Macquarie: Buy Adani Power- 3Q11 not bad, solid growth ahead; Target Rs 145

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Adani Power
3Q11 not bad, solid growth ahead
Event
 Despite delivering a softer earnings result than we expected, the 3Q11 result
is small fry relative to FY12 earnings growth (where we assume lower PLFs).
We are more focussed on the commissioning of the 660MW Mundra Phase 3
over 4Q11, currently being synchronised. We understand Adani Power will bid
this off-take primarily into upcoming bilateral contracts.
 With fuel security at Mundra and volume growth aligning with management
guidance, we retain our Outperform. The stock is trading on 11x FY12 NPAT
and 8x FY13 NPAT. If we wanted to get really bearish and strip out the Tiroda
project for fears of coal linkage delivery, our Mundra earnings should still see
the stock trade on 13x FY12 NPAT and 10x FY13 NPAT.

Impact
 3Q11 – lower revenue than expected: Generating 1,931BUs and selling
1,717BUs with an average realisation of Rs2.93/kWh, implying a merchant
realisation of Rs4.43/kWh (90% of volume sold was under contract with
GUVNL). We had assumed a higher PLF and therefore assumed all the
marginal volume was sold into merchant. Adani reported EBITDA of Rs2.7bn
vs our estimate of Rs3.7bn. Reported NPAT of Rs1.1bn was driven by a
deferred tax charge of Rs0.7bn during the quarter (non cash).
 Catalyst is a stronger 4Q11 and 1Q12 due to volume + pricing: With
higher merchant realisations likely between Feb-June, but more structurally,
the commissioning of the first 660MW supercritical plant anticipated to start
delivering into the merchant market (we have accounted for any upside in
4Q11). We understand that Adani will bid for several bilateral contracts,
including in Maharashtra, Uttar Pradesh, etc. Maharashtra is currently in the
market for 2,000MW of capacity for a 2-yr period from 31 March 2011.  
 Fuel security over FY12? Adani has noted all of Mundra’s capacity is
currently using low-cost Bunyu coal. While the company still suggests its coal
linkage with MCL will kick in throughout FY12, we think that is too optimistic
and assume 1.4mt of imported coal at market prices will be used.  
Earnings and target price revision
 FY11E EPS -30% mainly due to non-cash tax charge. Our target price
modestly changes to Rs145.00 from Rs146.00.
Price catalyst
 12-month price target: Rs145.00 based on a PER methodology.
 Catalyst: commissioning of Mundra Phase 3, unit 1 over next month.
Action and recommendation
 Despite being underweight on the sector, Adani Power remains our preferred
IPP with strong earnings growth over the next two years and a competitive
fuel position.


3Q10: EBITDA margin staying flat from 2Q to 3Q
Margins stayed relatively flat over the quarter as costs remained controlled (utilising coal from Bunyu)
and realisations remained flat post extended rainfall (read lower demand) over 3Q11.


Ongoing capacity growth likely to expand margins with more merchant
We understand that the first 660MW unit of Mundra Phase 3 has operated for more than a week at
100% PLF and is expected to come on-line this quarter (4Q11) delivering into bilateral merchant
contracts.


In FY12, with the Mundra Phase 3 expected to deliver its off-take into the merchant market, its
exposure to merchant power prices will peak, with earnings sensitivities to merchant shown below.