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Adani Power: Initiation of coverage: poised for powerful earnings growth
1 (Buy) rating and target price of Rs158
We initiate coverage of Adani with a 1 (Buy) rating and sixmonth
target price of Rs158. We believe the company is bestpositioned
to benefit from robust short-term demand for power
until FY12, and that its projects have strong fuel security
compared with those of its peers. We forecast earnings to rise at
a CAGR of 204% for FY11-13 based on the value of the 9.2GW
of capacity under construction. At our target price, the stock
would trade at 13.8x PER and 3.9x PBR on our FY12 forecasts.
Adani is our top sector pick, as we believe it will benefit from
strong capacity additions of 8.3GW until FY14. Short term to
FY12, we see upside potential for the share price from pre-PPA
sales, as capacities are likely to be commissioned earlier than we
expect and around six-to-nine months prior to the PPA
commencement dates. We estimate 1.8GW capacity will be
available for short-term sales in FY12.
Fuel leveraged to linkages; 70% is secured
We estimate around 80% of Adani’s FY15 coal requirements of
37m t.p.a. will be met through domestic linkages. Given our
negative outlook for companies that are overly dependent on
coal linkages from CIL, this remains our key risk for Adani.
However, we are also confident that Adani is better-placed than
its competitors in the long term, due to its ability to weather fuel
shortages by way of imports, given the recent arrangements by
its parent company, AEL, to secure coal from Indonesia and
Australia.
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