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Aggressively SELL Reliance Energy

September 25, 2007

Exclusive Live Coverage of EventsBreaking News: India’s Largest FII, Citigroup has recommended a SELL on Reliance Energy and has categorized the stock in “Low Risk” category. Stock Price target is Rs 510.

RELE shares have rallied up 118% over the past 5 months on expectations of blue-sky scenarios through capacity additions, EPC order wins and the value of CBM blocks. Even with extreme blue-sky scenario of 1] additional 25,000MW capacity in 7 years, 2] execution of EPC orders of Rs800bn to be executed over 7 years with EBITDA margins of 15%, 3] no fuel supply risks, 4] no execution risks, 5] generous multiples for valuations, 6] and 20% premium to our existing value of RELE (ex-cash) yields only Rs1,183/share. Citi reiterates a Sell on stock.

RELE has re-rated every time a project has been announced. It was expected that RELE would capitalize on the opportunities thrown up by the passing of the Electricity Act 2003 (EA03). Projects were announced from time to time, but 4 years have passed and RELE continues to have only 941MW of generation capacity and distribution licenses in Mumbai and Delhi.

12-month target price for Reliance Energy of Rs510 is based on RELE (ex net cash) value of Rs229 and net cash value of Rs281 (1.1x FY07E Net Cash/FD Share). RELE (ex net cash) would comprise Mumbai business value of Rs117, other power assets value of Rs27, EPC Business value of Rs65 and Delhi distribution value of Rs20. At target price of Rs510, RELE (ex Delhi) would trade at a P/E multiple of 10.1x FY09E.

Dalal Street Recommendation: We have recommended our clients to BUY PUT OPTIONS.

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