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Adani Power (ADAN.BO)
Buy Maintained but Target Price Cut to Rs130
Decent absolute 3QFY11 – but below CIRA expectations — 3QFY11 was
decent from an absolute sense with PBT growth of 89% YoY and 20% QoQ.
However, PBT at Rs1.8bn was 22% below CIRA at Rs2.3bn. PAT at Rs1.1bn was
39% below CIRA on the back of higher-than-expected deferred taxes.
EPS cut by 6-44% over FY11E-20E – Target price cut to Rs130 — To factor in:
(1) lower than expected run rate in 9mFY11; (2) lowering of our merchant price
estimates; (3) inability to terminate 1000MW PPA with GUVNL; and (4) duty on
merchant sales. We also lower our target price to Rs130 to factor in the EPS cut.
The single biggest risk to our recommendation — Is Adani Power’s plans of
pre PPA merchant up-fronting not working. According to the management, almost
all its power plants would be commissioned 3-12 months before the start of the
PPA date. During this period, the company expects to sell all the generated power
in the merchant market and get higher than PPA rates.
However, this has not worked in Mundra I & II — We have noticed that this has
not worked in the Mundra I & II of 1320MW as evident from realizations of only
Rs3.56/kWh in FY10 and given that in 9mFY11 the company has sold only 14% of
total sales in the merchant market. Management has communicated that this
would start working from Mundra III.
Impact of no pre PPA up-fronting — All else being equal, our (1) target price
could be lowered to Rs115 (from Rs130 currently); (2) FY12E-14E EPS estimates
could be cut by 7-50%; (3) FY12E-14E RoEs could be cut by 5-20%; and (4) most
important, the stock would then not look very cheap on P/E and P/BV multiples.
Target price cut to Rs130 (from Rs159 earlier)
We revise down our target price to Rs130 (from Rs159 earlier) to factor in our
6-44% EPS cuts over FY11E-FY20E.
What if merchant up-fronting of pre PPA sales does not happen?
The single biggest risk to our target price and Buy recommendation is Adani
Power’s plans of pre PPA merchant up-fronting not working.
According to the management, almost all its power plants would be
commissioned 3-12 months before the start of the PPA date. During this
period, the company expects to sell all the generated power in the merchant
market and get higher than PPA rates.
We have not assumed in delays in the commissioning schedule and factored
in the pre PPA merchant up-fronting. However, we have noticed that this has
not worked in the Mundra I & II of 1320MW, as evident from the realizations
of only Rs3.56/kWh in FY10 and given that in 9mFY11 the company has sold
only 14% of total sales in the merchant market.
Management in our past interactions has mentioned that this would start
working from Mundra III onwards. However, if this does not work, all else
being equal, our (1) target price could be lowered to Rs115 (from Rs130
currently); (2) FY12E-14E EPS estimates could be cut by 7-50%; (3) FY12E-
14E RoEs could be cut by 5-20%; and (4) most important, the stock would
then not look very cheap on P/E and P/BV multiples.
Lower than expected run rate in 9mFY11
PAT at Rs3.5bn implies the company is running far behind our FY11E
estimates of Rs11.5bn. We believes it is unlikely that the company can
achieve PAT >Rs6-6.5bn in FY11E.
Lowering of our merchant price estimates
Merchant prices have declined to Rs3.41/kwh in November 2010 from
Rs4.75/kwh in November 2009. Prices on energy exchanges (IEX) have
declined to Rs2.04/kwh in November 2010 from highs of ~Rs7/kwh 2 years
ago. The key reason behind falling merchant prices has been capacity
addition in 2010 (which has been above historical norms) and poor financial
health of State Power Utilities (SPUs), which has reduced the willingness to
buy expensive power and has forced SPUs to resort to load shedding.
Please see our detailed report on health of SPUs and its impact on merchant
prices : India Infrastructure Insights - 4 - SPU Financials Deteriorate – So Do
Merchant Volumes and Prices
Unable to terminate 1000MW PPA with GUVNL:
GERC has requested the Government of Gujarat to ask APL to withdraw the
termination notice of the PPA with GUVNL to supply 1,000 MW of power for
25 years at a rate of Rs2.35/kWh. GERC has also asked the Government of
Gujarat to press GMDC for prompt necessary action on the execution of the
fuel supply agreement with APL to ensure supply of 1000 MW power to
GUVNL at a competitive rate to meet future demand of the state.
According to GERC, GUVNL did not propose to provide for any arrangement
for fuel for the project, and APL had to provide details of the same at the time
of submission of the bid. The bid documents also do not envisage any
conditional bid, which is linked to availability of fuel from an identified source.
APL had mentioned in the bid that the company had tied-up imported coal
with Coal Orbis Trading, Germany and Kowa Company.
Arrangement with GMDC was an APL internal matter and APL’s obligation
under the PPA is not co-terminus with its arrangement for supply of fuel by
GMDC. Since the obligation to arrange fuel is with APL, it becomes
incumbent on APL to arrange fuel if its arrangement with GMDC does not go
through.
Duty on merchant sales to DTA:
The Ministry of Finance in a notification issued on 6th September 2010 has
replaced the 16% duty on sale of electricity from power projects situated in
SEZ to domestic tariff area (DTA), or non processing areas of SEZ, with a
much lower duty of Rs100 per1000kwh (for imported coal).
We now factor in a duty of Rs0.10/kWh on merchant sales and assume that
the duty on GUVNL sales would be reimbursed, as this event is a change in
law. The company has made an application for the same to GERC.
Decent absolute 3QFY11 – but below CIRA expectations
Adani Power’s 3QFY11 was decent from an absolute sense with PBT growth
of 89% YoY and 20% QoQ. However, the PBT at Rs1.8bn was 22% below
CIRA expectations of Rs2.3bn. PAT at Rs1.1bn was lower by 39% on the
back of higher-than-expected deferred taxes.
It might be worth noting that Adani Power does not pay cash taxes for
Mundra 4620MW, as it is claiming SEZ benefits on the same. However, it
has to pay custom duty of Rs0.10 per kWh for energy removed from SEZ to
Domestic Tariff Area (DTA).
Auxiliary consumption continues to be high, as the company consumes
some of its power generated for the construction of its expansion units at
Mundra. We expect auxiliary consumption to fall once all the units in Mundra
4620MW are commissioned.
GUVNL tariff in 2QFY11 is lower as the management has clarified that as per
its contract with GUVNL, the contracted tariff during 2Q is lower versus other
quarters on account of 2Q being an off-peak season. This came as a
negative surprise to us.
Adani Enterprise securing coal for Adani Power
Bunyu Island coal mines in Indonesia
Adani Indonesia, a 100% subsidiary of ADE, has been awarded coal mining
concessions in Bunyu Island, Indonesia, from which coal will be used for the
power projects being developed by Adani Power. Adani Indonesia through its
subsidiaries, PT Lamindo Inter Multikon and PT Mitra Niaga Mulia, has been
awarded these coal mining concessions.
According to Pt. Mintek Dendrill Indonesia, the estimated coal reserves at
these three mines are approximately 150mn tonnes with an average GCV of
5,200 kcal/kg. The coal mines are located in the island of Bunyu in East
Kalimantan, near the border of Malaysia to the north. The sites are located in
the central and northern part of the island.
Adani Indonesia, as a contractor for PT Lamindo Inter Multikon since Mar08,
excavated 2.32 mn tons and 1.08mn tons during FY10 and FY09,
respectively. Adani Indonesia has an in-house exploration and mining team
with more than 1,100 personnel and other equipment and infrastructure to
carry out mining operations in Indonesia.
PT Lamindo Inter Multikon has also constructed a jetty for barging operation
in FY08 to service its mining operations. PT Mitra Niaga Mulia is expected to
commence coal mining operations in FY11. As of March 31, 2010, ADE has
invested ~US$59.68mn in the Bunyu operations.
Adani Shipping Pte Limited, Singapore, a 100% subsidiary of AEL, has
entered into a contract for the purchase of 2 newly-built capesize vessels
with expected delivery by December 2010 for transportation of coal from the
Indonesian coal mines operated by AEL to India to fire the 4,620MW of
capacity being developed by APL in Mundra.
Purchase of interest in Galilee coal tenement
ADE through its step down Australian subsidiary, Adani Mining Pty, has
concluded a binding agreement with Linc Energy to purchase a 100%
interest in its Galilee coal tenement in the Galilee Basin, Queensland. The
purchase consideration is A$500mn (US$455mn) plus a royalty payment
A$2/ton (US$1.8/ton) for a 20-year period linked to production. The
US$455mn has been financed through US$55mn of internal generation,
US$250mn loan from ICICI Bank and US$150mn loan from Bank of India.
The purchase has received approval of the Foreign Investment Review
Board (FIRB) and the indicative approval of the Queensland Government.
The Galilee tenement has a JORC compliant resource of 7.8 billion tonnes of
coal, which makes it the largest single coal tenement in Australia.
While multiple evacuation routes are available for the mined coal, Adani
(through Mundra Port and SEZ ) has recently been awarded preferred
proponent status for the development of Dudgeon Point terminal in Mackay,
Queensland which entitles Adani with the right (subject to technical and
commercial feasibility) to develop coal terminal of between 30-60 MMTPA
capacity. Dudgeon Point lies near the existing coal terminals of Hay Point
and Dalrymple Bay Coal Terminal.
Coal from the Galilee basin would support and enable the rapid expansion of
the power business of APL in India while also expanding ADE coal business
where Adani is already the largest importer of thermal coal in India.
The company has already rented office space in Brisbane to house up to 70
employees and has begun work on an environmental impact statement (EIS)
and a drilling program that should be completed in the next 14 months. The
company expects to hire up to 5,000 people during construction of the
Galilee project and 4,000 when it hits peak capacity in ~2022.
Galilee Basin
The Galilee Basin in central western Queensland is host to world-class
resources of export quality thermal coal. The Galilee Basin represents the
future of large modern mechanized high productivity export thermal coal
operations. This basin is defined by the vast lateral continuity of the coal
measures and the benign structural environment. Both factors are integral in
defining substantial resources and reserves for export markets and achieving
high productivity mining operations.
Published information to date suggests that current defined coal resources in
the Galilee Basin are over 22bn tons as shown below.
Figure 15. Galilee Basin
Project Operator / Manager JORC Inferred Tonnes (bn tons)
Kevins Corner / Alpha Hancock Coal 6.1
China First / North Alpha Waratah Coal 7.4
South Galilee Project Bandanna / AMCI 1.0
Galilee Linc Energy Now Adani Enterprises 7.8
Total 22.3
Source: Guilford Coal
Indonesian Coal Purchase Rights
ADE through its step-down Indonesian subsidiary, PT Adani Global, has
entered into a binding tripartite agreement on 25
th
August 2010 for setting up
a dedicated rail and port project with the Regional Government of Sumatra
Selatan, Indonesia and PT Bukit Asam (a Government of Indonesia coal
mining company). PT Bukit Asam is one of the leading producers of coal in
Indonesia, and owns the second largest coal reserves in Indonesia.
This project provides coal purchase rights to ADE and the infrastructure
created will be used for transportation of a minimum volume of 35mn tons of
coal on a take or pay basis from PT Bukit Asam concessions in South
Sumatra. The concession is initially valid for a maximum period of 30 years,
which can be extended by mutual agreement
The project envisages the ownership, construction and operation by ADE
(through its various subsidiaries) of 250km rail line capable of transporting a
minimum 35mn tons of coal (expandable to 60mn tons). The rail line will
connect Tanjung Enim (a coal mining area) to Tanjung Carat (where ADE will
build a port with matching capacity for evacuating the coal).
PT Bukit Asam will sell 60% of such coal to Adani at the government notified
price and the balance tonnage would be a contract carriage for Bukit Asam.
The long-term price for the transportation has been linked to CPI and fuel
prices in order to provide a fair return to both parties.
The project is estimated to cost US$1.65bn and will be constructed within 48
months. The Government of South Sumatra, Indonesia has undertaken to
provide and facilitate all permits and approvals and arrange for all land for
rail and port required for the project.
Adani has a large coal mining setup in East Kalimantan (Bunyu) and the
present initiative in Sumatra will further strengthen its coal sourcing reach
from Indonesia.
Adani Power
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
Rs130 for the stock (cost of equity of 13%).
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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Adani Power (ADAN.BO)
Buy Maintained but Target Price Cut to Rs130
Decent absolute 3QFY11 – but below CIRA expectations — 3QFY11 was
decent from an absolute sense with PBT growth of 89% YoY and 20% QoQ.
However, PBT at Rs1.8bn was 22% below CIRA at Rs2.3bn. PAT at Rs1.1bn was
39% below CIRA on the back of higher-than-expected deferred taxes.
EPS cut by 6-44% over FY11E-20E – Target price cut to Rs130 — To factor in:
(1) lower than expected run rate in 9mFY11; (2) lowering of our merchant price
estimates; (3) inability to terminate 1000MW PPA with GUVNL; and (4) duty on
merchant sales. We also lower our target price to Rs130 to factor in the EPS cut.
The single biggest risk to our recommendation — Is Adani Power’s plans of
pre PPA merchant up-fronting not working. According to the management, almost
all its power plants would be commissioned 3-12 months before the start of the
PPA date. During this period, the company expects to sell all the generated power
in the merchant market and get higher than PPA rates.
However, this has not worked in Mundra I & II — We have noticed that this has
not worked in the Mundra I & II of 1320MW as evident from realizations of only
Rs3.56/kWh in FY10 and given that in 9mFY11 the company has sold only 14% of
total sales in the merchant market. Management has communicated that this
would start working from Mundra III.
Impact of no pre PPA up-fronting — All else being equal, our (1) target price
could be lowered to Rs115 (from Rs130 currently); (2) FY12E-14E EPS estimates
could be cut by 7-50%; (3) FY12E-14E RoEs could be cut by 5-20%; and (4) most
important, the stock would then not look very cheap on P/E and P/BV multiples.
Target price cut to Rs130 (from Rs159 earlier)
We revise down our target price to Rs130 (from Rs159 earlier) to factor in our
6-44% EPS cuts over FY11E-FY20E.
What if merchant up-fronting of pre PPA sales does not happen?
The single biggest risk to our target price and Buy recommendation is Adani
Power’s plans of pre PPA merchant up-fronting not working.
According to the management, almost all its power plants would be
commissioned 3-12 months before the start of the PPA date. During this
period, the company expects to sell all the generated power in the merchant
market and get higher than PPA rates.
We have not assumed in delays in the commissioning schedule and factored
in the pre PPA merchant up-fronting. However, we have noticed that this has
not worked in the Mundra I & II of 1320MW, as evident from the realizations
of only Rs3.56/kWh in FY10 and given that in 9mFY11 the company has sold
only 14% of total sales in the merchant market.
Management in our past interactions has mentioned that this would start
working from Mundra III onwards. However, if this does not work, all else
being equal, our (1) target price could be lowered to Rs115 (from Rs130
currently); (2) FY12E-14E EPS estimates could be cut by 7-50%; (3) FY12E-
14E RoEs could be cut by 5-20%; and (4) most important, the stock would
then not look very cheap on P/E and P/BV multiples.
Lower than expected run rate in 9mFY11
PAT at Rs3.5bn implies the company is running far behind our FY11E
estimates of Rs11.5bn. We believes it is unlikely that the company can
achieve PAT >Rs6-6.5bn in FY11E.
Lowering of our merchant price estimates
Merchant prices have declined to Rs3.41/kwh in November 2010 from
Rs4.75/kwh in November 2009. Prices on energy exchanges (IEX) have
declined to Rs2.04/kwh in November 2010 from highs of ~Rs7/kwh 2 years
ago. The key reason behind falling merchant prices has been capacity
addition in 2010 (which has been above historical norms) and poor financial
health of State Power Utilities (SPUs), which has reduced the willingness to
buy expensive power and has forced SPUs to resort to load shedding.
Please see our detailed report on health of SPUs and its impact on merchant
prices : India Infrastructure Insights - 4 - SPU Financials Deteriorate – So Do
Merchant Volumes and Prices
Unable to terminate 1000MW PPA with GUVNL:
GERC has requested the Government of Gujarat to ask APL to withdraw the
termination notice of the PPA with GUVNL to supply 1,000 MW of power for
25 years at a rate of Rs2.35/kWh. GERC has also asked the Government of
Gujarat to press GMDC for prompt necessary action on the execution of the
fuel supply agreement with APL to ensure supply of 1000 MW power to
GUVNL at a competitive rate to meet future demand of the state.
According to GERC, GUVNL did not propose to provide for any arrangement
for fuel for the project, and APL had to provide details of the same at the time
of submission of the bid. The bid documents also do not envisage any
conditional bid, which is linked to availability of fuel from an identified source.
APL had mentioned in the bid that the company had tied-up imported coal
with Coal Orbis Trading, Germany and Kowa Company.
Arrangement with GMDC was an APL internal matter and APL’s obligation
under the PPA is not co-terminus with its arrangement for supply of fuel by
GMDC. Since the obligation to arrange fuel is with APL, it becomes
incumbent on APL to arrange fuel if its arrangement with GMDC does not go
through.
Duty on merchant sales to DTA:
The Ministry of Finance in a notification issued on 6th September 2010 has
replaced the 16% duty on sale of electricity from power projects situated in
SEZ to domestic tariff area (DTA), or non processing areas of SEZ, with a
much lower duty of Rs100 per1000kwh (for imported coal).
We now factor in a duty of Rs0.10/kWh on merchant sales and assume that
the duty on GUVNL sales would be reimbursed, as this event is a change in
law. The company has made an application for the same to GERC.
Decent absolute 3QFY11 – but below CIRA expectations
Adani Power’s 3QFY11 was decent from an absolute sense with PBT growth
of 89% YoY and 20% QoQ. However, the PBT at Rs1.8bn was 22% below
CIRA expectations of Rs2.3bn. PAT at Rs1.1bn was lower by 39% on the
back of higher-than-expected deferred taxes.
It might be worth noting that Adani Power does not pay cash taxes for
Mundra 4620MW, as it is claiming SEZ benefits on the same. However, it
has to pay custom duty of Rs0.10 per kWh for energy removed from SEZ to
Domestic Tariff Area (DTA).
Auxiliary consumption continues to be high, as the company consumes
some of its power generated for the construction of its expansion units at
Mundra. We expect auxiliary consumption to fall once all the units in Mundra
4620MW are commissioned.
GUVNL tariff in 2QFY11 is lower as the management has clarified that as per
its contract with GUVNL, the contracted tariff during 2Q is lower versus other
quarters on account of 2Q being an off-peak season. This came as a
negative surprise to us.
Adani Enterprise securing coal for Adani Power
Bunyu Island coal mines in Indonesia
Adani Indonesia, a 100% subsidiary of ADE, has been awarded coal mining
concessions in Bunyu Island, Indonesia, from which coal will be used for the
power projects being developed by Adani Power. Adani Indonesia through its
subsidiaries, PT Lamindo Inter Multikon and PT Mitra Niaga Mulia, has been
awarded these coal mining concessions.
According to Pt. Mintek Dendrill Indonesia, the estimated coal reserves at
these three mines are approximately 150mn tonnes with an average GCV of
5,200 kcal/kg. The coal mines are located in the island of Bunyu in East
Kalimantan, near the border of Malaysia to the north. The sites are located in
the central and northern part of the island.
Adani Indonesia, as a contractor for PT Lamindo Inter Multikon since Mar08,
excavated 2.32 mn tons and 1.08mn tons during FY10 and FY09,
respectively. Adani Indonesia has an in-house exploration and mining team
with more than 1,100 personnel and other equipment and infrastructure to
carry out mining operations in Indonesia.
PT Lamindo Inter Multikon has also constructed a jetty for barging operation
in FY08 to service its mining operations. PT Mitra Niaga Mulia is expected to
commence coal mining operations in FY11. As of March 31, 2010, ADE has
invested ~US$59.68mn in the Bunyu operations.
Adani Shipping Pte Limited, Singapore, a 100% subsidiary of AEL, has
entered into a contract for the purchase of 2 newly-built capesize vessels
with expected delivery by December 2010 for transportation of coal from the
Indonesian coal mines operated by AEL to India to fire the 4,620MW of
capacity being developed by APL in Mundra.
Purchase of interest in Galilee coal tenement
ADE through its step down Australian subsidiary, Adani Mining Pty, has
concluded a binding agreement with Linc Energy to purchase a 100%
interest in its Galilee coal tenement in the Galilee Basin, Queensland. The
purchase consideration is A$500mn (US$455mn) plus a royalty payment
A$2/ton (US$1.8/ton) for a 20-year period linked to production. The
US$455mn has been financed through US$55mn of internal generation,
US$250mn loan from ICICI Bank and US$150mn loan from Bank of India.
The purchase has received approval of the Foreign Investment Review
Board (FIRB) and the indicative approval of the Queensland Government.
The Galilee tenement has a JORC compliant resource of 7.8 billion tonnes of
coal, which makes it the largest single coal tenement in Australia.
While multiple evacuation routes are available for the mined coal, Adani
(through Mundra Port and SEZ ) has recently been awarded preferred
proponent status for the development of Dudgeon Point terminal in Mackay,
Queensland which entitles Adani with the right (subject to technical and
commercial feasibility) to develop coal terminal of between 30-60 MMTPA
capacity. Dudgeon Point lies near the existing coal terminals of Hay Point
and Dalrymple Bay Coal Terminal.
Coal from the Galilee basin would support and enable the rapid expansion of
the power business of APL in India while also expanding ADE coal business
where Adani is already the largest importer of thermal coal in India.
The company has already rented office space in Brisbane to house up to 70
employees and has begun work on an environmental impact statement (EIS)
and a drilling program that should be completed in the next 14 months. The
company expects to hire up to 5,000 people during construction of the
Galilee project and 4,000 when it hits peak capacity in ~2022.
Galilee Basin
The Galilee Basin in central western Queensland is host to world-class
resources of export quality thermal coal. The Galilee Basin represents the
future of large modern mechanized high productivity export thermal coal
operations. This basin is defined by the vast lateral continuity of the coal
measures and the benign structural environment. Both factors are integral in
defining substantial resources and reserves for export markets and achieving
high productivity mining operations.
Published information to date suggests that current defined coal resources in
the Galilee Basin are over 22bn tons as shown below.
Figure 15. Galilee Basin
Project Operator / Manager JORC Inferred Tonnes (bn tons)
Kevins Corner / Alpha Hancock Coal 6.1
China First / North Alpha Waratah Coal 7.4
South Galilee Project Bandanna / AMCI 1.0
Galilee Linc Energy Now Adani Enterprises 7.8
Total 22.3
Source: Guilford Coal
Indonesian Coal Purchase Rights
ADE through its step-down Indonesian subsidiary, PT Adani Global, has
entered into a binding tripartite agreement on 25
th
August 2010 for setting up
a dedicated rail and port project with the Regional Government of Sumatra
Selatan, Indonesia and PT Bukit Asam (a Government of Indonesia coal
mining company). PT Bukit Asam is one of the leading producers of coal in
Indonesia, and owns the second largest coal reserves in Indonesia.
This project provides coal purchase rights to ADE and the infrastructure
created will be used for transportation of a minimum volume of 35mn tons of
coal on a take or pay basis from PT Bukit Asam concessions in South
Sumatra. The concession is initially valid for a maximum period of 30 years,
which can be extended by mutual agreement
The project envisages the ownership, construction and operation by ADE
(through its various subsidiaries) of 250km rail line capable of transporting a
minimum 35mn tons of coal (expandable to 60mn tons). The rail line will
connect Tanjung Enim (a coal mining area) to Tanjung Carat (where ADE will
build a port with matching capacity for evacuating the coal).
PT Bukit Asam will sell 60% of such coal to Adani at the government notified
price and the balance tonnage would be a contract carriage for Bukit Asam.
The long-term price for the transportation has been linked to CPI and fuel
prices in order to provide a fair return to both parties.
The project is estimated to cost US$1.65bn and will be constructed within 48
months. The Government of South Sumatra, Indonesia has undertaken to
provide and facilitate all permits and approvals and arrange for all land for
rail and port required for the project.
Adani has a large coal mining setup in East Kalimantan (Bunyu) and the
present initiative in Sumatra will further strengthen its coal sourcing reach
from Indonesia.
Adani Power
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
Rs130 for the stock (cost of equity of 13%).
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.
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