Adani Power SELL -Realisations drop; fuel costs pop:: ICICI Sec

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Adani Power’s (APL) Q2FY11 results were significantly below expectations with
PAT at Rs1.25bn (I-Sec: Rs1.82bn), primarily due to lower realisation at
Rs2.96/KwHr versus Rs3.37/KwHr in Q1FY11. Blended realisation decreased due to
lower merchant volumes (7% of total sales based on Rs5/KwHr merchant rate
assumption) and lower merchant realisation at Rs5/KwHr. Further, fuel cost rose
QoQ to Rs1.05/KwHr from Rs0.95/KwHr in Q1FY11. Q2FY11 performance lends
further credence to our view that merchant prices will likely reduce (the monsoons
might have been an aiding factor, but the YoY trend also supports our view) and
that low-cost coal supply from Adani Enterprises (AEL) to APL is unsustainable.


􀁦 Q2 corroborates our view. Rising fuel cost has raised concerns over the
sustainability of cheap fuel supply from AEL. Also, falling merchant realisation and
volumes reinforce our stock and sectoral view. Q2FY11 profits have been
significantly below estimates, primarily due to low PLF at 82% (mainly due to low
demand as per the management, in line with our observation of demand contraction
in Q2FY11), higher auxiliary consumption and lower merchant volumes at 7% of total
sales (I-Sec:16.75%). Further, fuel cost rose to Rs1.05/KwHr from Rs0.95/KwHr, thus
neutralising the QoQ benefit from lower O&M cost. In spite of reduction in interest
cost to 7.81% from 11.5% and lower tax rate at 14%, profits were below estimates.

􀁦 We lower our target price to Rs110 from Rs119 to reflect the unfavourable Gujarat
Electricity Regulatory Commission (GERC) verdict on the Gujarat Urja Vikas Nigam
(GUVNL) supply case (contracted at Rs2.35/KwHr), which more than offsets the
favourable impact from reduced customs duty in Mundra plant (from 16% to
Rs0.1/KwHr). We factor in 25% probability that the GUVNL contract will be
terminated (versus 50% earlier) – the matter is pending in the Appellate Tribunal.

􀁦 Reduced uncertainty; valuations remain expensive. Of the three risks (customs
duty, GUVNL contract and unsustainable coal cost), clarity is available on the first two
– the customs duty decision went in favour of APL, but the GUVNL case was decided
against it. Unsustainable coal cost remains the only uncertain factor. We find the
stock expensive at current levels and our DCF target price suggests 20% downside.