2009-08-24 (daiwa sec) reliance infrastructure [1]...nts the growth...

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT. Global Equity Research

Company Report

24 August 2009 (No. of pages: 34)

Reliance Infrastructure (RELI IN) Utilities: India

6-mth rating: 3Target price: Rs1,029.00 (-9.6%)

Share price: Rs1,137.75 (24 Aug)

Jaideep Goswami(91) 22 6622 1010

[email protected]

Jonas Bhutta(91) 22 6622 1008

[email protected]

Saurabh Mehta(91) 22 6622 1009

[email protected]

Initiation of coverage: valuation discounts the growth potential

Transition phase; initiate coverage with a 3 (Hold) rating We initiate coverage of Reliance Infrastructure (RELI) with a 3(Hold) rating. The company is evolving from a power utility to a full-fledged infrastructure conglomerate. Its power-transmission and infrastructure asset-ownership businesses have long-term potential, although they are at the investment phase currently.

Reliance Power (RPWR) is the key valuation driver RELI’s 45% stake in RPWR (RPWR IN, Rs158.70, Not rated) contributes 42% of our sum-of-the-parts (SOTP) valuation. Thus, RPWR’s fair value should be the main driver of RELI’s stock performance. RPWR has a pipeline of 33.74GW of power-generation projects. Timely execution of these could be a challenge, and they are unlikely to contribute meaningfully to earnings before FY12, in our view.

SOTP-based target price of Rs1,029 We assume that RELI will meet its project-completion schedule. We forecast an engineering, procurement and construction (EPC) business revenue CAGR of 40% for FY10-12, with an EBITDA margin of 8%. We see the upside trigger for the stock as winningnew BOT projects, and the downside risks as execution delays and an unfavourable outcome in the pending court case.

Reuters code RLIN.BO

Market data SENSEX Index 15,628.75 Market cap (US$bn) 5.27 EV (US$bn; 10E) 6.3 3-mth avg daily T/O (US$m) 104.88 Shares outstanding (m) 225 Free float (%) 62.3 Major shareholder AAA Project Ventures (37.1%) Exchange rate Rs/US$ 48.615 Performance (%)* 1M 3M 6M Absolute (2.7) 1.5 132.5 Relative (4.2) (9.8) 31.3 Source: Daiwa Note: *Relative to SENSEX Index

Investment indicators 2010E 2011E 2012E PER (x) 19.3 18.0 16.3 PCFR (x) 7.0 25.0 9.4 EV/EBITDA (x) 25.7 22.4 19.4 PBR (x) 1.8 1.7 1.5 Dividend yield (%) 0.7 0.8 0.9 ROE (%) 10.2 9.7 9.9 ROA (%) 5.1 5.1 5.3 Net debt equity (%) 35.6 44.7 35.7 Source: Daiwa forecasts

Price and relative performance

Source: Bloomberg, Daiwa

Income summary Revenue EBITDA Net profit EPS CFPS DPS Year to 31 Mar (Rs m) (%) (Rs m) (%) (Rs m) (%) (Rs) (%) (Rs) (Rs) 2008 63,642 11.5 5,463 9.8 10,846 35.3 46.034 23.7 10.483 6.269 2009 96,965 52.4 5,065 (7.3) 11,389 5.0 50.378 9.4 39.485 6.975 2010E 97,791 0.9 11,913 135.2 13,247 16.3 58.803 16.7 162.652 8.232 2011E 117,851 20.5 13,680 14.8 14,216 7.3 63.108 7.3 45.565 8.835 2012E 143,947 22.1 15,820 15.6 15,730 10.6 69.826 10.6 120.847 9.776 Source: Company, Daiwa forecasts Note: The investment indicators and income summary on the front page of this report, as well as the back-page financial summary, are all based on the forex assumptions set out in the table at

the back of this report, unless stated otherwise.

Jaideep Goswami (91) 22 6622 1010 Reliance Infrastructure 2

Contents

Investment summary.........................................................................................................3

Transitioning from pure utility to an infrastructure conglomerate ...................................5

Reliance Power is the key valuation driver.......................................................................6

Valuation...........................................................................................................................8

What would drive the stock up or down? .........................................................................9

Generation assets and the Mumbai licence area .............................................................10

Delhi distribution area.....................................................................................................12

Transmission projects .....................................................................................................13

EPC division revenue CAGR of 40% for FY10-12E .....................................................14

Roads...............................................................................................................................16

Metro-rail projects – early-mover advantage..................................................................18

Reliance Power – 33.74GW of projects in the pipeline..................................................21

Implementation holds the key.........................................................................................22

Valuations .......................................................................................................................24

Appendix I – update on Reliance Power projects ...........................................................26


Investment summary

We initiate coverage of RELI with a 3 rating as:

1) We believe the macro outlook is positive for the power and infrastructure sectors in terms of emerging opportunities, the government’s renewed focus on infrastructure, and the improvement in the availability of credit. We believe RELI is well-positioned to benefit from these factors, given what we see as its strong balance sheet and management experience.

2) The company’s core generation and distribution business is regulated, so

we believe its profit may not increase significantly in the near future.

3) We forecast EPC revenue to increase at a CAGR of 40% for FY10-12, with an EBITDA margin of 8% over the period. However, we do not expect the EPC business to contribute significantly to our SOTP valuation.

4) Most of the projects of RPWR, which accounts for 42% of our SOTP

valuation for RELI, are at an early stage of execution. We think these projects are unlikely to contribute meaningfully to earnings before FY12.

5) We think the asset-ownership businesses – power-transmission and

infrastructure projects, such as roads, airports, and metro systems – have huge long-term potential. However, most of these businesses are at the investment phase currently. Hence, we do not expect them to boost earnings or return ratios in the near term.

6) The main earnings driver in the past has been treasury income, which we

expect to decline due to the increase in investments in assets.

7) The improving visibility with regards to financial closure and the execution of infrastructure and RPWR projects should be positive triggers for the stock, in our opinion.

8) We see the most important near-term catalyst as a favourable verdict in the

KG Basin gas case.

Valuation We have a SOTP-based six-month target price of Rs1,029 for RELI. We value the power business (including RPWR) and the infrastructure business on a DCF-to-equity basis, the EPC business on an EV/EBITDA basis, and net cash and equivalent at book value.

• We value the power-generation assets, the Mumbai licence area and the Delhi distribution area on a DCF basis, with a value of Rs234/share, assuming a cost of equity (CoE) of 13% and a terminal growth rate of 2%.

• We value the EPC division using a target EV/EBITDA multiple of 9x on our FY11 forecasts, giving a value of Rs159/share.

• We value the infrastructure asset-ownership projects, including five road projects and metro-system projects, at Rs83/share on an NPV basis at a CoE of 15%.

• We value RELI’s stake in RPWR at Rs425/share on a free-cash-flow to equity basis, using a CoE of 15% and applying a holding-company discount of 20%.

• We value the net cash and equivalent at book value, at Rs122/share.


Upside triggers and downside risks In our view, key upside triggers for the stock could come in the form of earlier-than-expected implementation of projects, and the government speeding up the implementation of infrastructure and power projects (faster-than-expected policy reforms). A favourable outcome in the ongoing KG Basin gas dispute would also be a very important upside catalyst for the share price, in our view. We see the key downside risks as project delays, and the possibility of not receiving KG Basin gas. Almost 30% of the company’s total planned power capacity is dependent on the availability of KG Basin gas. Any delays with the implementation of RPWR projects or negative news flow in terms of equipment supply or delays in receiving clearances would have a very negative impact on the stock, in our opinion. As far as the regulated business is concerned, any deferment of the revenue gap or fuel-adjustment charge (FAC) would be negative, in our view. In general, land acquisition is a big hurdle for infrastructure projects, and can delay the implementation of road or power projects.


Transitioning from pure utility to an infrastructure conglomerate

RELI is in a transition phase currently. It is evolving from a power utility to a full-fledged infrastructure conglomerate. RELI has power-distribution licences in the two metros of Mumbai and Delhi, generating capacity of 941MW, and a strong EPC business order backlog of Rs206bn concentrated in orders from RPWR and BOT assets (Rs206bn) across the road, metro-rail, real-estate and power-transmission segments. Restructured businesses

RELI restructured all of its businesses recently under separate subsidiaries. We believe this will enable each business to focus on rapid growth, and we expect major value to be unlocked from these subsidiaries in the future by listing the stocks. Bidding aggressively for projects

RELI is bidding for projects across various businesses. In distribution, it is bidding for franchisee licences for cities in Bihar, Madhya Pradesh, Uttar Pradesh and Maharashtra. It is also bidding actively for transmission and infrastructure projects, such as roads, airports, and metros. Funding these projects would not be an issue for RELI, in our opinion. RELI plans to raise Rs42.9bn through an equity issuance priced at Rs1,000/share by allotting 42.9m warrants to the promoters. As per Securities and Exchange Board of India (SEBI) guidelines, RELI will receive 25% of the amount (Rs10.72bn) on allotment, while the balance will be received upon conversion of the warrants. We believe this plan to issue equity should be viewed positively, as it would allow the company to bid for additional infrastructure and power projects, and enhance its borrowing capability.

Incremental equity capex (Rs m) RELI needs to put in equity capex of Rs19.24bn in FY10 and Rs13.69bn in FY11 for the existing projects

FY09 FY10E FY11E FY12EPower Western Region Strengthening Scheme - 1,000 3,200 -Parbati-Koldam Transmission Project 52 563 788 848Mumbai Strengthening Scheme 1,000 5,100 5,400 3,800

Infrastructure projects DS Toll 52 - - -NK Toll 45 - - -TK Toll 57 1,331 - -TD Toll 45 992 - -SU Toll 84 1,931 - -Mumbai Metro One 1,725 1,820 1,575 -Airport Metro Express Link , Delhi - 6,491 2,164 -Gurgaon Faridabad Road Project - 16 562 842Total investments 3,060 19,244 13,688 5,490

Source: Company, Daiwa forecasts Infrastructure projects ... no significant contribution

Infrastructure projects do not contribute currently to RELI’s revenue or profit. However, RELI has been making steady progress with the urban infrastructure projects that it has undertaken. The five road projects (401km in Tamil Nadu [TN]) have achieved financial closure, and management guides for two of these projects to be commissioned by 3Q FY10. Mumbai Metro One (MMO) and Airport Metro Express Link (AMEL) have achieved financial closure, and are scheduled to be commissioned by 3Q FY11. However, the execution risk remains, and we have yet to see of any of these projects being completed or cash flow start to flow in, so until that happens we would not be confident about the value-accretion capabilities of the projects. Potential value creation

We believe RELI’s asset-ownership business has huge long-term potential. Most of these businesses, however, are at the investment phase currently. Hence, these businesses would not boost earnings or return ratios in the near term. Significant upside from such investments is only likely to become apparent from FY12 onwards, in our opinion.

Unlocking major value in subsidiaries

We believe funding would not be an issue for RELI

Issuing warrants to the promoters


Reliance Power is the key valuation driver

RELI has a 45% stake in RPWR, which accounts for 42% of our SOTP valuation for RELI. Thus, RPWR’s DCF-based fair value would be the main driver of RELI’s valuations. We prefer to use a DCF valuation for RPWR, rather than the market price, as the true determinant of its fair value. Currently, RPWR’s business is at the execution phase, and a DCF would reflect its true long-term value, in our opinion. RPWR has ambitious plans to set up 33.74GW of greenfield power-generation projects. These include 18.84GW of coal-based projects, 10.28GW of gas-based projects, and 4.62GW of hydro-electric power projects. The projects are well diversified in terms of the type of fuel they use, as well as their geographical spread, in our view.

Capacity-addition schedule Significant capacity would only start to be added from FY12 onward

9,920

6,5803,880

32,520

300 300

6,140

2,900

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

(MW)

Source: Company, Daiwa forecasts Resolution of gas-supply dispute

30% of RPWR’s planned capacity is based on obtaining a supply of gas from the KG D6 field owned by Reliance Industries (RIL) (RIL IN, Rs1,974.3, 3). This matter is before the courts at the moment. Policy proposals by the India Government regarding the supply of gas and an unfavorable outcome in the court case add to the implementation risk for the 10.28GW power plant, in our opinion. Implementation holds the key

Timely execution of these projects would be the biggest challenge, in our view, while delays with obtaining clearances – either environmental or forestry – could cause problems. In any event, we believe these proposed projects are unlikely to contribute meaningfully to RELI’s earnings before FY12. However, recent initiatives by the government could aid project implementation

The India Government’s renewed focus on accelerating the land-acquisition process, allowing faster clearance from the environmental and forestry departments, and encouraging private participation in coal extraction augurs well for future infrastructure projects, in our opinion. Also, the easier availability of credit through agencies, such as India Infrastructure Finance Company Limited (IIFCL) and Power Finance Company (PFC), should facilitate the financial closure of mega projects. All of these government initiatives should really help with the implementation of these projects, in our opinion, and be a significant positive for RPWR.


We need to monitor the progress of these projects closely. RPWR plans to commission its first plant (Rosa I) by the end of FY10. Timely completion of this project would instil a lot of confidence in management’s ability to execute projects on time. Also doubts about the functioning of China-made equipment in an Indian environment could be laid to rest with the smooth operation of Rosa 1. RPWR plans to use main plant packages (boiler, turbine and generator) from equipment suppliers in China for most of its capacity.


Valuation

We have a SOTP-based six-month target price of Rs1,029 for RELI. We value the power business (including RPWR) and the infrastructure business on a DCF-to-equity basis (to reflect what we see as the true long-term value of these long-gestation-period projects), the EPC business on an EV/EBITDA basis, and net cash and equivalent at book value.

• We value the power-generation assets, the Mumbai licence area and Delhi distribution area on a DCF basis, arriving at a value of Rs234/share, assuming a CoE of 13% (based on the low-risk nature of the business) and a terminal growth rate of 2% (in line with the low-growth profile of the utility business).

• We value the EPC division using a target EV/EBITDA multiple of 9x on our FY11 forecasts, giving a value of Rs159/share. This multiple represents a 20% discount to Larsen & Toubro’s (LT) (LT IN, Rs1,482, 3) E&C division’s multiple of 11.2x on our FY11 forecasts. Our target multiple takes into account the company’s lack of an execution history for large projects.

• The five road projects are valued at Rs46/share on an NPV basis at a CoE of 15%.

• The metro-rail projects are valued at Rs37/share on an NPV basis at a CoE 15%.

• We value RELI’s stake in RPWR at Rs425/share on a free-cash-flow to equity basis using a CoE of 15%, and applying a holding-company discount of 20%.

• We value the net cash and equivalent at book value, at Rs122/share.

SOTP methodology

Business Equity value

(Rs bn)Stake

(%)Value/share

(Rs) Remarks Generation and Mumbai licence area 42.6 100 189 DCF at CoE of 13% and TV of 2% Delhi distribution area 20.6 49 45 DCF at CoE of 13% and TV of 2% WRSS 1.3 100 6 NPV at CoE of 15% EPC 35.9 100 159 EV/EBITDA of 9x, discount of 20% to LT Roads 10.4 100 46 NPV at CoE of 15% Mumbai Metro 5.8 69 18 NPV at CoE of 15% Delhi Metro 4.5 95 19 NPV at CoE of 15%

RPWR 266.1 45 425DCF at CoE of 15%, TV of 2.5%, and holding-company discount of 20%

Net cash and equivalent 27.6 - 122 Book value Total 1,029 Source: Company, Daiwa forecasts

RELI: PER bands RELI: PBR bands

0

500

1,000

1,500

2,000

2,500

Apr-0

1

Dec-0

1

Aug-

02

May-0

3

Jan-

04

Sep-

04

Jun-

05

Feb-

06

Oct-0

6

Jul-0

7

Mar-0

8

Nov-0

8

Aug-

09

(Rs)

8x

16x

24x

32x

0

500

1,000

1,500

2,000

2,500

Apr-0

1

Dec-0

1

Aug-

02

May-0

3

Jan-

04

Sep-

04

Jun-

05

Feb-

06

Oct-0

6

Jul-0

7

Mar-0

8

Nov-0

8

Aug-

09

(Rs)

0.7x

1.4x

2.1x

2.8x

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts


What would drive the stock up or down?

• Resolution of the gas dispute in favour of Reliance Natural Resources (RNRL), a group company, would be a very positive share-price catalyst for RELI, in our view. Almost 30% of RPWR’s power capacity is dependent on the availability of gas from the KG Basin. The Mumbai High Court order handed down earlier was favourable to RNRL, as it stipulated a gas price of US$2.34/mmbtu. Now, the matter is pending in the Supreme Court. The government has filed for leave to petition the Supreme Court, and the hearing has been set for 1 September 2009. The price of gas could be set at either US$2.34/mmbtu or US$4.2/mmbtu, depending on the ruling. Our base-case assumption for the price of gas is US$4.2/mmbtu. Should the gas be supplied at US$2.34/mmbtu, it would have a significant positive impact on RELI (see following table), in our view.

Sensitivity to realised gas price

Gas price (US$/mmbtu) Per RPWR share value (Rs) Value to RELI of 45% stake (Rs)3.7 214 8004.3 178 6674.9 142 5325.4 111 4165.9 82 307Source: Company, Daiwa forecasts

• RELI is bidding for distribution franchisee licences for various cities in Bihar, Madhya Pradesh, Uttar Pradesh and Maharashtra. RELI is also actively bidding for transmission and infrastructure projects in the road, airport, and metro sectors. While we believe winning these projects would provide a short-term boost for sentiment toward RELI’s share price, the real value would not materialise until there is clarity on the value-accretion potential from such projects. We need to see that RELI is not compromising on returns when bidding aggressively for these projects. In the same way, achieving financial closure for these projects would be positive for the stock, in our opinion.

• RPWR projects account for 69% of RELI’s EPC order book. Hence, timely execution of such projects would boost RELI’s EPC revenue and enhance the value of RPWR.

• RELI has created a subsidiary special-purpose-vehicle structure for each business segment. We believe there is a strong possibility that the value of these could be unlocked through initial public offers and listing of some of these subsidiaries in the future.

• Any adverse development in the RIL-RNRL court case would put 10.28GW of gas-based planned capacity additions at risk. This equates to 30.46% of RPWR’s total planned power-generation capacity.

• RELI has receivables worth Rs10.34bn (Rs46/share) and made up of the revenue gap and FAC from the Mumbai licence area. In our view, further deferment of collections may put a strain on RELI’s cash flow.

• Delays with the implementation of projects by RPWR, or any negative news flow relating to equipment supply or delays in receiving clearances would have a very negative impact on the stock, in our view.


Generation assets and the Mumbai licence area

RELI distributes electricity to 2.7m consumers in suburban Mumbai, with demand peaking at 1,579MVA in FY09. Reliance Energy sources its energy requirements from its own generating station in Dahanu, Tata Power (TPWR IN, Rs1,321.1, Not rated), and other ‘bilateral’ contracts. The Dahanu Station has a capacity of 500MW, and has only been able to meet 40% of demand in the licence area. Tata Power has been meeting the remaining demand in the licence area. RELI has been unable to sign a long-term power-purchase agreement with TPWR, as TPWR has informed RELI of its inability to provide power from FY11 onwards. RELI has been sourcing power in the spot market at a much higher cost. Sourcing of power RELI has issued a tender for medium-term power procurement with a tenure of three-to-five years, which, if it goes ahead, would be the industry’s first medium-term power-procurement agreement. First, the issuance of the tender is in accordance with prevailing regulatory norms, which mandate procuring power for more than a year, and only through a bidding process. Second, the cost of power purchased through the power-purchase agreement would be lower than the Rs7-8 RELI spends when purchasing through bilateral contracts.

Sources of power procurement for distribution in the Mumbai licence area Sourcing of power from bilateral contracts has risen significantly to 30%, as has the overall tariff for retail customers

0

20

40

60

80

100

120

FY 07 FY08 FY09 FY10E0

1

2

3

4

5

6

7

8

Dahanu Tata Power Spot/UI Dahanu Tata Power Spot/UI

(%) (Rs)

Source: Company, Daiwa forecasts Tariff hike capped at 10%

The distribution, transmission and generation of power are all regulated businesses in the Mumbai licence area, with all fixed and variable costs passed on to the consumer. However, in any given year, the increase in tariff for the consumer cannot be more than 10%. The remaining amount is carried forward to the next year, with an interest rate of 10% applied to the amount deferred. … resulting in regulatory assets

RELI has Rs10.34bn of regulatory assets in the power business resulting from the revenue gap and FAC. The revenue gap – the gap between the actual cost and what has been approved by the regulator in the form of tariffs – is Rs3.56bn. The FAC of Rs6.78bn was due to an increase in the cost of fuel, which was not recovered in FY09, but would be recoverable through future tariff determination. These regulatory assets are a cause for concern, in our opinion.

Regulatory assets of Rs10.34bn are cause for concern


Open access

Open access gives a distribution licencee the right to supply power and the consumer the right to receive power from an available distribution player. In the Mumbai licence area, RELI faces competition from Tata Power with regards to distributing power. TPWR can use RELI’s existing transmission network by paying a ‘wheeling’ charge determined by the regulator. TPWR also plans to set up a parallel network, and extend its network to areas where there are none currently. TPWR proposes to incur Rs10bn of capex over next 12 months, which would require prior approval of the regulator. We believe that the above would have no impact on RELI in the near term. However, over the medium term, if RELI is not able to reduce the tariff, it would face the risk of consumers in the licence area shifting to TPWR. Generation assets RELI has a total generation capacity of 941MW – Dahanu (500MW), Samalkot 220 (MW), Goa (48MW), Kerala (165MW) and wind-farm projects in Karnataka (7.6MW). All of these generation plants have signed long-term power-purchase agreements. All these generation assets come under the purview of the regulatory agencies, with returns on base equity regulated, and all fixed and variable costs passed on to consumers. They generate steady cash flow, and none of these plants have any capex plans for the next two-to-three years. Hence, we do not expect any increase in the regulated equity or eventual increase in returns. Stable operating cash flow valued at Rs42.57bn RELI earns a regulated return of 16% from the distribution business, and a 14% return from the generation and transmission businesses, in addition to incentives for operational efficiency. Based on this, we forecast total profits, ie, regulated earnings and incentives, of Rs4.39bn for FY10, Rs4.73bn for FY11 and Rs5.04bn for FY12. We use a free-cash-flow to equity method to value the regulated utility business in Mumbai. We assume a CoE of 13%, given the low-risk nature of the business and a terminal growth rate of 2%, in line with the low-growth profile of the utility business.

DCF of generation business and Mumbai licence area (Rs m) FY10E FY11E FY12E FY13E FY14EPAT 4,389 4,729 5,038 5,298 5,447 Depreciation 2,870 3,133 3,339 3,532 3,578Capex (7,210) (7,510) (5,910) (5,510) (1,320) FCF 48 351 2,467 3,320 7,706Discount rate (%) 88 78 69 61 54PV of cash flow 43 275 1,710 2,036 4,182 Forecast horizon 8,246 PV of terminal value 34,320 Equity value 42,566 Shares outstanding (m) 225 Equity value per share (Rs) 189 Source: Daiwa forecasts

Steady cash flow from 941MW with long- term contracts, but no upside potential, in our view


Delhi distribution area

RELI distributes power in New Delhi to 2.5m consumers through BSES Rajdhani Power Limited (BRPL) in South and West Delhi, and through BSES Yamuna Power Limited (BYPL) in East and Central Delhi. Increased stake from 26% to 49% RELI increased its stakes in both BRPL and BYPL from 26% to 49% by investing Rs1.34bn in FY09. Aggregate transmission and commercial (AT&C) loss reduction – likely to drive earnings growth

RELI has reduced the AT&C loss dramatically over the past seven years – for BRPL, from 47.4% in FY03 to 20.6% in FY09, and for BYPL, from 61.9% in FY03 to 22% in FY09. We expect the decline in AT&C losses to drive earnings growth in the future, by means of incentives for achieving target AT&C-loss reductions in the multi-year tariff (MYT) given by the Delhi Electricity Regulatory Commission (DERC).

Target AT&C losses (%) According to the MYT, these targets are given to earn incentives over the regulated return

FY09E FY10E FY11EBRPL 23.5 20.2 17.0BYPL 30.0 26.2 22.0

Source: Company, DERC, Daiwa Valued at Rs20.60bn RELI earns a regulated return of 16% from the distribution business, as well as incentives for reducing AT&C losses. We use a free-cash-flow to equity method to value the business, with assumptions of a CoE of 13%, and a terminal growth rate of 2% to factor in our expectation of low and stable long-term growth.

DCF of Delhi distribution area (Rs m) FY10E FY11E FY12E FY13E FY14EPAT 2,040 2,160 2,280 2,400 2,520 Depreciation 2,085 2,185 2,285 2,385 2,485 Capex (2,500) (2,500) (2,500) (2,500) (2,500) FCF 1,625 1,845 2,065 2,285 2,505 Discount rate (%) 100 88 78 69 61 PV of cash flow 1,625 1,633 1,617 1,583 1,536 Forecast horizon 7,994 PV of terminal value 12,606 Equity value 20,600 Shares outstanding (m) 225 Equity value per share (Rs) 91 RELI's stake (%) 49 RELI's value per share (Rs) 45 Source: Company, Daiwa forecasts


Transmission projects

Western Region Strengthening Scheme (WRSS) RELI was awarded the WRSS project by Power Grid Corporation of India (PGCIL) on a build-own-operate (BOO) basis. We estimate the total project cost to be Rs14bn. RELI achieved financial closure in May 2009, at a gearing of 4x. The project involves the construction of two sets of transmission lines – one of 2,317 circuit kilometres (ckm) and the other of 967ckm. Approval to acquire rights of way has been obtained, along with all the regulatory clearances necessary to commence the projects. Design, engineering and testing activities for 90% of the towers have been completed. The project has a concession period of 25 years, and is likely to be commissioned by 3Q FY11. Parbati-Koldam Transmission Project (PKTP) RELI is implementing the transmission line network for the Parbati and Koldam hydro-electric power projects in Himachal Pradesh (HP). RELI has a 74% stake, with the remaining 26% held by PGCIL. The total project cost is estimated to be Rs10.75bn. Power Finance Corporation (PFC) (POWF IN, Rs220.8, 1) has sanctioned a major portion of the debt. Financial closure is expected by 2Q FY10, at a gearing of 2.33x. The project is expected to be commissioned by 4Q FY13 Mumbai Strengthening Scheme (MSS) RELI is currently strengthening the Mumbai transmission system to improve its reliability and match the load requirements of the transmission system. The total project cost is estimated to be Rs18bn. The project is funded at a gearing of 2.33x, and scheduled to be completed by 4Q FY12.

Transmission project details Project name Stake (%) Project cost (Rs bn) Debt:equity Construction end Western Region Strengthening Scheme 100 14 80 : 20 3Q FY11 Transmission lines Parbati & Koldam in HP 74 11 70 : 30 4Q FY13 Mumbai Strengthening 100 18 70 : 30 4Q FY12 Source: Company, Daiwa research

WRSS valued at Rs1.25bn

We value the transmission projects on an NPV basis, with a CoE assumption of 15%. Based on our assumptions, we value the WRSS project at Rs1.25bn. We have not assigned any value to PKTP, given the risk of delays with the construction of generation projects and financial closure of the transmission projects.


EPC division revenue CAGR of 40% for FY10-12E

The EPC division’s order book totalled Rs206.2bn at the end of June 2009. We expect the EPC division’s revenue growth to be driven by orders from RPWR. Currently, internal orders account for 70% of the order book, with an order from Sasan UMPP alone accounting for about 60% of this.

Order book for the EPC division (June 2009) Order from Sasan alone accounts for more than 60% of the order book

Sasan62%Butibori

7%

WRSS6%

Parichha1%

Hisar8%

Raghunathpura, DVC16%

Source: Company Strong order-book inflow

RPWR has a pipeline of 33.74GW of projects. Of that, RPWR has placed EPC orders for about 5.4GW (RELI has obtained about 4.26GW of orders). Hence, we believe there is a strong likelihood of a large order-book inflow from RPWR. We believe RPWR is in the process of placing EPC orders for the Krishnapatnam project (6 x 660MW) with RELI, which should flow into the order book between 2Q and 3Q FY10. Other possible orders that might be given to RELI include the Chitrangi project (6 x 660MW) in 4Q FY10, and the Tilaya project (6 x 660MW) in FY11. There is also the possibility of 4,000MW of further capacity being added close to Tilaya, with the availability of additional coal from the Kerendhari ‘B’ and ‘C’ blocks of the North Karanpura mines with geological reserves of 1,028m tonnes. This would also result in potential order inflow for RELI in FY12.

Projected order-book Inflow from RPWR We believe the order book for RELI’s EPC division would exceed Rs450bn in FY11, which represents strong revenue visibility

FY10E FY11E Project Value (Rs bn) Project Value (Rs bn)Krishnapatnam 115 Tilaya 115Chitrangi 110

Source: Company, Daiwa forecasts Management’s guidance for sales growth for the EPC division of a 40-50% CAGR over the next three-to-four years looks quite achievable, in our view, given the strong order-book backlog. We have assumed a CAGR of 40% for the value of contracts billed from FY10 to FY12.


EPC revenue

5

15

25

35

45

55

65

75

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

(Rs bn)

40% CAGR

Source: Company, Daiwa forecasts EBITDA margin estimated to be 8%

Our assumption of an 8% EBITDA margin is based on two major premises: 1) the company outsources the main plant and the balance of plant contracts, and 2) all the projects in the order book are fixed-price contracts. The fixed-priced contracts are exposed to raw-material price risks, as these EPC projects have long gestation periods. Management focuses on project management, and outsources the main plant and balance of plant packages to third parties. Hence, we believe an 8% EBITDA margin is sustainable. Our assumption represents a 300-350 basis-point discount to LT’s EBITDA margins of 11-11.5%.

Margin comparison with LT

0

2

4

6

8

10

12

14

16

FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E

EBITDA margins RELI EBITDA margins LT

(%)

Source: Company, Daiwa forecasts Valuation

We value the EPC division at an EV/EBITDA multiple of 9x on our FY11 forecasts, giving a value of Rs159/share. This multiple represents a 20% discount to the one we apply to LT’s E&C division (11.2x on our FY11 forecasts). Our target multiple takes into account RELI’s lack of an execution history with large projects.

Valuation of the EPC business FY11 EPC EBITDA 4,008EV/EBITDA multiple of LT (x) 11.2Discount rate (%) 20Target EV/EBITDA multiple (x) 9.0EV for EPC (Rs m) 35,915Shares outstanding (m) 225Equity value per share (Rs) 159Source: Company, Daiwa forecasts


Roads

Asset owner of 401 km at advanced stages of construction RELI owns the assets of five BOT toll-road projects located in TN with a total length of 401 km. These projects were granted on concessions from the National Highway Authority of India (NHAI). The average concession period for all these projects is 25 years. RELI has achieved financial closure for all of the projects and, on average, has received grants of 25% for all of them involving a total capex of Rs31.58bn. For the NK Toll and DS Toll projects, construction work has been completed and they are ready to collect tolls. The other three projects (TK Toll, TD Toll and SU Toll) are all at advanced stages of construction, and are scheduled to be completed by 2Q FY11. Each of the five projects originates or passes through an important industrial town in TN. In our view, this should ensure strong traffic growth in the future.

Road-project details

Projects Share (%) Basis Concession period

(years) Length (km) Status Capital cost (Rs m) Debt:equity:grant (%)NK Toll 100 BOT – toll 20 44 Completed 3,450 80:13:07DS Toll 100 BOT – toll 20 53 Completed 4,150 80:13:07TK Toll 100 BOT – toll 30 80 Construction 7,550 61:19:20TD Toll 100 BOT – toll 30 88 Construction 5,600 40:19:41SU Toll 100 BOT – toll 25 136 Construction 10,830 47:20:33Source: Company, Daiwa forecasts

RELI has received another BOT toll-based road project in the Delhi NCR region totalling 66 km, with a concession period of 17 years. The total capex required is Rs7.8bn. The project is at an early stage, and management expects to achieve financial closure by 2Q FY10. RELI has emerged as the L1 bidder for the Western Freeway Sealink, and is awaiting the letter of allotment (LOA). The project capex is Rs34bn. RELI has also emerged as a preferred bidder for the Eastern Peripheral Expressway, where the capex is estimated at Rs35bn. A further three road projects worth Rs135bn are in the pipeline and are awaiting requests for proposal (RFP). Five road projects valued at Rs46 per share

Assumptions for road projects Parameters NK Toll DS Toll TK Toll TD Toll SU TollCapital cost (Rs m) 3,450 4,150 7,550 5,600 10,830Debt:equity:grant (%) 80:13:07 80:13:07 61:19:20 40:19:41 47:20:33Base-year traffic (PCUs) 34,100 29,500 25,700 14,750 17,000YoY growth (%) 5 5 5 5 5Base-year toll (Rs/PCU) 316 325 356 368 356YoY growth (%) 5 5 5 5 5O&M expenses (% of capex) 1.0 1.0 1.0 1.0 1.0Interest rates 10 10 10 10 10Commissioning date (COD) Sep-09 Sep-09 Jul-10 Jul-10 Jul-10Source: Company, Daiwa forecasts We value the five road projects in TN involving the construction of 401 km at Rs46/share on an NPV basis at a CoE of 15%.

These projects are parts of important inter-state and intra-state national highways


Valuations are very sensitive to traffic and CoE assumptions

Road valuations are very sensitive to the traffic assumptions. For every 100 basis-point decline in the traffic assumption, the value decreases by 20%, and similarly, with every increase of 100 basis points in the CoE, the value increases by 23%. We have not assigned any value to the Delhi NCR region project, as it is still at an early stage and has not yet achieved financial closure.


Metro-rail projects – early-mover advantage

RELI is developing metro-rail projects currently in Mumbai (MMO) and Delhi (AMEL). The total project cost of the two metro projects is Rs52.4bn. In the Mumbai metro, RELI holds a 69% stake, with viability gap funding (VGF) of Rs6.4bn, ie, 27%, and a 95% stake in the Delhi metro. The main revenue stream for both the projects is fares, which would ensure steady cash flow. The other revenue stream would be commercial rents and advertising space that the company gets to develop as part of the concession. The latter revenue stream has upside potential, in our view. RELI also won the Mumbai Metro Line 2 project recently, after it emerged as the sole bidder for a 32km-long elevated stretch in the Mankhurd-Bandra-Charkop corridor with 27 stations and a concession period of 35 years. The total project cost, as estimated by the Mumbai Metropolitan Region Development Authority (MMRDA), is Rs80bn, and VGF is Rs23bn.

Metro-rail project details

Projects Share (%)

Concession period (years)

Length (km) COD Capital cost (Rs bn) Debt:equity:grant (%)

MMO 69 35 12 2Q FY11 23.5 51:22:27AMEL 95 30 23 2Q FY11 28.8 70:30 (no grant)Source: Company, Daiwa estimates

MMO – RELI holds a 69% stake The MMO project is the first east-west corridor rail connection in Mumbai. The project was awarded through an international competitive bidding process on a public-private partnership (PPP) framework to a RELI-led consortium. RELI holds a 69% stake, while MMRDA holds 26%, and the remaining 5% is held by Veolia Transport, France. The 12-km long rail project will connect the suburbs of Versova and Ghatkopar, and have 12 stations along the route. These are the busiest areas of Mumbai, and have no existing rail connections. The MMO has a planned initial capacity of 600,000 passengers per day, which will be expanded gradually to 1.1m passengers per day by increasing the frequency of trains. Financial closure achieved – VGF of Rs6.4bn received

The total project cost for developing the rails is Rs24bn, of which the Maharashtra State Government will provide Rs6.4bn in the form of VGF. RELI obtained financial closure for the project in October 2008, with IDBI bank as the lead banker.

The first east-west corridor rail connection


Financial structure

Debt - Rupee37%

Debt - Foreign13%

Equity22%

VGF28%

Source: Company, Daiwa forecasts Revenue streams: ticketing, rent, and advertising space

The main revenue stream for the project is fares. The base revenue set in FY04 was Rs6 for <= 3 km, Rs8 for >3 & <= 8 km, and Rs10 for >8 km, with an increase of 11% every fourth year. The other revenue stream would be commercial rents that the company gets to develop as part of the concession. Each of the 12 stations has 1,000 sq m of area to develop around the station. The third revenue stream is advertising space on the railway platform and within the train carriages. Likely to be commissioned by 2Q FY11

The MMO project was awarded in March 2007. Since then, all of the major contracts for rolling stock, signalling, traction, and power supply have been awarded. The consortium possesses about 80% of the rights of way required. A prototype car body has been manufactured successfully, and delivery of the first rolling stock is scheduled for 3Q FY10. Foundation work for viaducts, stations and depots has almost been completed. Foundation work for the Western Express Highway Special Bridge and Mithi River Special Bridge is in progress. The project is scheduled to be completed by September 2010, and has a concession period of 35 years (including the construction period). AMEL, Delhi The AMEL project is a metro-rail line linking New Delhi Railway Station and New Delhi International Airport. This is the first high-speed airport link of its kind in the country, connecting the airport with the central railway station. The project was awarded through an international competitive bidding process on a PPP basis to a RELI-led consortium. RELI holds a 95% stake, while remaining 5% is held by CAF (Spain). The 23-km long rail project will have six stations along the route: New Delhi, Shivaji Stadium, Dhaula Kuan, NH-8, IGI Airport and Dwarka. Of the six stations, five would be underground, and only the Dhaula Kuan station would be elevated. It would have an initial capacity of 15,000 passengers per day, which will be expanded gradually to 75,000 passengers per day by increasing the frequency of trains. Project funding with a gearing of 2.33x

The total project cost for developing the network is Rs28.8bn. RELI obtained financial closure for the project in February 2009, with Axis bank as the lead banker. RELI has funded the project with an equity contribution of Rs7.5bn.


Revenue streams: ticketing, rent, and advertising space

The main revenue stream is fares. The basic pricing is Rs30 for <=3 km, Rs150 for <=17-18 km, and Rs180 for >=18, with an increase based on the Wholesale Price Index (WPI) every second year. The other revenue stream would be commercial rents for areas that the company gets to develop as part of the concession. The five stations have a total of about 59,000 sq m of area that can be developed around the stations. The third revenue stream is advertising space on the railway platform and within the carriages of the trains. Likely to be commissioned by 2Q FY11

The project is progressing well, with most of the contracts for rolling stock, signalling, traction, and power supply having been awarded. Definitive designs for all systems have also been finalised. System-wide installation activity has commenced. The project is scheduled to be completed by 2Q FY11, before the Commonwealth Games, and has a concession period of 30 years (including the construction period). Valuations of metro projects

MMO: assumptions AMEL: assumptions Tariff As on FY04 (Rs) As on FY11 (Rs) <= 3 km 6.0 7.4 > 3 & <= 8 km 8.0 9.9 > 8 km 10.0 12.3 Tariff revision 11% every fourth year Passenger traffic (m) Concentration (%) Base (m) <= 3 km 10 22 > 3 & <= 8 km 75 164 > 8 km 15 33 Traffic growth (%) FY12-17 FY18-22 FY23-end <= 3 km 11 6 5 > 3 & <= 8 km 11 6 5 > 8 km 11 6 5

Tariff As on FY11 (Rs) <=17-18 km 150 >=18 180 <=3 km 30 Tariff revision 7% every two years Passenger traffic (m) Concentration (%) Base (m) <=17-18 km 75 4.1 >=18 20 1.1 <=3 km 5 0.3 Traffic growth (%) FY12-17 FY18-22 FY23-end <=17-18 km 18 12 10 >=18 18 12 10 <=3 km 18 12 10

Source: Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts We value the metro-rail projects at Rs37/share on an NPV basis at a CoE 15%. The discount rate factors in the construction and operational risks that the project carries. We have not assigned any value to the Mumbai Metro 2 project, as it is still at a nascent stage, and not yet achieved financial closure.


Reliance Power – 33.74GW of projects in the pipeline

RPWR is the power-generation arm of Anil Dhirubhai Ambani Group, and RELI has a 44.96% stake in RPWR. RPWR has ambitious plans to set up 33,740MW of greenfield power-generation projects. These include 18,840MW of coal-based projects, 10,280MW of gas-based projects, and 4,620MW of hydro-electric power projects. The projects are well diversified in terms of the type of fuel used, as well as their geographical spread.

• There are four power projects with an aggregate capacity of about 16GW: i) Sasan UMPP (3,960MW) in Madhya Pradesh has been allotted three captive mines. The coal from these captive mines will also be used for: ii) Chitrangi (3,960MW), located close to Sasan, iii) Krishnapatnam (3,960MW) in Andhra Pradesh will use coal imported from Indonesia, and iv) Tilaya (3,960MW) in Jharkhand, with captive coal blocks from Kerendhari ‘B’ & ‘C’ and reserves of 1,028m tonnes.

• The Rosa power plant, with an aggregate capacity of 1,200MW, is regulated partly by a two-part tariff, with regulated returns of an ROE of 15.5% + 0.5%, and partly on a merchant-tariff basis. Butibori (600MW) is for industrial consumers in Maharashtra, and based partly on merchant sales.

• The single largest project in the world, a 7,480MW gas-based combined-cycle gas-turbine project in Uttar Pradesh, is to be set up to cater to the needs of the northern states of Punjab, Haryana, Delhi and Rajasthan.

• Shahpur (4,000MW), a 2,800MW gas-based combined-cycle gas-turbine plant of 1200MW using imported coal and based in Maharashta, will cater to the requirements of the Mumbai licence area, Gujarat and Maharashtra.

• Seven hydro-electric projects with an aggregate capacity of 4,620MW across Uttarakhand (400MW) and Arunachal Pradesh (4,220MW).

Projects in the pipeline

Projects Type Configuration (units) Capacity (MW) Location Rosa I Coal 2 x 300MW 600 Uttar Pradesh Sasan Imported coal 6 x 660MW 3,960 Madhya Pradesh Krishnapatnam Coal 6 x 660MW 3,960 Andhra Pradesh Tilaya Coal 6 x 660MW 3,960 Jharkhand Rosa II Imported coal 2 x 300MW 600 Uttar Pradesh Shahpur Coal 2 x 600MW 1,200 Maharashtra Butibori Coal 2 x 300MW 600 Maharashtra MPPL 6 x 660MW 3,960 Madhya Pradesh Total coal 18,840 Shahpur (gas) Gas 2 x 1,400MW 2,800 Maharashtra Dadri 5 x 1,400MW + 480MW 7,480 Uttar Pradesh Total gas 10,280 Urthing Sobla Hydro-electric 4 x 100MW 400 Uttarkhand Tato II Hydro-electric 4 x 175MW 700 Arunachal Pradesh Siyom Hydro-electric 4 x 250MW 1,000 Arunachal Pradesh Kalai Hydro-electric 8 x 150MW 1,200 Arunachal Pradesh Amulin Hydro-electric n.a. 420 Arunachal Pradesh Emini Hydro-electric n.a. 500 Arunachal Pradesh Mithudon n.a. 400 Arunachal Pradesh Total hydro-electric 4,620 Total 33,740 Source: Company, Daiwa


Implementation holds the key

Power-generation projects have long gestation periods, and there are hurdles to be overcome through out the period, starting with obtaining environmental clearances, financial closure, fuel supplies, acquiring land for building the project, and ensuring the timely supply of equipment. Initiatives by the government Reenergized drive by the India Government to accelerate land acquisition, obtain faster clearance from the environmental and forestry departments, and encourage the private participation in coal extraction augurs well for future infrastructure projects, in our view. Also, the easier availability of credit through agencies such as IIFCL and PFC should facilitate the financial closure of mega projects. All of these government initiatives should really help with the implementation of these projects, in our opinion, and be a significant positive for RPWR. The following table sets out the progress to date for each of the planned projects.

Advancement achieved by planned projects

Projects Land

acquisition Water source Fuel supplyEnvironmental

clearance

EPC/BTG contract

award Power offtake

agreement Financial

closureRosa I Sasan * Krishnapatnam x xTilaya x x xRosa II x Shahpur x x x x x x Butibori x * MPPL x X x x x x Shahpur (gas) x X x x x Dadri * X x x x Urthing Sobla x n.a. n.a. x x x Tato II x n.a. n.a. x x x x Siyom x n.a. n.a. x x x Kalai x n.a. n.a. x x x x Amulin x n.a. n.a. x x x x Emini x n.a. n.a. x x x x Mithudon x n.a. n.a. x x x x Source: Company, Daiwa Note: *75% completed

We set out details of these projects and milestones achieved to date in Appendix I. Aggregate capex plans for FY10-16 exceed US$20bn The funding requirements in terms of debt and equity combined exceed US$20bn for FY10–16. RPWR achieved financial closure on Sasan during very difficult times, so we are confident in management’s ability to raise funds for its mammoth capex plans. Projects with an aggregate capacity of 5.46GW have already achieved financial closure.

Funding requirements FY10E FY11E FY12E FY13E FY14E FY15E FY16E TotalEquity (Rs bn) 36 60 57 56 45 7 3 264Debt (Rs bn) 121 179 168 159 109 16 8 759 Gearing (x) 3.36 2.98 2.93 2.84 2.43 2.38 2.43 2.88 Capacity (MW) 300 600 6,740 16,660 23,240 27,120 30,020 30,020Source: Company, Daiwa forecasts


32.52GW of green field power generation by FY10-FY17 RPWR has ambitious plans to set up 32.52GW of greenfield power-generation projects by FY17. However, we believe the company faces significant execution challenges due to a number of factors, such as the availability of gas. The ongoing court case to resolve the issue of gas supplies from RIL to RNRL might have an impact on the Dadri and Shahpur gas-based projects. The hydro-electric projects are at the very early stages of execution. Meanwhile, most of the coal-based projects have already tied up ‘linkages’, or been allotted captive coal blocks. Still, we believe it will be a long and difficult process for RPWR to execute these projects on time. The commissioning schedule for the planned capacity additions up to FY17 is set out in the following table.

Capacity-addition schedule (MW) FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17ERosa I 300 600 600 600 600 600 600 600Sasan - - 2,640 3,960 3,960 3,960 3,960 3,960Krishnapatnam - - - 1,600 4,000 4,000 4,000 4,000Tilaya - - - - - 800 2,400 4,000Rosa II - - 600 600 600 600 600 600Shahpur - - 1,200 1,200 1,200 1,200 1,200 1,200Butibori - - 300 300 300 300 300 300MPPL - - - - 1,980 3,960 3,960 3,960Shahpur (gas) - - - 2,800 2,800 2,800 2,800 2,800Dadri - - 1,400 5,600 7,800 7,800 7,800 7,800Urthing Sobla - - - - - 400 400 400Tato II - - - - - 700 700 700Siyom - - - - - - 1,000 1,000Kalai - - - - - - 300 1,200Amulin - - - - - - - -Emini - - - - - - - -Mithudon - - - - - - - - 300 600 6,740 16,660 23,240 27,120 30,020 32,520Source: Company

Capacity additions by fuel Power offtake

0

5

10

15

20

25

30

35

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

(GW)

Coal Imported coal Gas Hydro-electric

8%

31%

37%

23%

1%

0% 10% 20% 30% 40%

Cost Plus PPA

Case I bids

Case II bids

Merchant power

Industries

Source: Company, Daiwa estimates Source: Company, Daiwa estimates


Valuations

RELI has a 45% stake in RPWR, which accounts for 42% of our SOTP valuation for RELI. Thus, RPWR’s DCF-based fair value would be the main driver of RELI’s valuations. We prefer to use a DCF valuation for RPWR, rather than the market price, as the true determinant of its fair value. Currently, RPWR’s business is at the execution phase, and a DCF would reflect its true long-term value, in our opinion. Assumptions Our assumptions for capital costs, operational efficiency and revenue are mostly in line with management’s assessment. We have adopted slightly higher capital-cost assumptions than management, and our operational assumptions are better than management has guided for. We assume a higher plant load factor (PLF) and lower operation and maintenance (O&M) costs, after looking at the performance of RELI’s generation station at Dahanu, which has performed consistently over the past five years at a PLF of 100%, and where O&M costs are much lower than the industry average.

Capital-cost and operational assumptions

Project Cost

(Rs bn) Cost

(Rs m)/MW Gearing

Station heat rate

(kcal/kWh)

Price coal/gas (Rs/t) or gas

(US$/mmbtu)

Calorific value (kcal/kg for

coal & kcal/scm for gas) PLF (%)O&M

(Rs m/MW)Rosa I 27 45.0 80:20 2,200 1,640 4,000 90 1.5Sasan 194 49.0 75:25 4,700 315 4,700 90 1.5Krishnapatnam 168 42.4 70:30 2,100 2,400 4,200 90 1.5Tilaya 165 41.7 75:25 2,380 315 4,700 90 1.5Rosa II 27 45.1 70:30 2,200 1,640 4,000 90 1.5Shahpur 50 42.0 75:25 2,100 3,390 4,200 90 1.5Butibori 14 46.8 80:20 4,638 1,150 4,638 90 1.5MPPL 166 42.0 70:30 2,050 500 4,000 90 1.5Shahpur (gas) 84 30.0 75:25 1,650 5.42 8,100 90 0.6Dadri 224 30.0 70:30 1,650 5.42 8,100 90 0.6Urthing Sobla 21 52.0 70:30 n.a. n.a. n.a. 55 1.0Tato II 40 57.8 70:30 n.a. n.a. n.a. 66 1.0Siyom 58 57.8 70:30 n.a. n.a. n.a. 52 1.0Kalai 73 60.8 70:30 n.a. n.a. n.a. 53 1.0Amulin Emini Mithudon

Not considered, as they are at a very nascent stage

Source: Company, Daiwa forecasts RPWR – valuation We believe a DCF is the most appropriate method for valuing RPWR, given the long gestation period of power projects. Our DCF model uses a three-stage forecast for cash flow. The first stage involves cash-flow projections up to FY21. The second stage is the semi-explicit period of FY22-31, during which we assume an annual growth rate of 8% for free cash flow. The third stage is based on a terminal-growth-rate assumption of 2%. Our model assumes a CoE of 15%. Accordingly, our DCF model gives a value of Rs111.


DCF to equity in the first stage (Rs bn) FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E PAT 0.2 8.0 7.1 2.7 22.1 71.6 93.0 109.7 121.5 133.1 145.9 148.1 Depreciation 0.1 1.9 8.1 24.6 38.1 47.5 50.2 52.2 52.2 52.2 52.2 52.2 Gross cash flow 0.2 10.0 15.2 27.3 60.3 119.1 143.2 161.9 173.7 185.3 198.1 200.3 Change in working capital 0.1 3.1 6.3 22.2 22.8 16.7 5.1 3.8 1.7 1.7 1.9 0.1 Debt repayment 0.0 4.5 7.7 25.1 57.6 66.6 66.6 66.6 66.6 66.6 66.6 66.6 Equity drawdown (initial equity investment) 35.8 60.0 57.2 56.0 44.8 6.9 3.4 0.0 0.0 0.0 0.0 0.0 Free cash flow to equity (35.7) (57.7) (56.1) (75.9) (65.0) 29.0 68.0 91.4 105.4 117.0 129.6 133.6 Discount rate (%) 100.0 87.0 75.6 65.8 57.2 49.7 43.2 37.6 32.7 28.4 24.7 21.5 Present value of cash flow (35.7) (50.2) (42.4) (49.9) (37.2) 14.4 29.4 34.4 34.5 33.3 32.0 28.7 Source: Company, Daiwa forecasts

RPWR: DCF valuation

Discount rate (%) NPVExplicit period (up to FY21) 15 (9)Semi-explicit period (FY22-31) 15 207Terminal period (FY31 onwards) 15 126Total 323Less: equity investment in FY08-09E 57NPV of FCFE (Rs bn) 266Value (Rs/share) 111Source: Company, Daiwa forecasts

DCF sensitivity to CoE and terminal growth (Rs) CoE Terminal growth 14.0% 14.5% 15.0% 15.5% 16.0%0.5 134 117 103 90 781.5 139 122 107 93 802.5 145 127 111 97 843.5 152 133 116 101 874.5 161 140 122 106 92Source: Daiwa forecasts COE

RPWR’s value is very sensitive to the CoE. Every 50-basis-point decline results in a 14.4% increase in the value, while every 50-basis-point increase results in a 13% decrease. Terminal growth

For every 100-basis-point decline in the terminal growth rate, the value decreases by 3.9%. Similarly, for every 100-basis-point increase, the value increases by 4.6%. PLF

Every 1% variation in the PLF for the power plants has a 4.1% effect on the value of the company. O&M

O&M expenses consist of employee costs, repairs and maintenance, and administration and general expenses. A 10% decrease in O&M expenses would raise the value by 5.5%.


Appendix I – update on Reliance Power projects

Rosa Phase I – 600MW (2 x 300MW)

• Rosa Phase I is a coal-based subcritical power plant, located in the District of Shahjahanpur in Uttar Pradesh. RPWR has acquired 1,470 acres of land, and secured a supply of water from the Garrah river. Coal-supply linkages have been obtained from the Ashoka mines, and a transportation agreement has been signed with Indian Railways.

• The EPC/BTG contract has been awarded to an electric company in Shanghai. Financial closure has been achieved, with IDBI Bank as the lead banker, and a gearing ratio of 80:20.

• A power offtake agreement has been signed with Uttar Pradesh Power Corporation Ltd. (UPPCL) for 25 years on a cost-plus-tariff-based power-purchase agreement, with a regulated ROE of 15.5% + 0.5%.

• Work on Rosa Phase I is progressing well, and the company expects to commission the first unit by March 2010 and the second unit by June 2010.

Rosa Phase II – 600MW (2 x 300MW)

• Rosa Phase II is a coal-based subcritical power plant, also located in District of Shahjahanpur in Uttar Pradesh. Phase II will be added using the resources available from Phase I, ie, land and water from the Garrah river, while coal supply linkages will be obtained from Central coal fields.

• The EPC/BTG contract has been awarded to a Shanghai electric company. Financial closure has been achieved, with IDBI Bank as the lead banker, and a gearing ratio of 80:20.

• A power offtake agreement has been signed with Uttar Pradesh Power Corporation Ltd. (UPPCL) for 25 years on a cost-plus-tariff-based power-purchase agreement, with a regulated ROE of 15.5% + 0.5% for 300MW, and the remaining 300MW has a contract with Reliance Trading Limited.

• Rosa Phase II is scheduled to be commissioned in 2011-12. Butibori Group Captive Power Plant – 600MW (2 x 300MW)

• Butibori, a coal-based subcritical power plant, is located in MIDC Butibori, in the District of Nagpur in Maharashtra. Water supply has been secured from MIDC Butibori, and 225 acres of land has been acquired. Coal supply linkages have been obtained from the Western coal fields for 1.234m t.p.a., and a transportation agreement has been concluded with Indian Railways.

• The BTG contract has been awarded to a Shanghai-based electric company, and the EPC contract has been given to RELI. Financial closure has been achieved, with Axis Bank as the lead banker, and a gearing ratio of 80:20.

• A power offtake agreement has been concluded, with a power-purchase agreement signed with industrial consumers and trading companies for 235MW.

• Construction activity has commenced, and site-enabling activity has been completed.

• There are plans to add a further 300MW at the site.


Sasan UMPP – 3,960MW (6 x 660MW)

• Sasan, a pithead-coal supercritical-technology-based UMPP, is located in the District of Singrauli in Madhya Pradesh. Land acquisition is in progress. Of the total requirement of 2,000 acres of land, more than 75% have been acquired, with water supply coming from Govind Vallabh Pant Sagar.

• The project has been allotted three coal blocks: Moher, Moher Amlohri extension, and Chhatrasal, with aggregate reserves of more than 700m tonnes. Total peak coal production from these mines combined would not be more than 20m t.p.a., with a mine-strip ratio of 1:4. The company will do its own mining at Moher and Moher Amlohri, while Chhatrasal will be given to an operator.

• The BTG contract has been awarded to a Shanghai electric company, and the EPC contract has been given to RELI. Financial closure has been achieved, with State Bank of India as the lead banker, and a gearing ratio of 75:25.

• With regards to the power offtake, power-purchasing agreements have been signed with 14 procurers from seven states for 25 years at a ‘levelized’ tariff.

• Construction activity has commenced, and site levelling has begun.

• The commissioning of the project has been brought forward by three years from 2016 to 2013, with the first unit now scheduled to be commissioned in 2012, and completed by March 2013.

Chitrangi Power Project – 3,960MW (6 x 660MW)

• Chitrangi is a 3,960MW power plant located in the District of Singrauli in Madhya Pradesh. Land acquisition is in progress. The project requires 3,454 acres of land, of which 2,563 acres belong to the government.

• Coal will be sourced from captive coal blocks allotted to the Sasan project – Chhatrasal – for which approval has been received.

• A power offtake agreement for 1,241MW has been signed with M.P. Power Transmission Company Ltd. (MPPTCL) at Rs2.45/unit (Case 1 bid). The rest will be on Case 1 bid with other states in the western region and through short-term trading.

Krishnapatnam UMPP – 4,000MW

• Krishnapatnam shall use imported coal and is based on supercritical technology. This UPMM is located in the District of Nellore in Andhra Pradesh. Land acquisition has mostly been completed (2,625 acres), and water supply and sea-water clearance has been obtained. Coal will be sourced from Indonesia from Reliance Coal Resources Limited, a 100%-owned subsidiary.

• The EPC contract has gone to RELI and for BTG they have got offers from vendors, with flexibility to choose the unit configuration between 660, 800 and 1,000MW. Evaluations are being conducted.

• Financial closure is in process, with IDBI and PFC the lead co-arrangers for the Rupee loan and even Asian Development Bank evaluating it. The company expects financial closure to be achieved by March 2010.

• With regards to the power offtake, power-purchasing agreements have been signed with 11 procurers from four states for 25 years on a levelized tariff.

• The first unit is scheduled to be commissioned in September 2013, and completed by March 2014.


Tilaya UMPP – 4,000MW

• Tilaya is a pithead-coal supercritical-technology-based UPMM located in Tilaya village, in the District of Hazaribagh, Jharkhand. Environmental clearance has been obtained for the power-plant area.

• The project has been allotted coal from the Kerendhari ‘B’ & ‘C’ blocks of the North Karanpura mines with geological reserves of 1,028m tonnes.

• The BTG contract has been awarded to a Shanghai electric company and the EPC contract given to RELI. Financial closure has been achieved, with State Bank of India as the lead banker, and a gearing ratio of 75:25.

• With regards to the power offtake, power-purchasing agreements have been signed with 18 procurers from 10 states for 25 years on a levelized tariff of Rs1.77/unit

• Construction activity has commenced, and site levelling has started.

• The first unit is scheduled to be commissioned in June 2015, and completed by June 2017.

Dadri Gas Project – 7,480MW (5 x 1,400MW + 480MW)

• Dadri is a gas-based combined-cycle gas-turbine project located near Dadri in the District of Gaziabad in Uttar Pradesh. Of the total requirement of 2,500 acres, 2,100 have been acquired. All clearances, including environmental clearance, have been obtained for the project.

• With regards to the power offtake, power-purchasing agreements have been signed with the northern states of Punjab, Haryana, Delhi and Rajasthan.

• Construction activity has commenced, and site levelling has started.

• According to RPWR management, the first unit can come on stream within 12-24 months of securing a supply of gas from the KG Basin D6 blocks of RIL.

Shahpur Project – 4,000MW

• Shahpur is a 1,200MW imported-coal-based super-critical plant, and a 2,800MW gas-based combined cycle gas turbine (CCGT) project, located in the District of Raigad in Maharashtra. Fulfilling the land requirement of 2,630 acres is in progress, while water supply from the Noganthane Weir has been granted by the Maharashtra Government. All clearances (including environmental) have been obtained for the project.

• Supply of gas for CCGT from the KG Basin D6 Blocks of RIL through the east-west pipeline, which is 55 km from the Shahpur project, and coal will be imported from Indonesia.

• Power offtake agreements have been concluded with Gujarat, Maharashtra and Mumbai.

Tato II Hydroelectric Power Project (HEPP) – 700MW (4 x 175MW)

• Tato II is run off the river located in the Siyom District of W Siang in Arunachal Pradesh. A detailed project report is being prepared by SNC Lavalin, and environmental-impact studies have been completed. A report on the hydrological aspects has been submitted to the Central Electricity Authority (CEA)/Central Water Commission (CWC) for approval.

• Power offtake to distribution companies (discoms) on cost-plus-tariff and merchant-sales bases, scheduled to be commissioned by 2015-16.


Siyom HEPP – 1,000MW (4 x 250MW)

• Siyom is also run off a river, located in the Siyom District of W Siang in Arunachal Pradesh. A detailed project report is being prepared by Halcrow, in the UK, and environmental clearance and consent to establish the project have been obtained. A report on the hydrological aspects has been submitted to the CEA/CWC for approval, and the layout plan is being finalised.

• Power offtake to discoms on a cost-plus-tariff basis, scheduled to be commissioned by 2016-17.

Urthing Sobla HEPP – 400MW (4 x 100MW)

• Urthing Sobla is run off a river in the Dhauliganga District of Pitthorgarh, Uttarkhand. A detailed project report is being prepared by SMEC Australia, and all project clearances are being pursued.

• Power offtake is on a 100% merchant-sale basis, and the project is scheduled to be commissioned by 2015-16.

Kalai HEPP – 1,200MW (8 x 150MW)

• Kalai is run off a river in the Lohit District of Anjaw in Arunachal Pradesh.

• Power offtake to discoms on cost-plus-tariff and merchant bases, scheduled to be commissioned by 2017.

Amulin (420MW), Emini (500MW) and Mithudon (400MW) HEPP

• Amulin, Emini and Mithudon are new hydro-electric power plants for which a memorandum was signed with the Arunachal Pradesh Government on 2 March 2009. All three plants are located on the Mathun River, in the Dibang Valley, and are at very nascent stages.


Company background RELI is a power-distribution licencee in the two metros of Mumbai and Delhi, has a generating capacity of 941MW, and has emerged as a strong player in the EPC business. It has BOT assets across the road, metro-rail, real-estate and power-transmission segments. It has a 45% stake in RPWR, which has pipeline of 33.74GW of greenfield power-generation projects.

Reliance Infrastructure – financial summary Profit and loss (Rs m) Balance sheet (Rs m)

Year to 31 March 2008 2009 2010E 2011E 2012E Net sales of electricity 49,198 71,831 62,002 67,746 73,800 Income from EPC 14,444 25,134 35,789 50,105 70,147 Total revenue 63,642 96,965 97,791 117,851 143,947 YoY change (%) 11.5 52.4 0.9 20.5 22.1 Cost of electricity 26,193 42,540 29,494 33,287 37,381 Cost of fuel 10,155 13,197 10,625 11,220 11,856 Salaries & wages 3,525 3,940 4,727 5,200 5,720 Exp of EPC, contracts 13,357 23,392 32,926 46,097 64,535 Other expenses 4,948 8,831 8,106 8,367 8,634 Total op. exp. 58,178 91,900 85,878 104,171 128,126 EBITDA 5,463 5,065 11,913 13,680 15,820 EBITDA margin (%) 8.6 5.2 12.2 11.6 11.0 YoY change (%) 9.8 (7.3) 135.2 14.8 15.6 Depreciation 2,229 2,449 2,870 3,133 3,339 EBIT 3,234 2,616 9,043 10,548 12,481 Other income 11,370 12,623 11,877 11,555 11,468 Interest 3,088 3,305 4,766 4,766 4,766 PBT 11,516 11,934 16,154 17,337 19,183 Tax 671 545 2,908 3,121 3,453 Tax rate (%) 5.8 4.6 18.0 18.0 18.0 Reported PAT 10,846 11,389 13,247 14,216 15,730 Net-profit margin (%) 17.0 11.7 13.5 12.1 10.9 YoY change (%) 35.3 5.0 16.3 7.3 10.6

Cash flow (Rs m) Year to 31 March 2008 2009 2010E 2011E 2012E PBT (excl EO) 11,516 11,934 16,154 17,337 19,183 Depreciation 2,229 2,449 2,870 3,133 3,339 Net change in working capital (5,278) (1,108) 15,759 (11,850) 3,388 Others (5,999) (4,349) 1,858 1,645 1,313 Cash flow from operations 2,470 8,926 36,641 10,264 27,223 Capex (7,603) (5,737) (7,210) (7,510) (5,910) Net Investments made (456,656) (440,270) (12,589) (13,739) (5,000) Other investing activities 438,140 436,082 - - - Cash flow from investing activity (26,118) (9,925) (19,799) (21,249) (10,910) Change in share capital (1,269) (7,593) (8) - - Change in debt 1,900 15,129 - - - Div. & div. tax (1,403) (1,696) (2,170) (2,329) (2,577) Others 3,537 (3,209) 5,959 (4,766) (4,766) Cash flow from financing activity 2,765 2,632 3,782 (7,095) (7,342) Total cash generated (20,883) 1,633 20,623 (18,079) 8,971 Cash opening balance 21,759 876 2,510 23,133 5,054 Adjustments Cash closing balance 877 2,510 23,133 5,054 14,025

As at 31 March 2008 2009 2010E 2011E 2012E Paid-up capital 2,356 2,261 2,253 2,253 2,253 Reserves & surplus 114,513 116,814 138,615 150,503 163,657 Total equity 116,869 119,074 140,868 152,756 165,909 Total debt 49,889 73,322 73,322 73,322 73,322 Other liabilities 2,687 1,940 1,940 1,940 1,940 Capital employed 169,445 194,336 216,130 228,017 241,171 Net fixed assets 30,675 33,402 43,386 47,764 50,334 Capital work in progress 5,689 5,644 - - - Investments 76,644 121,471 134,060 147,799 152,799 Inventory 3,003 4,407 4,590 5,359 6,657 Debtors 13,514 15,233 18,754 20,987 25,634 Other current assets 6,456 10,121 10,121 10,121 10,121 Cash and equivalent 877 2,510 23,133 5,054 14,025 Loans and advances 66,365 55,766 42,394 45,456 48,815 Total cur. assets 90,215 88,036 98,991 86,977 105,252 Current liabilities 25,994 46,555 52,508 46,723 59,415 Provisions 7,784 7,663 7,800 7,800 7,800 Total cur. lia. & prov. 33,778 54,218 60,308 54,523 67,215 Misc. expenditure Capital deployed 169,445 194,336 216,130 228,017 241,171

Ratios Year to 31 March 2008 2009 2010E 2011E 2012E EPS (Rs) 46.0 50.4 58.8 63.1 69.8 YoY change (%) 23.7 9.4 16.7 7.3 10.6 Cash EPS (Rs) 55.1 59.0 68.7 73.9 81.3 EBITDA (%) 8.6 5.2 12.2 11.6 11.0 Net-profit margin (%) 17.0 11.7 13.5 12.1 10.9 Net debt to equity (%) 41.9 59.5 35.6 44.7 35.7 PER (x) 24.7 22.6 19.3 18.0 16.3 EV/EBITDA multiple (x) 58.0 64.8 25.7 22.4 19.4 PBR (x) 2.10 2.25 1.8 1.7 1.5 EV/sales (x) 5.0 3.4 3.1 2.6 2.1 ROCE (%) 6.7 6.3 6.5 6.4 6.7 ROE (%) 10.3 9.7 10.2 9.7 9.9 BVPS (Rs) 542.5 505.4 623.1 678.1 736.5 ROA (%) 5.7 5.2 5.1 5.1 5.3 DPS (Rs) 6.3 7.0 8.2 8.8 9.8 Div.-payout ratio (%) 13.6 13.8 14.0 14.0 14.0 Dividend yield (%) 0.6 0.6 0.7 0.8 0.9 Asset-turnover ratio 0.3 0.4 0.4 0.4 0.5 Inventory (days) 19.9 18.9 21.0 20.0 20.0 Receivables (days) 77.5 57.3 70.0 65.0 65.0 Payables (days) 73.3 69.5 75.0 80.0 80.0

Source: Company, Daiwa forecasts

Daiwa forex assumptions (vs. US$) Year end Rmb HK$ W S$ NT$ A$ Rs Rp RM 2007 7.300 7.800 935.8 1.440 32.432 1.143 39.413 9,400 3.310 2008 6.828 7.750 1,259.6 1.430 32.792 1.423 48.803 11,120 3.460 2009E 6.700 7.800 1,200.0 1.440 32.500 1.250 47.000 9,800 3.480 2010E 6.450 7.800 1,160.0 1.420 32.200 1.120 46.100 9,500 3.440 2011E 6.200 7.800 1,100.0 1.400 32.400 1.160 45.500 9,500 3.420 Source: Daiwa


DAIWA’S ASIA PACIFIC RESEARCH DIRECTORY

Hong Kong Regional Research Head Nagahisa MIYABE (852) 2848 4971 [email protected] Regional Research Co-head Craig IRVINE (852) 2848 4485 [email protected] Macro Economy (Hong Kong, China) Kevin LAI (852) 2848 4926 [email protected] Strategy (Regional) Mun Hon THAM (852) 2848 4426 [email protected] Banking (Hong Kong), Insurance (China) Steven CHAN (852) 2848 4468 [email protected] Consumer/Retail (Hong Kong, China) Peter CHU (852) 2848 4430 [email protected] Industrials (Regional) Taiki KAJI (852) 2848 4460 [email protected] IT/Electronics (Regional, Taiwan, Singapore, Hong Kong and China)

Pranab Kumar SARMAH (Regional Head of IT/Electronics)

(852) 2848 4441 [email protected]

IT/Electronics (Hong Kong, China) Joseph HO (852) 2848 4443 [email protected] Materials/Energy (Regional) Alexander LATZER

(Regional Head of Materials) (852) 2848 4463 [email protected]

Materials/Energy (China) Jason LI (852) 2848 4499 [email protected] Oil & Gas (China, Korea) Andrew CHAN (852) 2848 4964 [email protected] Property Developers (Hong Kong, China), Conglomerates (Hong Kong)

Jonas KAN (Head of Hong Kong Research)


Small/Medium Caps (Hong Kong, China) Kevin LEUNG (852) 2848 4489 [email protected] Telecommunication (Regional, Greater China, Korea and Singapore)

Marvin LO (852) 2848 4465 [email protected]

Transportation (Hong Kong, China) Geoffrey CHENG (852) 2848 4024 [email protected] Transportation (Hong Kong, China, Singapore) Kelvin LAU (852) 2848 4467 [email protected] Utilities (China) Alan CHAN (852) 2848 4483 [email protected] China – Shanghai Strategy (Regional) Hirokazu YUIHAMA (Head of Research) (86) 21 5840 1338 [email protected] Automobiles Ricon XIA (86) 21 5879 6833 [email protected] Consumer/Retail Nicolas WANG (86) 21 5840 5653 [email protected] All Industries Hongxia ZHU (86) 21 5840 1138 [email protected] Singapore Head of Research Tatsuya TORIKOSHI (65) 6321 3050 [email protected] Macro Economy (Regional) Prasenjit K BASU

(Chief Economist, Asia Ex-Japan) (65) 6321 3069 [email protected]

Banking, Property and REITs (Singapore) David LUM (Regional Head of Banking/Finance)


Healthcare (Singapore, Hong Kong and China) Soo Kee ANG (65) 6329 2133 [email protected] Conglomerates, Commodities; Energy and Small/Medium Caps (Singapore)

Chris SANDA (65) 6321 3085 [email protected]

Taiwan Head of Research Hirokazu MITSUDA (886) 2 2758 8754 [email protected] Macro Economy Christina Y LIU (Chief Economic Advisor) (886) 2 8789 0675 [email protected] IT/Electronics (IC-design, Semiconductors) Aaron JENG (886) 2 8780 1469 [email protected] IT/ Technology Hardware Calvin HUANG (886) 2 2758 8805 [email protected] IT/Technology Hardware (Components) Andrew CHANG (886) 2 8789 5341 [email protected] IT/Technology Hardware Mitsuharu WATANABE (886) 2 2758 9437 [email protected] Materials, Small/Medium Caps Albert HSU (886) 2 8786 2212 [email protected] South Korea Banking/Finance Chang H LEE (Head of Research) (82) 2 787 9177 [email protected] Automobiles, Shipbuilding, Industrials Sung Yop CHUNG (82) 2 787 9157 [email protected] Banking/Finance Eric MIN (82) 2 787 9176 [email protected] Chemicals Daniel LEE (82) 2 787 9121 [email protected] Consumer/Retail Sang Hee PARK (82) 2 787 9165 [email protected] Industrials Naoki IEIRI (82) 2 787 9184 [email protected] IT/Electronics Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics, Software Thomas Y KWON (82) 2 787 9181 [email protected] Australia Macro Economy Yukino YAMADA (Based in Tokyo) (81) 3 5555 7219 [email protected] Banking/Insurance Johan VANDERLUGT (61) 3 9916 1335 [email protected] Resources/Mining/Petroleum David BRENNAN (61) 3 9916 1323 [email protected] India Strategy/Industrials Jaideep GOSWAMI (Head of Research) (91) 22 6622 1010 [email protected] Banking/Finance Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Materials Vishal CHANDAK (91) 22 6622 1006 [email protected] Oil & Gas Atul RASTOGI (91) 22 6622 1020 [email protected] Pharmaceuticals and Healthcare, Consumer Kartik A. MEHTA (91) 22 6622 1012 [email protected] Software, Telecommunications R. RAVI (91) 22 6622 1014 [email protected]


DAIWA SECURITIES GROUP INC OFFICE / BRANCH / AFFILIATE ADDRESS TEL FAX

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, (03) 5555 3111 (03) 5555 0661 Tokyo, 100-6753

Daiwa Securities America Inc Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Securities Trust and Banking (Europe) PLC (Dublin Branch) Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

DAIWA SECURITIES SMBC LIMITED OFFICE / BRANCH / AFFILIATE ADDRESS TEL FAX

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, (03) 5555 3111 (03) 5555 0661 Tokyo, 100-6753

Daiwa Securities SMBC Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 (Daiwa SMBC Europe)

Daiwa Securities SMBC Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, (49) 69 717 080 (49) 69 723 340 (Daiwa SMBC Europe, Frankfurt) Federal Republic of Germany

Daiwa Securities SMBC Europe Limited, Paris Branch 112, Avenue Kléber, 75116 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 (Daiwa SMBC Europe, Paris)

Daiwa Securities SMBC Europe Limited, London, 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Geneva Branch (Daiwa SMBC Europe, Geneva)

Daiwa Securities SMBC Europe Limited, Milan Branch Via Senato 14/16, 20121 Milan, Italy (39) 02 763 271 (39) 02 763 27250 (Daiwa SMBC Europe, Milan)

Daiwa Securities SMBC Europe Limited, Sucursal en España Jose Ortega y Gasset 20, 7th floor, Madrid 28006, Spain (34) 91 529 9800 (34) 91 577 5887 (Daiwa SMBC Europe, Spain)

Daiwa Securities SMBC Europe Limited 25/9, build. 1, Per. Sivtsev Vrazhek, Moscow 119002, Russian Federation (7) 495 617 1960 (7) 495 244 1977 Moscow Representative Office

Daiwa Securities SMBC Europe Limited, Middle East Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 (Daiwa SMBC Europe, Middle East) Manama, Bahrain

Daiwa Securities SMBC Europe Limited Dubai Branch The Gate village Building 1, 1st floor, Unit-6, DIFC, P.O.Box-506657, (971) 47 090 401 (971) 43 230 332 Dubai, UAE.

Daiwa Securities SMBC Hong Kong Limited Level 26, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Securities SMBC Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, (65) 6220 3666 (65) 6223 6198 Republic of Singapore

Daiwa Securities SMBC Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP Daiwa Securities SMBC Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines

Daiwa Securities SMBC-Cathay Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities SMBC Co Ltd, Seoul Branch 6th Floor, DITC Building, #27-3, Youido-dong, Yongdungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, Republic of Korea

Daiwa Securities SMBC Co Ltd, Beijing Office Room 3503/3504, Capital Tower Beijing, (86) 10 6500 6688 (86) 10 6500 3594 No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People’s Republic of China

Daiwa SMBC-SSC Securities Co Ltd, Shanghai Office 15/F., Aurora Plaza, No. 99 Fucheng Road, Pudong, (86) 21 6859 8000 (86) 21 6859 8030 Shanghai, People’s Republic of China

Daiwa Securities SMBC Co. Ltd, Bangkok Representative Office Level 8 Zuellig House, 1 Sliom Road, Bangkok 10500, (66) 2 231 8381 (66) 2 231 8121 Thailand

Daiwa Securities SMBC India Private Limited 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India

Daiwa Securities SMBC Co. Ltd, Hanoi Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hoan Kiem Dist. Hanoi, Vietnam

DAIWA INSTITUTE OF RESEARCH LTD OFFICE / BRANCH / AFFILIATE ADDRESS TEL FAX

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

DIR America Inc 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 7103, 7104

DIR Europe Ltd 1/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8654

DIR Hong Kong Ltd Level 26, One Pacific Place, 88 Queensway, Hong Kong (852) 2536 9332 (852) 2845 2190

Paris Representative Office 112 Avenue Kleber, 75116 Paris, France (33) 156 26 2272 (33) 156 26 2270

Taiwan Representative Office 13/F, No. 200, Sec 1, Kee-Lung Road, Taipei, 106 Taiwan (886) 2 2758 8754 (886) 2 2345 3699

Shanghai Representative Office Room 04-A, 15/F., Aurora Plaza, No. 99 Fucheng Road, Pudong, (86) 21 5840 1181 (86) 21 5840 1178 Shanghai, China


DISCLAIMER This publication is produced by Daiwa Securities SMBC Co. Ltd and/or its non-U.S. affiliates, and distributed by Daiwa Securities SMBC Co. Ltd and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities SMBC Co. Ltd nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities SMBC Co. Ltd, and/or its affiliates except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities SMBC Co. Ltd, its parent, holding, subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in , or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Daiwa Securities SMBC and Daiwa Securities Group

Daiwa Securities SMBC is a Daiwa Securities Group company that is 60% owned by parent Daiwa Securities Group and 40% by Sumitomo Mitsui Financial Group.

Ownership of Securities: Daiwa Securities SMBC Co.

Daiwa Securities SMBC may currently, or in the future, own or trade either securities issued by the company referred to in this report or other securities based on such financial instruments. Daiwa Securities Group has filed major shareholding reports for the following companies of which it owns over 5% (as of 31 July 2009): Sumitomo Mitsui Construction (1821); Tanabe Engineering (1828); GABA (2133); Edion (2730); Sapporo Drug Store (2786); Fuji Foods (2913); Netyear Group (3622); Japan Systems Create (3822); FreeBit (3843); Air Water (4088); Soken Chemical & Engineering (4972); Nihon Electric Wire & Cable (5817); Kawagishi Bridge Works (5921); Nasu Denki-Tekko (5922); Super Tool (5990); Hanshin Diesel Works (6018); Okada Aiyon (6294); Toa Valve Holding (6466); Meisei Electric (6709); Sanyo Electric (6764); Shibaura Electronics (6957); Mitsui High-Tec (6966); Taiyo Yuden (6976); Shinseido (7415); Endo Manufacturing (7841); Daiwa Seiko (7990); Daiko Denshi Tsushin (8023); Daiwa SMBC Capital (8458); Astmax (8734); DA Office Investment (8976); Square Enix Holdings (9684); Imperial Hotel (9708); Verite (9904); Valor (9956).

Investment Banking Relationship: Daiwa Securities SMBC Co.

Daiwa Securities SMBC has lead-managed public offerings and/or secondary offerings (excluding straight bonds) in the past twelve months for the following companies: Linical (2183); Sobal (2186); Yashima Denki (3153); Toridoll (3397); Zappallas (3770); Tri-Wall (3957); C'BON Cosmetics (4926); Toshiba (6502); Sumitomo Mitsui Financial Group (8316); Orix (8591); Daiwa Securities Group (8601); T&D Holdings (8795). (list as of 7 August 2009)

Investment Banking Relationship: non US affiliates of Daiwa Securities SMBC Co.

The non U.S affiliates of Daiwa Securities SMBC in Hong Kong have, within the preceding 12 months, had an investment banking relationship with or received compensation for investment banking services from, the following corporations the securities of which are listed on The Stock Exchange of Hong Kong Limited; China Automation Group Limited; China Kangda Food Co. Ltd.; Fu Ji Food & Catering Services Holdings Ltd.; International Elite Ltd.; Solargiga Energy Holdings Ltd..

Hong Kong This research is distributed in Hong Kong by Daiwa Securities SMBC Hong Kong Limited (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact Daiwa Securities SMBC Hong Kong Limited in respect of any matter arising from or in connection with this research.

Relevant Relationship (DHK)

Daiwa Securities SMBC Co or its non US affiliates in Hong Kong may from time to time have an individual employed by or associated with any member companies serving as an officer of the company reviewed in this research.

DHK market making

DHK may from time to time make a market in securities covered by this research.

Singapore This research is distributed in Singapore by Daiwa Securities SMBC Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act. By virtue of distribution to these category of investors, Daiwa Securities SMBC Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Section 36 relates to disclosure of Daiwa Securities SMBC Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Securities SMBC Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Securities SMBC Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Securities SMBC Stockbroking Limited in respect of any matter arising from or in connection with the research.

India This research is distributed in India by Daiwa Securities SMBC India Private Limited which is regulated by the Securities and Exchange Board of India. Recipients of this research in India may contact Daiwa Securities SMBC India Private Limited in respect of any matter arising from or in connection with this research.


DISCLAIMER (cont’d) United Kingdom This research report is distributed by Daiwa Securities SMBC Europe Limited, which is authorised and regulated by The Financial Services Authority and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Securities SMBC Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past three years for the issuer of such securities. In addition, employees of Daiwa Securities SMBC Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Securities SMBC Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Securities SMBC Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Securities SMBC Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. These include the requirement that the remuneration of Analysts must not be linked to specific transactions carried out by underwriting or investment banking departments, nor may any decisions on remunerations of Analysts involve the said departments directly. Daiwa Securities SMBC Europe Limited’s research has been published in accordance with our conflict management policy, which is available at http://www.daiwasmbc.co.uk/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at http://www.daiwausa.com/report_disclosure.html.

Germany This document has been approved by Daiwa Securities SMBC Europe Ltd and is distributed in Germany by Daiwa Securities SMBC Europe Ltd, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

United States This report is distributed in the U.S. by Daiwa Securities America Inc. (DSA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DSA’s views at any time. Neither DSA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DSA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DSA: Daiwa Securities America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

Ownership of Securities. For “Ownership of Securities” information please visit BlueMatrix disclosure Link at http://www.daiwausa.com/report_disclosure.html.

Investment Banking Relationships. For “Investment Banking Relationships” please visit BlueMatrix disclosure link at http://www.daiwausa.com/report_disclosure.html.

DSA Market Making. For “DSA Market Making” please visit BlueMatrix disclosure link at http://www.daiwausa.com/report_disclosure.html. DSA made a market in securities or ADRs of the following issuers at the time this report was published.

Research Analyst Conflicts. For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at http://www.daiwausa.com/report_disclosure.html. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DSA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification. For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at http://www.daiwausa.com/report_disclosure.html. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months.

Additional information may be available upon request.

2009-08-24 (daiwa sec) reliance infrastructure [1]...nts the growth...

Documents

reliance power projects

reliance power rpwr

e revenue rs

power utility

rpwr rpwr

gw of projects

transmission projects

ebitda rs