfra distributes electricity to over 25 million consumers across Mumbai and Delhi, directly or through subsidiaries. It also generates 941 Mw of electricity from its power stations located in Maharashtra, Andhra Pradesh, Kerala, Karnataka and Goa.

The other key business segment for the company is infrastructure, where it has a portfolio of 11 road projects totalling length of 970 km at project outlay of about ~115 billion.

“One needs to assess whether the deal resolves all the balance-sheet problems from a long-term perspective and does RInfra have enough asset base to create value for a long-term investor," says says Gaurang Shah, head investment strategist at Geojit Financial Services.

Adding: "Given the overall debt on the Anil Dhirubhai Ambani (ADAG) companies, investors need to be cautious. The ADAG group companies, of late, have not created any value for the shareholders. If anything, the wealth has been eroded. There are better plays in the infra space in case one needs to take an exposure in the sector."

Except Adani Transmission, which has gained around 5 per cent thus far in calendar year 2018 (CY18), all power sector stocks have underperformed the markets during this period, ACE Equity data show. RInfra has slipped nearly 14 per cent year-to-dae basis. This is as compared to around 12 per cent fall in the S&P BSE Power index and around 14 per cent rise in the S&P BSE Sensex during this period.

Going ahead, analysts expect the power sector to see consolidation where stressed assets/firms are bought by larger, profitable players. In such a scenario, the valuation at which a stressed asset/firm is bought will determine the road ahead for the stocks. Nonetheless, NTPC and JSW Energy are better placed to ride out the storm, if any, said analysts, who also believe that select road construction players could be looked at, given the rising focus on the sector.