Business Profile

Reliance Power Limited (RPower), originally incorporated as Bawana Power Private Limited, is part of the Reliance Anil Dhirubhai Ambani Group and is currently developing 13 medium and large sized power projects with a combined planned installed capacity of 28,200 MW. The identified project sites are located in western India (12,220 MW), northern India (9,080 MW), northeastern India (2,900 MW) and southern India (4,000 MW). The projects include seven coal-fired projects (14,620 MW) to be fueled by reserves from captive mines and supplies from India and abroad, two gas-fired projects (10,280 MW) to be fueled primarily by reserves from the Krishna Godavari Basin (the “KG Basin”) off the east coast of India, and four hydroelectric projects (3,300 MW), three of them in Arunachal Pradesh and one in Uttarakhand.

Company intends to sell the power generated by these projects under a combination of long-term and short-term PPAs to state-owned and private distribution companies and industrial consumers. In addition to the 28,200 MW of power projects, company intends to develop additional power projects to help meet the huge demand in this sector.

Company is considering the development of CBM (Coal Bed Methane) power generation projects based on fuel from CBM blocks being explored by a consortium that includes company’s affiliates. Company also intends to invest in overseas opportunities that are a strategic fit with company’s business. Company intends to explore the possibility of registering certain of its projects with the Clean Development Mechanism executive board for the issuance of carbon emission reduction certificates that company may sell. The company has subsidiaries viz SPL, CAPL, MPPGL, RPSCL, MEGL, VIPL, USHPPL, THPPL, SHPPL and KPPL. Projects of an aggregate generation capacity of 24,600 MW were bid and secured by the Company in its own name. Of this Dadri Project of 7,480 MW is being developed by the Company and the Projects of 17,120 MW are being developed through subsidiaries.

Objectives of IPO

The company intends to use the issue proceeds for:

Funding Subsidiaries to part finance the construction and development costs of certain identified projects: The company is pursuing the development of 13 power generation projects that are currently under various stages of development. Out of these projects, one is being executed by company and 11 projects are being developed by nine subsidiaries, which have been set up to develop these projects. One project is expected to be executed through a subsidiary that remains to be transferred to company. Company intend to use a portion of the Net Proceeds to partially fund five subsidiaries which are developing the following six projects, collectively referred to as “Identified Projects”:

                  Name                 Project Name
                  RPSCL              -600 MW Rosa Phase I
                  RPSCL              -600 MW Rosa Phase II
                  VIPL                 -300 MW Butibori
                  SPL                   -3960 MW Sasan
                  MEGL              -1200 MW Shahapur Coal
                 USHPPL           -400 MW Urthing Sobla

The aggregate amount estimated for the above is Rs 86,424.30 million.

Investment Rationale

• The Ministry of Power has set a goal/Mission 2012: Power for All. According to estimate, the total energy requirement in India will increase to 968,659 GWh by fiscal year 2012, 1,392,066 GWh by fiscal year 2017 and to 1,914,508 GWh by fiscal year 2022. This would lead to an annual Electric Peak load of 152,746 MW in fiscal year 2012, 218,209 MW in fiscal year 2017 and 298,253 MW in fiscal year 2022. The northern region is expected to contribute 30.1% and the western region is expected to contribute 28.4% of the overall annual Electric Peak load in fiscal year 2022. The Government has estimated the total investment potential of the sector at Rs. 9,000 billion for a specified period up to fiscal year 2011. This represents a significant opportunity for capacity expansion and growth for company.
• Company has located the majority of its projects in the northern, western and north-eastern regions of India to cater to the significant unmet demand in the northern and western regions of India. As the peak demand for the fiscal year ended March 31, 2007 was 104,867 MW and CEA expects it to grow to 152,746 MW and 218,209 MW by the fiscal years ending March 31, 2012 and March 31, 2017, respectively, hence company’s projects are well positioned to serve expected demand. In addition, company has planned for each project to be situated either close to its fuel source or to the load center.
• The 13 projects that company is developing have a combined planned installed capacity of 28,200 MW, which comprise one of the largest power generation portfolios under development in India. Along with that company’s power portfolio includes some of the most significant power projects in the industry like Sasan, a 3,960 MW coal-fired UMPP located in Madhya Pradesh, is expected to be the largest pithead coal-fired power project at a single location in India. Similarly, Dadri, a 7,480 MW gas-fired project located in Uttar Pradesh, is expected to be the largest gas-fired power project at a single location in the world. Also, Krishnapatnam, a 4,000 MW coal-fired project, is the third and most recently awarded UMPP.
• The Kyoto Protocol paved the way for the Clean Development Mechanism (“CDM”), a program that encourages sustainable development projects that reduce greenhouse gases in the earth’s atmosphere by issuing tradable certificates called Certified Emission Reductions (“CERs”) and Verified Emission Reductions (“VERs”). Company expect to be eligible for the CDM benefits due to the technologies that it intends to employ at certain of its power generation projects. Company intends to explore the possibility of registering certain of its projects with the CDM executive board for the issuance of carbon emission reduction certificates that company may sell. In order to realize these benefits, company have entered into MOUs with CDM specialists who have agreed to assist company with the development of its CDM strategies and may purchase CERs from company.
   

Concerns

• As the company is in project implementation phase hence it will have long gestation period. The earnings are likely to remain back ended and would be closely linked to capacity adds. As per the proposed schedule, the capacity addition begins from year FY10, followed by marginal profit. However meaningful earnings kick in only by FY13 with commissioning of unit at Dadri and accelerated completion of Sasan UMPP.
• The company is currently intending to finance approximately 20% to 30% of the cost of these projects in contributions from Reliance Power and approximately 70% to 80% of the cost of these projects with third-party debt. Company’s ability to meet its debt service obligations and to repay its outstanding borrowings will depend primarily upon the cash flow generated by company’s business. In case if company is not able generate sufficient cash and fails to meet its debt service obligations, there could be a material adverse effect on company’s business and results of operations.
• Company have entered into long-term PPAs for its Rosa Phase I and Sasan power projects for a term of 25 years from the commissioning of the project and intend to enter into long-term PPAs for other power projects that company is developing. Under a long-term PPA, company typically sells all the power generated from a power plant to the customers at predetermined tariffs. Accordingly, if tariffs generally increase, company will not be able to renegotiate the terms of the PPAs to increase its tariffs. Company also expects to enter into short-term PPAs, which may create additional variability in its revenues and could expose its business to risks of market fluctuations in demand and price for power. Company may also be exposed to increased competition, particularly that arising from changes in technology that may allow other power generation companies to offer power at lower rates. Risks associated with the structure of Company’s PPAs could have a material adverse impact on company’s business, prospects, financial condition and results of operations.
• Company had negative cash flow from operating activities of Rs. 3.1 million for Fiscal 2006 and Rs. 4.4 million for the six months ended September 30, 2007 on a non-consolidated basis. This was principally due to decrease of Rs. 26.1 million in trade and other receivables and a decrease of Rs. 43.2 million in trade and other payables for the six months ended September 30, 2007. If the negative cash flow trend persists in future, Company may not be able to generate sufficient amounts of cash flow to finance its working capital and capital expenditure requirements.

Valuation

• The company is the primary vehicle for investments in the power generation in Reliance ADA group .The Company has entered and intended to enter into various arrangements with companies of Reliance ADA group, including REL, RNRL and Reliance Energy Transmission. This will help the company in drawing upon the considerable expertise and resources these affiliates have in the energy sector.
  As the company is in project implementation phase hence meaningful earnings likely to kick in later years. After commissioning of these proposed projects over next few years the company would be among one of the major power producing company in India. The company enjoys the lower risk due to its well diversified project portfolio comprising of coal , gas and hydro.
• The company with its strategies like lower cost of generation, fast completion of projects and efficient operations looks an attractive issue to deploy the funds.
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-By Hem Securities Research (www.hemonline.com )