Reliance Power - ICRA assigns 4/5 Rating

Leading credit rating agency, ICRA assigned IPO Grade 4, indicating above average fundamentals, to the proposed initial public offering of Reliance Power (RPower), a subsidiary of Reliance Energy. ICRA assigns IPO grading on a scale of IPO Grade 5 to IPO Grade 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals.

The IPO Grade 4 assigned by ICRA reflects the benefits arising out of being a part of the Reliance Anil Dhirubhai Ambani Group which has considerable experience across the value chain in the power sector and the expected cost competitiveness of most of the power projects in relation to the markets it proposes to serve, which when combined with spiraling energy deficits and the groups plans of maintaining a judicious mix of long term PPAs and short term trading, should result in strong earnings growth in the long term.

Further, the IPO proceeds would enable the company to tie up the equity funding for the first tranche of projects that it has identified. The grading also reflects the prospects for the power generation business in the country with increasing regulatory clarity, gradual emergence of a market for trading in power and improvement in financial position of some of the utilities in the state sector.

The grading is however constrained by the implementation risks inherent in project implementation of the scale and magnitude being envisaged by RPower, uncertainty on issues related to gas and the ability of the company to maintain the desired levels of all operating parameters, especially in case of the competitively bid projects, apart from executing the projects without cost overruns.

The company would also be subject to technology risks arising out of the fact that for some of its plants, which are based on Super Critical Technology, the BTG would be primarily imported and these are yet to be proven in Indian conditions, even though they have an operating history internationally. However these risks are partly mitigated due the significant financial strength enjoyed by the promoter group, along with demonstrated execution capabilities. Also, as a strategy to mitigate the financing risk, RPower has taken in principle sanctions for rupee debt facilities of Rs 179.4 billion and foreign currency denominated debt facilities of USD 542 million, which constitute more than 87% of total debt requirement for identified projects.

Shares of Reliance Energy gained Rs 144.4, or 6.76%, to settle at Rs 2,279. The total volume of shares traded was 1,396,980 at the BSE.