Reliance Infrastructure’s focus on a few businesses will shore up its valuation

Reliance Infrastructure's focus on a few businesses will shore up its valuation

Reliance Infrastructure, which has been trying to build its focus on selected segments, is now in news amid talks about Greenko Group being interested in buying its Mumbai electricity business for an enterprise value of Rs 10000-13000 crore.

Greenko is a home-grown power company owning and operating 2500 MW of power generation capacity.

Earlier Reliance Infrastructure had indicated in its investor presentation that it is exploring opportunities to monetise its Mumbai electricity assets, which comprise 500 MW power plant at Dahanu near Mumbai and power distribution assets. In Mumbai, the company distributes about 1800 MW of power to close to 30 lakh customers.

rinfra presentation

How could it help?

Mumbai assets are lucrative in terms of generating consistent cash with negligible regulatory risks. Mumbai electricity business comes under the standalone business and if one removes the EPC business revenue, it clocks close to Rs 8000 crore revenue. The company’s annual report suggests that the Mumbai distribution business alone makes a revenue of close to Rs 6000 crore.

Interestingly, while the standalone power business makes only 34 percent of the consolidated revenue it makes close to 42 percent of the consolidated profits before interest, depreciation and tax, which indicate that contribution of power business is fairly high.

Reliance Infrastructure is now focusing on emerging and possibly high growth businesses, which will require capital. The company also wants to ease financial leverage. To put it in perspective, while Reliance Infrastructure has debt to equity (debt at around Rs 29,165 crore in FY17) ratio at a comfortable 1.2 times, its interest coverage ratio is under two times. The good news is there is a conscious effort to de-leverage by divesting few assets and further reduce debt with the proposed InvIT.

“We see Reliance Infrastructure to be in a transformation phase for the next 2‐3 years. It has partly divested its power distribution business, exited cements & roads business, and entered the defense sector…all showcase the long‐term vision of the company,” said Yellapu Santosh, who is tracking the company at IndiaNivesh Securities.

Unlocking value

If some of these large deals including InvIT and Mumbai electricity business fructify they could unlock huge value. While the exact amount of the debt to equity structure of these assets is not known at this point in time, debt tied to these assets will go and equity would be released.

These initiatives could also have a positive impact on valuations. Currently, the market does not attribute much value to some of these businesses, which is also reflected in valuations. The company with a market capitalisation of Rs 13,300 crore on a reported net worth of Rs 23,348 crore in FY17, is valued at price to book value of about 0.56 times. However, this could get rerated as some of these businesses are divested at higher valuations. The standalone business or power business would certainly get higher multiples than the multiple given to the consolidated entity.