Equity Research: Reliance Power

Reliance Power is the part of the Reliance Group led by Anil Ambani engaged in construction and operation of power projects across the globe. It plays an important role in the energy sector of the country with it's huge potential power generation capacity either on it's own or with it's subsidiaries by it's diversified and vast power portfolio.

About the Company

Reliance power Ltd. is one of the key player in the energy sector in India, Company operates, develops and construct variety of power projects including coal-based, gas-based, and renewable energy projects in India as well as internationally on its own or with it’s subsidiaries, Company incorporates in 1995 and is a part of the Reliance Anil Dhirubhai Ambani Group(ADAG), and led by Anil Ambani Here are some key aspects and facts about the company  

·   Projects Undertaken: Company has undertaken development and operation of various projects all over the India and some international projects also, The tasks underneath improvement comprises 3 coal-fired tasks; one gas-fired projects and 12 hydroelectric projects, six of them in Arunachal Pradesh, 5 in Himachal Pradesh and one in Uttarakhand. Its project portfolio additionally includes 3,960 MW Sasan Ultra Mega Power Project, positioned in Madhya Pradesh. UMPPs are a part of the Indian government's initiative to collaborate with power generation groups.

•         Portfolio: Organization have diversified portfolio which includes coal, gas, hydro, solar and some forms of renewable energies also to satisfy the growing energy needs of the country sustainably.
•    Outlook To Renewable Energy: company has taken so many initiatives in creation or operation with renewable sources of energy including wind power and solar power. Company has explored too many opportunities to expand its renewable energy portfolio to sync with global shift towards cleaner and sustainable sources of energy.
•   Business Expansion: As increasing demand in energy sector creates a lot of expansion opportunities to business in the industry so the Reliance power has been focused on expanding it’s presence with in India and Internationally as well. Expansion strategies are aligned with the mission and vision of the company oftenly
•  Installed Capacity: Reliance power has about 6000 megawatt (MW) operational power generation asset and it continue to expand its capacity through the construction of new power plants.
• Environmental Initiatives: Reliance power develops innovative technologies to make their services environmental friendly by use of green technology by guiding principles of 5Rs: Reduce, Reuse, Recycle, Renew and Respect.
•  Social Responsibility: Company take appropriate CRS measures to create direct and positive economic, social and environmental impact by partnering with government, NGO bodies, Rural development programs and various SHGs.

•   Financial Performance: Reliance Power has consistently demonstrated improving stock price over 2020 and recovering losses post 2018
• Carbon Credits: To maintain the level of Carbon credits organization uses Clean development mechanism (CDM) under United Nations Framework Convention on Climate Change(UNFCCC) and others. one of largest portfolio of highest quality Carbon offsets with a CDM registered project portfolio, of more than 8000 MW, with potential to offset 60 million Certified Emission Reductions(Carbon credits)

Management

Industry Analysis

In power generation India stands at 3^rd position in the world during the fiscal year 2022-23 with total electricity generation of 1884 tWh and gross electricity consumption is 1327 kWh and in gross consumption 17.89% consumed by primary sector of the country which is highest among the world. Generation and distribution of energy industry show a huge potential till now, As India’s electricity sector is dominated by fossil fuels till now particularly coal, which is producing 3 quarters of the country electricity as coal is non renewable resources of energy and also it creates lot’s of carbon emission in the environment so the Industry is shifting it’s road toward non-renewable sources of energy. In 2022-23, renewable power generation was 22.47% of total utility power generation when total utility power generation increased by 8.77% to 1614.70 billion kWh. Under the government’s 2023-27 electricity plan, India restricted on building any fossil fuel power plants and targeted to reach energy contribution by non renewable sources to 44.7% till 2029-30,reason for increasing demand of energy is also because of HVAC(cooling) and other cooling measures and increasing population and it’s increasing demand for energy also derive the overall demand for the country.

Renewable power and EVs are the main drivers, with substantial investments also going into batteries, heat pumps, and nuclear power. Low-emission power is set to account for almost 90% of total electricity generation investments in 2023. Solar energy is a standout, receiving over $1 billion per day, exceeding spending on upstream oil. Additionally, demand for electric cars and heat pumps is booming.

In current decade, Indian electricity sector will witness major conversion with respect to demand growth, energy mix, and market operation as meeting economy’s demand to ensure that country has sufficient electricity all the times, that’s why industry is shifting their focus towards non-renewable sources also because the peak demand and energy demand would be 363 GW and 2,459 billion kWh (excluding rooftop solar generation) respectively in the fiscal year 2031–32.IEA estimates India will add between 600 GW to 1200 GW of additional power 2050 in addition, post 2015 Energy distribution is major problem then the energy generation recently due to diversification of the country.Still industry is capable of major transformation and developments despite of various risks because there are lot’s of  opportunity to explore which comes with innovations and core strengths.

Risk

Every sector has it’s significant inherent risks, some key risks in this sector which can be impactful to the company or overall industry are listed below:

• Government Policy and Regulation:

Changes in government policy and regulation is one of the major factor which derive the overall demand and supply of the power sector for example Carbon commission changes, CC limits that can effect the profitability of the business.

• Market Fluctuation:

These market witness volatility in the prices cos it’s influence by various factors for instances such as geopolitical issues, supply and demand non equilibrium and fluctuation in currency exchange rate and these fluctuation can impact the overall financial performance of the company.

•    Environmental Risks:

As awareness regarding the ESG is growing rapidly, companies in the sector substantially making changes as per the requirement to safeguard themselves from legal compliance.

• Technology Innovation:

Rapid innovation can be seen as opportunity or threat to the industry subjective with the adaptability criteria of the company that can disrupt or enhance the profitability of the company

• Geopolitical Factors:

As lot’s of chaos had been created in the world till now whether it’s Russia-ukarine war, Arab country monopolies and Palestine and Israel issues that created lot’s of volatility and fluctuation in the market of crude oil and that’s one of the major risk that directly impact the supply side of energy sector

•     Energy Transition Risk:

Adaptability rates to the changes to the company is slow cos it requires lot’s of investment to change the technology or methods rapidly so the shift towards the Renewable sources is quite rigid as it seems to the companies

•       Market Saturation:

As change in the road map toward the renewable sources of energy may lead to saturation of the market, reducing  overall profitability due to cut throat competition which will lead to less ROI.

•    Financial Risks:

As infrastructure projects of the company is huge so here exist the financing problem cos most of the financing of these projects come from government and bigger institutes which makes the company finances vulnerable to the economic decisions regarding the interest rates.

•       Inadequate Workforce:

In transition to the cleaner energy segment there is need for advanced skilled workforces and upskilling the existing workforce may or may not be cost effective to the company which create the direct impact on the financial statements of the companies.

•       Supply Chain Risk:

As previously mentioned distribution of the energy is becoming one of the major problem for the industry and for the company it’s not suitable sometimes to mange the complex supply chains of energy.

Concall Analysis

Reliance power policies syncing with the consumer behavior and guiding principles of the globe regarding the generation of energy by transitioning from traditional fossil fuel energy to the greener sources and by strengthening the transmission system for seamless distribution of energy and meeting the demand of the country and the demand drive from the industrial and commercial sector together accounting for nearly 50% of the country’s electricity consumption, resumption of economic activity post relaxation of pandemic restrictions has made a positive impact on the overall demand.

External environment factors that has been keys areas to be focused on are:  

• Enhanced focus on ESG norms.
•        Weak financial condition of electricity distribution Companies.
•    Government positive outlook towards future growth of power sector.
•       Implementation of New Environmental(Protection) Norms impact on the company key operations
•       Supply deficit of Gas allover the industry

Financials

Reliance Power Quarterly Results

 Reliance Power Profit & Loss

Reliance Power Balance Sheet

 Reliance Power Cash Flow

 Peer Comparison

Valuation:

·       Profit and Financial Performance:

Company had incurred huge losses in f.y 2019 & 2020 due to decrease in the net sales and unexceptional transfer from general reserve However company is recovering it’s losses despite of covid- 19 effect with in F.y 2021 and afterwards company’s revenue decreased due to change in policies and other market circumstances and company’s recovering it’s losses slowly and steadily, It’s shows potential of steady growth in near future.

•  Dividend Yield:
• Reliance Power had not distributed dividend from 2016 which is a red flag regarding the company outlook towards it’s investors.

·       Price-to-Earnings (P/E) Ratio:

A negative price-to-earnings (P/E) ratio indicates that a company has negative earnings or has been losing money over the past 12 months, Companies experienced down period due to some of the environmental factors and that’s not in hands of company.

·       Price-to-Book(P/B) Ratio:

The P/B ratio provide the insight about the trading price of the share above or below the intrinsic value, lower P/B ratio indicates the potential undervaluation of the share in the industry.

Conclusion

·       Outlook Toward Green Energy and Renewables:

Reliance power has done significant changes in the outlook towards the energy generation from the traditional fossil fuels to the green energy and adapting various renewable segments that will align with the global trend towards the sustainable growth of the business.

·       Addition in Capacity and Improving Distribution:

Reliance Power has done lot’s of efforts in increasing the overall capacity of the energy generation whether through traditional approach or new renewable source approach which highlight the company’s adaptability towards the increasing demand and change in the global trends.

·       ESG and Sustainability

Reliance Power is following ESG principles and taking environmental initiative and doing it social responsibility by various ways and following the industry norms and global trends.

·       Future Plans and Targets

Power Demand in India has grown at CAGR of 5.66% in last 5 years so the company decided to meet this demand by new renewable energy projects within the guidance of the new environment norms 2015 by diversifying it’s portfolio more effectively.

Source: Company's Website, Sharescart.com

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