Only RCom gains among ADAG firms

Last Updated: Wed, Mar 19, 2014 05:47 hrs

In the past year, only two of the four listed companies of the Anil Dhirubhai Ambani Group (ADAG) have moved significantly ahead in profits; only one has delivered positive returns on the bourses.

Reliance Communications (RCom) and Reliance Infrastructure (RInfra) have seen profits rise (even after excluding extraordinary items). Only the RCom stock is in positive territory, up 83 per cent in a year.

The latter's stock's gains are led by talk of balance sheet deleveraging through asset sales, benefits from a tie-up with Reliance Jio and some pricing power returning to the telecom sector. However, concerns around the infrastructure sector and the electricity distribution business have curbed gains for RInfra and Reliance Power (RPower). And, volatility in quarterly performance and a weak economic environment are being attributed as reasons for the underperformance in Reliance Capital's stock.

 What about the future? Experts say the near-term performance of these stocks is going to remain on similar lines. However, looking at developments at the company level, there is hope of gains in the long run, as regulatory clarity emerges and economic growth picks up.

"We do not expect any significant upside from RCom. RPower and RInfra will remain muted until after the elections and a policy shift," says Ambareesh Baliga, managing partner at Edelweiss Financial Services.

RCom, the most rewarding, surged after it signed a tower and infrastructure deal with Mukesh Ambani's Reliance Jio. Beside the jump in profits from a low base, the market sentiment also got a boost from the rise in rates in the sector. Given the aggressiveness shown by top telecom entities in the recent spectrum auction, analysts believe they'll be forced to raise rates further, to offset cost pressures, in continuation of a trend seen since mid-2013. However, the long term is difficult to predict, they add.

"Because of Reliance Jio's entry, the sector as well as RCom will see challenging times, with increased competition. RCom already is saddled with debt. Valuations-wise, too, RCom is trading at similar EV (enterprise value) to sales levels as Bharti Airtel. Hence, it makes sense to go for the better of the two, namely, Bharti Airtel," says Lalit Thakkar, managing director, institutional broking, Angel Broking. "I do not see a significant growth, neither in the top line nor the bottom line, at least for the next few quarters. They are reducing the free minutes they offer and might see a moderate growth in revenue," said Ankita Somani, telecom analyst at Angel Broking.

Bloomberg consensus estimates indicate RCom's earnings per share will rise 64 per cent to Rs 5.34 in FY14 and by 12 per cent to Rs 5.99 in FY15. The increase comes after five years of declining earnings. The consensus one-year target price is Rs 108, versus the current price of Rs 117. A big boost for the debt-ridden company (about Rs 40,000 crore of burden) would come if it is able to cut this to reasonable levels.

RPower & RInfra
Like its peers, both the infrastructure companies have been battling macro trends recent years. The flagship ultra mega power project (UMPP) of RPower Power, at Sasan in Madhya Pradesh, is currently seeking a rate increase for supply, with a response awaited for over a year from the Central Electricity Regulatory Commission. It also stalled work at its second UMPP, at Krishnapatnam in Andhra, after imported coal became costlier.

"The company's expansion projects of Tilaiya (3,960 Mw, at Jharkhand) and Chitrangi (3,960 Mw, in Madhya Pradesh)) are stuck at various regulatory and procedural hurdles. Access to captive coal and long-term power purchase agreements make us positive but a large part of the value resides in the long- gestation Chitrangi project. Near to medium-term upside hinges on progress of this project, which is tepid as of now," said Abhinav Sharma, research analyst at HDFC Securities, in his report.

Slow-moving projects are also hurting RInfra, which banks on construction orders from these projects. For the third quarter of this financial year, its engineering projects and construction and contracts revenues were down 52 per cent to Rs 875 crore (profits down 30 per cent). This pulled down the overall performance of RInfra, which saw good gains in the electricity business, a trend analysts expect to sustain.

RInfra has received a go-ahead from the power regulator to collect around Rs 2,800 crore in arrears for the Mumbai power distribution business. Along with interest costs, analysts are expecting Rs 925 crore of arrear recovery (cash inflow) annually for the next six years. The company has also been adding customers in the Mumbai and Delhi distribution business. "There is gradual improvement in overall performance and it is getting better," says Dilip Bhat, joint managing director at Prabhudas Lilladher, the financial advisory agency. For RPower, too, there has been some improvement but regulatory issues might continue to cap the upside, he says.

By Bloomberg consensus, the target price of RInfra is Rs 519, an upside of 27 per cent. For RPower, it is Rs 73, an upside of 12 per cent.

There are a few things to keep an eye on, though. RInfra's Mumbai metro project is expected to start soon. The Maharashtra government is looking into RInfra's request to increase rates, as the cost of the project has escalated. It also surrendered the Delhi metro rail project line back to the city government and is yet to receive compensation. "Reliance Infra is confident of recovering its entire investment of Rs 1,300 crore in Delhi Metro. The lenders of Delhi Metro have no recourse to the balance sheet of RInfra," said a research report by IDFC Securities. Any positive outcome on these fronts should boost sentiment.

Reliance Capital
This has been a consistent performer on a standalone basis (commercial finance business) but consolidated performance has been a bit volatile. However, analysts expect its performance to become more stable, with healthy growth in revenues and profits.

The December quarter saw the company reporting 64 per cent year-on-year rise in net profit to Rs 166 crore, on a 10 per cent growth in total income. While the commercial finance and asset management (AMC) businesses (90 per cent of pre-tax profits) did well, the performance could have been better but for the losses, albeit marginal (total Rs 7.2 crore), in the broking and distribution businesses. Life and general insurance businesses also saw a 32 per cent year-on-year decline each in profits.

ICICI Direct's analysts expect the AMC business to grow at around 14 per cent annually for the next two years. Commercial finance, which has entered new regions and reported an increase in asset yields, should also do well, with the loan book growing 15 per cent.

"Volatility in profit has subsided and subsidiaries' profits add up, clearing concerns over the mismatch on account of mark-to-market (asset revaluation) and other accounting not transparently visible in the past. We expect to see gradual growth in profits," said a research report by ICICI Direct. The Bloomberg consensus stock target price is Rs 443 (upside of 34 per cent).

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