Stock Review: RELIANCE POWER

While the performance of most power utilities continues to be disappointing, Reliance Power surprised the Street, with strong operational performance for the second consecutive quarter. The company, which currently has 600 MW operational power plant at Rosa, Uttar Pradesh continues to operate at a high capacity utilisation when other power producers are struggling to operate due to fuel unavailability.

At the current market price of . 84, Reliance Power's scrip trades at a valuation of a little higher than its peers. But this premium seems to be justified, given the strategy of the company. Given the present condition of the power industry, it is very cautious in laying the foundation for future. The two biggest concerns for power producers are high fuel cost and state electricity boards' inability to buy power at higher rates. In such a situation, Reliance Power is better positioned than its peers. The company has one of the highest captive coal reserves in the country — 65 million tonne at peak production — most of which has got environment clearances. Most plants are close to the captive mines reducing logistic costs. Also, it has done debt financing at a much lower rate of 6% compared to the industry average of around 10%. All this would enable Reliance Power to produce power at one of the cheapest rates, minimising the offtake risk from financially-weak state electricity boards. The June 2011 quarter result increases confidence in the company's strategy. Its year-onyear net sales increased 15%, operating profit rose 28% and net profit jumped 51%.

Also, the company is in a better position with regards to its Indonesian coal mines. Due to the Indonesian government's tax levy, Indonesian coal-linked projects of companies such as Reliance Power (Krishnapattam project), Tata Power, Adani Power would become less profitable. As the Krishnapattam project is in early stage of construction, the company has stalled all its construction activity for which it will have to pay a penalty of . 300 crore which is less than 2% of the total project cost. If the company doesn't go ahead with this project, it would still be able to sell coal from its Indonesian mines. Timely commissioning of its upcoming projects can rerate the stock. The company plans to add another 2500 MW of capacity, taking the total capacity to 3100 MW by the end of this fiscal and is well on track.