Stock Review: RELIANCE POWER

The Street cheered Reliance Power's better-than-expected result on Friday. After coming out with the initial public offer in FY08, the company has posted its first operating revenue from power generating assets in FY11. Its earnings rose by 11% to . 760.4 crore as the company's first 600 MW power plant at Rosa became operational. However, the earning per share was marginally higher due to higher depreciation and interest expenses.

Its 600 MW phase 1 project at Rosa operated at average plant load factor of 90%. Its phase 2 project of 600 MW will become operational in the current fiscal. In the next 18 months, the company plans to increase its power generation capacity by over eight times to 5,000 MW. One more advantage that the company enjoys is that it has large reserve pithead captive mines. Mines close to the power project sites are called pithead mines. This will ensure continuous access to cheap fuel. The management expects production from these coal mines to start in FY13. This increases the competitiveness of the company, especially at a time when the other players are grappling to manage the fuel supply.

For FY11, the company's net sales were at . 1,054.8 crore. Its operating margins improved because of lower employee and fuel cost. Operating margins will continue to improve on capacity additions. The company's other income, which mainly includes the interest earned on cash, showed a muted growth of 1.8%. The other income, which is the biggest earning component in its financial statement, will reduce gradually as more and more cash will be deployed for capital expenditure. Despite such a sustainable business model with around 4,400 MW capacity to be added in another 18 months and large reserve captive coal mines, the company is trading at a lower valuation to its peers. It is trading at a one-year forward price to book value of 1.6 against 2.9x of Adani Power and 1.9x of Tata Power. This is because the company will be able to benefit fully only by FY13.