Citi on Adani Power

Adani Power
(ADAN.BO; Rs137.55; 1L)
Valuation
Traditional valuation methodologies like P/E and EV/EBITDA multiples can be
misleading if used to value pure infrastructure asset holders, as profitability of
the projects can be lumpy, primarily on the basis of year of commissioning and
the life of the asset. In some years, when projects are commissioned, the
company may look attractive on a PE multiple basis, while in another year,
when the asset life ends, the stock may appear relatively expensive.

Infrastructure assets and more specifically Electric Utilities generate regular
and largely predictable cash flow streams for a fixed time period. Therefore,
discounted cash flow (DCF) is best-suited to value BOT projects. While
applying DCF one can choose free cash flow to the firm (FCF) or free cash flow
to equity (FCFE). We prefer FCFE as individual projects are highly geared and
gearing changes as debt is rapidly paid off. If we assume APL executes all its
projects flawlessly in line with our assumptions we would arrive at a value of
Rs159 for the stock.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to Adani Power.
Downside risks include: 1) Insufficient quantity of coal in Bunyu to fire the
Mundra project; 2) The total reserves of 150mn tonnes have three licenses.
While the counterparties of 2 of the 3 mines have procured long-term
exploitation licenses the third license has not yet been granted to the
counterparty; 3) Regulatory risk in Indonesia; 4) Fuel supply to Mundra Phase
IV and Tiroda is contingent on AEL achieving certain milestones and finalizing
the coal supply agreements and timely mining; 5) Fuel pricing risk for the
Indonesian coal; 6) Merchant tariff risks; 7) Execution risks; 8) Chinese
equipment quality risks; and 8) Interest rate risk.
Upside risks include: 1) Better than expected operating parameters; 2) Faster
than expected execution; 3) Higher than expected merchant tariffs; and 4)
Significant progress on 3300MW of projects now in planning stages.