Market wary of REL's new foray

MUMBAI: Reliance Energy’s (REL) diversification into urban transport sector with the Rs 2,356-crore Mumbai metro rail project is aimed at deploying part of its huge cash reserves (of over Rs 10,000 crore) for a better rate of return compared with the fixed 16% return in power distribution.

While the Mumbai-based power utility, part of the Reliance-ADA Group, is not seeing a concrete growth from its core business because of delays and long gestation in project implementation, it hopes to improve its topline growth with the metro rail project. The stock market, however, doesn’t look excited by REL’s horizontal diversification.

Its share price, which touched a 52-week high of Rs 701 on January 20, has slipped to Rs 444 on Wednesday, marginally up from its previous close of Rs 438. A senior REL official said the company has raised adequate funds when it was available cheap, and that it doesn’t need to raise any more funds.

REL, which holds 69% stake in the yet-to-be-named special purpose vehicle for the Mumbai metro project, will contribute about Rs 550 crore in equity. REL has already begun to achieve an early financial closure. At the debt-equity ratio of 70:30 and after the viability gap funding, the project would need a total of Rs 1,706 crore.

The other equity holders — Connex of France and Mumbai Metropolitan Region Development Authority (MMRDA) — will hold 5% and 26% respectively. Connex, which has undertaken several similar mass rapid transports systems worldwide, including Melbourne, Boston and Germany, is the operational partner of the consortium.

The REL official said the project has targeted a higher return on investment compared with the cap of 16% post-tax returns. “We will ensure quick implementation of the project to minimise cost and time overruns. We expect better traffic,” said the official. However, equity analysts don’t seem to be excited.

“None of their proposed projects are expected to be operational in the next 3-4 years. As far as the metro rail project is concerned, there is no proven track record of a similar project in India, while risks are high. For REL, there are no visible growth drivers,” said a senior analyst with Mumbai-based Networth.

The first corridor in phase-I — the 11.7 km Versova-Andheri-Ghatkopar stretch, one of Mumbai’s most congested stretches, is expected to service close to 60,000 commuters per hour on its completion by ’09. The phase-I of the metro project also includes the 38-km Colaba-Mahim-Charkop corridor and 14 km Bandra-Kurla-Mankhurd corridor.

The project will be on a build-own-operate and transfer basis for 35 years, of which five years are for construction. The consortium is expected to complete the tendering process for vendors in the next 2-3 months, while onsite work on the project will commence by October.