RInfra's Mumbai power biz sale a positive; analysts cautiously optimistic

Anil Ambani
Completion of its Mumbai power business sale to Adani Transmission and the plan to cut debt sharply from the earlier Rs 220 billion to Rs 75 billion and become a debt-free company by next year pushed the Reliance Infra (RInfra) stock higher by over 7 per cent to Rs 477 levels on the Bombay Stock Exchange (BSE) in intra-day deals on Thursday in an otherwise weak market. The stock closed 5.54 per cent higher at Rs 463.10.

The rub-off effect was visible on the other Anil Ambani – controlled companies as well, with Reliance Power and Reliance Capital rallying over 7 per cent and 4 per cent, respectively in intra-day deals on Thursday, and ending with 3-6 per cent gains, barring Reliance Communications which closed almost flat. Adani Transmission, on the other hand, slipped nearly 1.3 per cent to Rs 231 levels.

Though analysts see the development as a positive for RInfra, they do suggest investors ascertain 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 Rs 220 billion earlier, RInfra now aims to become debt-free by next year. That said, the stock rally 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 accordingly,” said G Chokkalingam, founder and managing director, 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 Rs 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 some consolidation where stressed assets / companies are bought by larger, profitable players. In such a scenario, the valuation at which a stressed asset / company 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, analysts say, who also believe that select road construction players could be looked at given the rising focus on the sector.