Reliance Infrastructure has been trying to build a focus on selected segments. It is now in the news amid talks about Greenko Group showing interest in buying its Mumbai electricity business for an enterprise value of Rs.10000 to Rs.13000 crore. Greenko is a home grown power company which owns and operates 2500 MW of power generation capacity.
Previously, Reliance Infrastructure had represented in the investor presentation that is looking at new opportunities to monetize its Mumbai electricity assets which comprise 500 MW power plant at Dahanu near Mumbai and power distribution assets. The company distributes about 1800 MW of power to about 30 lakh customers in Mumbai.
How will this help?
Assets in Mumbai are lucrative in terms of generating a regular flow of cash with negligible risks. The Mumbai electricity business comes under the standalone business and if the business revenue of EPC is removed, it clocks to Rs.8000 crore revenue. The annual report of the company suggests that the Mumbai distribution business alone generates revenue close to Rs.6000 crore. While the standalone power business generates only 34% of the consolidated revenues, it makes close to 42% of that consolidated profits before interest, depreciation and tax which shows that the contribution of the power business is quite high.
The company is now focusing across emerging and possibly high growth businesses which will need capital. It also wants to ease financial leverage. Reliance Infrastructure is making a conscious effort to de leverage by divesting few assets and to reduce debt with the proposed investment. Investment companies see Reliance Infrastructure in a phase of transformation for the next couple of years. It has party divested the power distribution business, entered the defense sector and exited from the cements and roads business.
If the deals including the Mumbai electricity business and proposed investment fructify, they could unlock huge value for the company. While the exact amount of the debt to equity ratio of the assets is not known, debt tied to these assets will go and equity would be released. These initiatives could have a strong impact on the valuation of the company. At present, the market does not give much value to some of its businesses which is also reflected in valuations. It is valued at a market cap of Rs.13, 300 crore on a reported net worth of Rs.23, 348 crore in FY 17. It is valued at a price to book value of 0.56 times. Some of the company’s businesses are divested at higher valuations and the standalone business or power business would get higher multiples than the one given to the consolidated entity.
Reliance Infrastructure has interesting times ahead with the various options of investment ahead of it. It will be interesting to see the valuation of the company if the proposed investments work out as planned.