Reliance Power: Uncertainty over fuel, tariff shrouds earnings visibility

Reliance Power's earnings for the quarter to March were a little above market expectations as the company received a one-time tax refund, compensating for the higher interest outgo on higher short-term borrowings due to delayed payments from the Uttar Pradesh state electricity board. 

The company's sales and earnings before tax declined quarter on quarter as it was cautious on selling power to the state electricity board due a rise in arrears. Despite the addition of 1,260 MW in March, the company's revenues dipped by 15% and its profit before tax fell by 41%. 

Lower other income and higher interest expense pulled down profitability. Lower other income (mainly interest income) implies the company deployed cash for capital expenditure of its other projects. 

Its 
investments in financial instruments declined from Rs 1,410 crore to Rs 40 crore in the past year. Higher interest expense was due to higher short-term borrowing for working capital requirements, necessitated by delayed payments by state electricity boards. 

Going forward, given the weak financials of state electricity boards, the company will be selling power to its parent company, 
Reliance Infrastructure, from its recently commissioned 600 MW Butibori plant. As a result, the profitability and the return on investments are likely to get impacted. Over five years after it launched its IPO, the company has commissioned 2,500 MW of capacity. 

Of this, 1,260 MW was added in March. In FY14, the company is looking to add close to 2,700 MW. But, uncertainty over fuel issues and tariff hikes prevails , making earnings visibility from its under-construction projects difficult. The company has sought tariff hikes for power from its 3,960 MW Sassan project, as there has been an escalation in costs. Its other projects — the 3,960 MW Chitrangi and 3,960 MW Tilaya — are likely to become operational in 2015. 

And its 2,400 MW Samalkot project and 3,960 MW Krishnapatnam project might take longer than anticipated since these projects are not viable because fuel has become expensive than anticipated earlier. With lack of visibility on earnings, the stock is likely to underperform the 
Sensex in the next few quarters till fuel and tariff issues are resolved at least for some of its projects. At current market price of Rs 77, the stock trades at a price to book value of 1.2.