Reliance Power: Need to get cheap fuel and funds for better future

Reliance Power's operational performance in the quarter to September did not impress much considering that power generation declined owing to shutdowns of plants and high fuel cost but high other income helped the utility to post a 20% sequential growth in net profit.

Comparing performance quarter on quarter would be more appropriate as the company's first power plant was operational only this year. On a sequential basis, generation declined 13%, indicating a capacity utilisation or plant load factor of 77% compared with 91% in the previous quarter. One reason for this is the escalation in tariff prices because of high fuel cost, reducing demand.

The fuel price increased roughly by 10% on sequential basis, leading to a decline in earnings before interest depreciation and tax or EBIDTA margin of 9,000 basis points at Rs 171 crore. However, profit after tax rose 20% to Rs 235 crore mainly on account of the change in accounting policy and higher interest earned.

This dip in operational performance may not be considered disappointing, given the dismal scenario in the power industry. The industry is struggling due to lack of fuel availability and no buyers for highpriced power. Considering this, Reliance Power is being cautious on both fronts: its strategy is to secure cheap fuel and finance projects at the lowest possible cost and thus create a long-term sustainable business model than just looking at near term earnings.

The company has huge captive mines in India and Indonesia, second only to NTPC. The production at these mines is expected to kickoff in line with its respective power plant commencements. Reliance Power now has only 600 MW operational and plans to add 3462 MW by December 2012.

Reliance Power's stock has gained 26% in the last one month. At Rs 103, it is trading at FY12 price to book value of 1.6. Though there will be nearterm pressure on the stock price, the company's strategies should help once its capacities become operational. They will enable the company to generate power at a very competitive cost and generate high return on equity, more than its peers.