RInfra trades its golden goose for cash with Adani Transmission to slash debt

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On Thursday, news of the sale of Reliance Infrastructure Ltd’s (RInfra) Mumbai power business (MPB) to Adani Tranmission Ltd set both stocks skyrocketing. While the former zoomed 13% before closing up 8% on relief from the debt-trap it was languishing in, the latter jumped 10% as the acquired power business seems to fit snugly into its ambitious growth plans in the power distribution business.

For the Anil Ambani-led RInfra, the long-pending deal will make it debt-free by March 2018. The sale of MPB should fetch the infrastructure conglomerate Rs18,800 crore, most of which will come in as the deal is realized and a small portion will hinge on regulatory approvals pending at RInfra. According to the media release, the firm “will utilize the proceeds of this transformative transaction entirely to reduce its debt, becoming debt free and up to Rs3,000 crore cash surplus.”

Certainly, this comes as breather for investors and the management of RInfra. Note that in October, India Ratings and Research had downgraded the firm’s long-term issuer rating, citing reasons of high leverage and delay in monetizing its road and power assets. In FY2017, the net debt was 6.4 times its operating profit and interest cover (ability to service interest cost) was just 1.1 times (the operating profit).

With a debt-free balance sheet, RInfra plans to focus on roads and other infrastructure engineering, procurement, construction (EPC) projects and defence sector.

However, the key concern is its ability to continue to generate steady cash flows. The power business (Mumbai and Delhi) together accounted for over three-fourths of its revenue, a significant portion of which will cease to exist post the MPB sale. Although exact figures are not known, the management is confident that cash flows would continue from its Delhi power business that is twice that of the MPB.

Meanwhile, the firm has filed its draft red herring prospectus with the Securities and Exchange Board of India for an InvIT to monetize seven of its road assets. This again would take operational assets generating cash flows from tolls, out from its revenue flows.

In other words, while the asset sale would perhaps improve its rating on the debt instruments, the firm would need to quickly scale up operations in other infrastructure areas to churn out cash flows. In a November investor presentation, the firm spelt out a tall target of achieving an order book of Rs50,000 crore in EPC projects. Be that as it may, revenue from these projects, if they bear fruit, will be several quarters away.

In any case, the asset sale brings instant relief on debt that ate into profits. Besides, it releases funds to bid for fresh projects, which itself should give a leg-up to the stock.

Meanwhile, the deal is a bigger victory for ATL as its transmission network will increase its reach in prime areas, enhance revenue and cash flows and even derive economies of scale with expansion. Edelweiss Securities Ltd estimates the domestic transmission sector to see a massive Rs3 trillion worth of investment over FY2018-2022 and ATL is aggressively looking to garner a significant share in these projects. That said, the stock’s trajectory will also be determined by the quantum of debt increase that the deal will finally bring with it. Besides, it could cap further capex unless backed by fresh equity infusion.