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Q3FY11 PAT lower than estimates
Adani Enterprises’ (AEL) Q3FY11 consolidated earnings, at INR 4.75 bn, were
lower than our estimates of INR 7 bn, largely due to higher deferred tax
provision of INR 667 mn in Adani Power, lower coal trading (down ~3.5 mn
tones), reduced other income (at INR 763 mn) and higher other expenditure (at
INR 4 bn, up ~78% Y-o-Y).
Mundra I & II fully operational; 60 MT coal terminal commissioned
During Q3FY11, Adani Power (APL), AEL’s 70.5% subsidiary, commissioned its
fourth 330 MW unit and also synchronised the nation’s first super critical unit.
Mundra Port & SEZ (MPSEZ), another 77.5% subsidiary, commissioned its 60 mn
tonne coal terminal in time to handle coal requirement of Tata Power’s 4 GW and
~4.6 GW of APL.
Surplus cash used to repay debt; impacting other income
Management indicated that it has used INR 30 bn of surplus cash (raised from
rights issue and QIP) to pre-pay APL’s debt due to lower yield on cash and higher
borrowing costs. Excluding APL and MPSEZ, AEL continues to be a zero-debt
company.
Awaits clearance for coal mine; MoU with Indonesia for rail+port project
The company is yet to receive clearances for its domestic coal mining project in
Parsa Kente and Machhakata (1.62 bt reserves). Post receiving the same,
management is confident of starting operations within 12 months. As AEL is yet
to bag environment and forest clearances for these mines, we have not
considered the ~INR 122/share in our SOTP.
Outlook and valuations: Back-ended asset play; maintain ‘HOLD’
Due to lower than expected trading volumes for the quarter we have revised our
FY11 & FY12 earnings downwards by ~10% each. We are introducing FY13
estimates and increased our Ke, in line with changes in macro assumptions, to
arrive at SOTP value of INR 468/share; this factors in the trading business, port
and power assets, but excludes coal mining (both in India and abroad) business.
We believe the current valuation factors in domestic mining as well as further
scale up/pipeline projects in its power, port and mining businesses, details of
which are not yet in public domain. At CMP of INR 604, since the stock factors in
most of the upsides hence, we maintain ‘HOLD/Sector Underperformer’
recommendation/rating.
Company Description
The Adani Group, founded in 1988, is one of the fastest growing business houses in
India. It has its roots in its flagship company, Adani Enterprises (erstwhile Adani
Exports), which was established by Mr. Gautam S. Adani in 1988 as a partnership firm
with an initial capital of INR 0.5 mn. The company is currently involved in multiple
business lines including trading, power generation coal mining and real estates.
Investment Theme
AEL has embarked on an ambitious business diversification and expansion plan. Its
business diversification, among various initiatives, includes entry into power generation,
infrastructure development, coal mining, and also developing and managing agro silos.
The company’s diversification plan is an initiative to enhance margins, profitability and
return on assets.
• The company is scaling up operations of and expanding its subsidiaries Adani Power
and Mundra Port with an intent to make them one of the leading players in their
respective sectors.
• The company is planning to leverage its success in India by pursuing port and
mining assets in Australia and Indonesia.
Recently, AEL was awarded the Preferred Proponent status for development of
port in Dudgeon, Queensland, Australia.
It entered into a tri-partite agreement to develop a port cum rail project
connecting a coal mine in Indonesia which will also entitle it to coal purchase
rights.
• These initiatives are part of vision 2020 wherein AEL will mine 200 mt of coal,
Mundra Port will handle 200 mt of cargo, and Adani Power will have a generation
capacity of 20 GW.
Key Risks
• Execution challenge
The biggest challenge for AEL is the execution risk of its projects in the pipeline. As
of now, it has only the trading business to fall back. The growth is coming from
projects that are in the pipeline.
• Internal risk management
AEL’s core business of commodity trading is exposed to market risks in a completely
unregulated environment. Monitoring of such risks requires stringent internal risk
management systems that are technology savvy. AEL’s trading portfolio is not only
exposed to market swings in exchange rates and prices, but is also exposed to local
government tariff policies and changes in trade restrictions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Q3FY11 PAT lower than estimates
Adani Enterprises’ (AEL) Q3FY11 consolidated earnings, at INR 4.75 bn, were
lower than our estimates of INR 7 bn, largely due to higher deferred tax
provision of INR 667 mn in Adani Power, lower coal trading (down ~3.5 mn
tones), reduced other income (at INR 763 mn) and higher other expenditure (at
INR 4 bn, up ~78% Y-o-Y).
Mundra I & II fully operational; 60 MT coal terminal commissioned
During Q3FY11, Adani Power (APL), AEL’s 70.5% subsidiary, commissioned its
fourth 330 MW unit and also synchronised the nation’s first super critical unit.
Mundra Port & SEZ (MPSEZ), another 77.5% subsidiary, commissioned its 60 mn
tonne coal terminal in time to handle coal requirement of Tata Power’s 4 GW and
~4.6 GW of APL.
Surplus cash used to repay debt; impacting other income
Management indicated that it has used INR 30 bn of surplus cash (raised from
rights issue and QIP) to pre-pay APL’s debt due to lower yield on cash and higher
borrowing costs. Excluding APL and MPSEZ, AEL continues to be a zero-debt
company.
Awaits clearance for coal mine; MoU with Indonesia for rail+port project
The company is yet to receive clearances for its domestic coal mining project in
Parsa Kente and Machhakata (1.62 bt reserves). Post receiving the same,
management is confident of starting operations within 12 months. As AEL is yet
to bag environment and forest clearances for these mines, we have not
considered the ~INR 122/share in our SOTP.
Outlook and valuations: Back-ended asset play; maintain ‘HOLD’
Due to lower than expected trading volumes for the quarter we have revised our
FY11 & FY12 earnings downwards by ~10% each. We are introducing FY13
estimates and increased our Ke, in line with changes in macro assumptions, to
arrive at SOTP value of INR 468/share; this factors in the trading business, port
and power assets, but excludes coal mining (both in India and abroad) business.
We believe the current valuation factors in domestic mining as well as further
scale up/pipeline projects in its power, port and mining businesses, details of
which are not yet in public domain. At CMP of INR 604, since the stock factors in
most of the upsides hence, we maintain ‘HOLD/Sector Underperformer’
recommendation/rating.
Company Description
The Adani Group, founded in 1988, is one of the fastest growing business houses in
India. It has its roots in its flagship company, Adani Enterprises (erstwhile Adani
Exports), which was established by Mr. Gautam S. Adani in 1988 as a partnership firm
with an initial capital of INR 0.5 mn. The company is currently involved in multiple
business lines including trading, power generation coal mining and real estates.
Investment Theme
AEL has embarked on an ambitious business diversification and expansion plan. Its
business diversification, among various initiatives, includes entry into power generation,
infrastructure development, coal mining, and also developing and managing agro silos.
The company’s diversification plan is an initiative to enhance margins, profitability and
return on assets.
• The company is scaling up operations of and expanding its subsidiaries Adani Power
and Mundra Port with an intent to make them one of the leading players in their
respective sectors.
• The company is planning to leverage its success in India by pursuing port and
mining assets in Australia and Indonesia.
Recently, AEL was awarded the Preferred Proponent status for development of
port in Dudgeon, Queensland, Australia.
It entered into a tri-partite agreement to develop a port cum rail project
connecting a coal mine in Indonesia which will also entitle it to coal purchase
rights.
• These initiatives are part of vision 2020 wherein AEL will mine 200 mt of coal,
Mundra Port will handle 200 mt of cargo, and Adani Power will have a generation
capacity of 20 GW.
Key Risks
• Execution challenge
The biggest challenge for AEL is the execution risk of its projects in the pipeline. As
of now, it has only the trading business to fall back. The growth is coming from
projects that are in the pipeline.
• Internal risk management
AEL’s core business of commodity trading is exposed to market risks in a completely
unregulated environment. Monitoring of such risks requires stringent internal risk
management systems that are technology savvy. AEL’s trading portfolio is not only
exposed to market swings in exchange rates and prices, but is also exposed to local
government tariff policies and changes in trade restrictions.
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