Adani Power – Weaker operational performance; maintain Sell : Anand Rathi

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Adani Power – Weaker operational performance; maintain Sell

n       Maintain Sell. Adani Power’s 2QFY11 results belied expectations despite generation being up 31% qoq and the new 330MW commissioning. Weaker merchant rates because of the monsoons trimmed realizations while higher fuel costs squeezed operating margins. We raise our target to `111 from `105 earlier; retain Sell.

n       Growth belies expectations. Sales rose 12% qoq to `3.95bn and net profit rose 10% to `1.25bn. Interest expense and depreciation rose 5% and 28% qoq respectively owing to the capacity commissioned. Higher ‘other income’ (up 139% qoq) and lower tax rate (down 927bp qoq) aided net profit. EBITDA margin fell 736bp qoq on higher fuel (44%) and staff costs (7%) as other expenses dropped 10% qoq.

n       Realizations slid on weaker merchant prices. Realizations slid qoq to `2.82/kWh from `3.33, on lower merchant rates due to the good monsoon. Fuel costs increased qoq to `1.13/kWh from `1.04 in 1QFY11.

n       Change in estimates. We slash FY11 sales estimates 29% due to lower generation and expected delay in Mundra commissioning. However, we raise FY11 and FY12 net profit estimates 15% and 21% respectively on the lower depreciation and interest expense from the delayed commissioning.

n       Valuation. We raise our sum-of-the-parts target price to `111 (projects: `106 + cash/investments:`5), which is 2.8x FY12e BV.