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Adani Enterprises Ltd
Marginally Lowering Numbers, Retain as Top Infra Developer
What's Changed
Price Target Rs900.00 to Rs874.00
F11e & F12e EPS Down 2% & 8% respectively
F2013e EPS Up 4% to Rs59.5
Investment conclusion: In a market environment that
has been difficult for infrastructure developers, Adani
Enterprises has marginally outperformed the broad
market and significantly outperformed its peers YTD
(Exhibit 1). However, we believe that there is a lot of
outperformance left to come. After updating for F3Q11
results, we are lowering our price target marginally (3%)
to Rs874, implying upside of 49% from current levels.
We reiterate AEL as our top pick in the infrastructure
developer universe in India.
Two businesses out of three surprising to the
upside isn’t too bad: We have updated our numbers
for the F3Q11 results. The power and port subsidiaries
had already reported numbers earlier; the former
surprised on the downside and the latter on the upside.
The coal trading business (the other main one in the
consolidated entity) surprised on the upside, taking total
EBITDA up 87% YoY (10% above our estimates).
However, the increased interest and depreciation from
the commissioning of the new power unit meant that net
income was 6% below our estimates (up 56% YoY).
Trimming F11-12e EPS by 2-8% and PT by 3%,
which still implies 49% upside: Our utility team
recently lowered its F11 net profit forecast for Adani
Power by 23% and its F12 forecast by 22%. However,
this is cushioned by the uptick in our port and coal
trading projections, bringing our overall AEL estimates
down 2-8%. Our price target moves down 3% to Rs874,
reflecting more conservative assumptions (an increased
holding company discount and higher execution
discount on Indian mining projects).
Investment Thesis: Why OW
• Indian energy deficit theme: Forays
into power, mining, O&G exploration,
and natural gas distribution,
supported by its port and trading
activities, make AEL one of the best
ways to play the theme, in our view.
• Scale / first-mover status in all
major businesses: AEL is the
majority owner in the second-largest
power company in India by F2013e
(70.25% holding in Adani Power) and
the largest private sector non-captive
port in India (81.2% holding in Mundra
Port & SEZ). It is the largest private
trading company in India and is also
set to become the largest private coal
mine development operator in India
(with 2bn tons of coal reserves).
• Strong internal cash generation:
Unlike most peer infrastructure
developers, AEL has several cash-cow
businesses (trading and real estate).
Even its asset-heavy businesses
(power and port) can finance
expansion via internal cash flow.
Key Value Drivers
• PPA sales and merchant tariffs at
Adani power.
• Domestic coal prices.
• Timelines on mining project
execution.
• Holding company discount.
• Port valuation.
Potential Catalysts
• Completion of land acquisition at
Parsa Kente mine.
• Securing of financing by Adani power
for the Tiroda III and Kawai projects.
• Increase in Coal India prices.
Key Risks
• Delays in execution of the power
plants or in coal mining.
• Land acquisition problems.
• Interdependence of businesses.
Adani Power – Execution Picking Up
• Adani Power reported F3Q revenue of
Rs5 bn (up 115% YoY), EBITDA of
Rs2.7 bn (up 115% YoY), and profits of
Rs1.1 bn (up 51% YoY).
• Reported profit was 30% lower than
MSe due to a Rs155 mn provision for
customs duty that was not passed
through to tariffs and excess deferred
tax provision of about Rs300 mn.
• Following F3Q11 results, our utilities
analyst, Parag Gupta, has lowered his
F2011 net profit estimate by 23%. This
reflects lower merchant assumption of
Rs4.8/unit (from Rs5/unit earlier) and
actual COD (Commercial Operations
Date) for unit 4 of Mundra I and II and
for unit 1 of Mundra III. F2012e net
profits are down by 22% primarily to
build in a lower merchant realization of
Rs4.4/unit versus Rs5/unit earlier.
• We cut our PT 11%, to Rs141: This is
based on weightings of 80% for our
base case and 20% for our bull case. In
our FCFe model, we assume 15% CoE
and a 2% terminal growth rate. We
believe that improving operational
efficiencies and commissioning of
additional units will increase confidence
in earnings, thereby driving stock
performance (for Adani Power, rated
Overweight).
Mundra Port – Strong Operating Results
• Mundra Port reported F3Q11 revenue of
Rs 4.2 bn (up 36% YoY), EBITDA of Rs
3.1 bn (up 34% YoY) and net profits of
Rs 2.3 bn (up 40% YoY). EBITDA
margins were flattish (down 80 bps to
73.6% in F3Q11
• Total cargo handled at Mundra for
F3Q11 was 12.4 MMT (up 26% YoY)
helped by strong growth in coal and
container volumes which were up 45%
and 44% YoY.
• Mundra has become the 7th largest
port in India with the cargo handled
at Mundra moving up to 37.6 MT for
9MF11- higher than several major
ports. It has also moved to being the
third largest Indian port for container
cargo.
• To account for the stronger than
expected growth in traffic, we have
increased our traffic estimates for F11e
by 3% to 50 mn tons (implying a growth
of 24% YoY in volumes in F4Q11e).
• This takes our F11-13e earnings up by
3-6% with our FCFE value moving up
by 6% (also helped by the time value) to
Rs209 / share for AEL.
Trading – Margin Uptrend Continues
• In F3Q11, the trading division reported
revenues of Rs26.8 bn (down 46% YoY)
as AEL focused only on coal trading and
trading its own power. Coal volumes
were flat at 6.4 mn tons in F3Q11.
• EBITDA margins surprised once again
on the upside with the company
registering a robust 12.4% (up 3.3%
QoQ) for the quarter, taking the ninemonth
margins for the division to 10.4%.
• While we believe that some of this
benefit would have come from the
inventories that the company would
maintain (given its status as the premier
coal importer in India), some of the
benefit of the rising prices is clearly also
going to the margins.
• We are upping our margin estimates by
50bps for F11-13e. This implies a QoQ
drop of 490 bps for F4Q11e, and a drop
of 340 and 390 bps from current levels
(F3Q11) for F12e and F13e.
• If we assume that the 9MF11 margins
(200 bps below F3Q11’s margins) are
sustainable, our earnings for F11-13e
would move up 41-43% for trading
and 12-13% for AEL as a whole.
Mining – What’s the Risk from Delays in Clearances
• Given the difficulty of getting clearances
(especially environment and forest), the
market has been concerned about the
coal mining business.
• We believe that the risk is mitigated by
two factors:
– AEL has foreign mines too (in
Indonesia and Australia) which are not
subject to the same risk.
– The earnings contribution from the
mining business starts up in F13e, which
means there is little risk to near term
earnings.
• That said, we agree that there is risk to
the value of the business in the SOP.
Hence, we are increasing the delay that
we built into the mines from 1 year to 2
years (or from 13.8% to 27.6%), to price
in the additional risk.
• We use a FCFE model with a 13.8%
cost of equity as the discount rate,
which gives us a value of Rs41bn for
the mine (after assuming a delay of two
years).
Financials – What’s Changed
• Among the four large businesses, only
our estimates on the earnings from
coal mining are unchanged.
• Given the lower merchant rate
assumptions by our utilities team, our
numbers on Adani power profits move
down 22-23% for F2011-12e, though
only 1% for F13e.
• Given the upside surprise in earnings
at the port (based on the uptick in
traffic) we are taking our earnings up
by 3-6% over F2011-13e.
• Our coal trading numbers move up 6-
20% for F11-13e, but there is still room
for upside surprise here. While we
continue to assume a decline in
margins, the margins continue to trend
up every quarter.
• While our net profits for F11e and F12e
move down 2% and 8% respectively,
for F13e, there is a 4% rise as power
estimates were relatively undisturbed
for F13e.
Price Target – What’s Changed
Positives:
• Around 2-3% increase across
businesses given the time value of
money (three months since our
November update.)
• Increase in the value of Mundra port,
given the uptick in our earnings
estimates.
• Increase in trading value as we
account for the margin upticks
Negatives:
• Accounting for the 11% dip in the
target price on Adani Power.
• Given lack of environmental
clearances, upping project discount on
Indian coal blocks from 14% to 28%.
• Increase in holding company discount
from 10% to 20% (adjusting to market
environment, though we continue to
believe that there shouldn’t be any
discount, given the dynamics).
Our target price on the company
moves down 3% to Rs874 to
account for the changes.
Valuation Methodology for Various Businesses
We use an FCFE model to value each of AEL’s businesses except for
the Agro and the CGD business, which we benchmark vs. peers
(forming 3% of our PT). In our view, the FCFE model is a good
measure of the intrinsic value of the company’s various business, as it
takes into account long-term free cash flows after factoring in capex
phasing, debt build-up/repayment, and working capital requirements.
The CoEs we use to calculate each of the business, listed below, take
into account the inherent risks of each business.
Power Business – Adani Power
Equity Beta 1.00
10- year risk free rate 8.00%
Equity risk premium 6.00%
Private project risk premium 1.00%
Cost of equity 15.0%
Port – Mundra Port and SEZ
Equity beta 0.80
10-year risk free rate (%) 8.0%
Equity risk premium (%) 6.0%
Cost of equity (%) 12.8%
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Adani Enterprises Ltd
Marginally Lowering Numbers, Retain as Top Infra Developer
What's Changed
Price Target Rs900.00 to Rs874.00
F11e & F12e EPS Down 2% & 8% respectively
F2013e EPS Up 4% to Rs59.5
Investment conclusion: In a market environment that
has been difficult for infrastructure developers, Adani
Enterprises has marginally outperformed the broad
market and significantly outperformed its peers YTD
(Exhibit 1). However, we believe that there is a lot of
outperformance left to come. After updating for F3Q11
results, we are lowering our price target marginally (3%)
to Rs874, implying upside of 49% from current levels.
We reiterate AEL as our top pick in the infrastructure
developer universe in India.
Two businesses out of three surprising to the
upside isn’t too bad: We have updated our numbers
for the F3Q11 results. The power and port subsidiaries
had already reported numbers earlier; the former
surprised on the downside and the latter on the upside.
The coal trading business (the other main one in the
consolidated entity) surprised on the upside, taking total
EBITDA up 87% YoY (10% above our estimates).
However, the increased interest and depreciation from
the commissioning of the new power unit meant that net
income was 6% below our estimates (up 56% YoY).
Trimming F11-12e EPS by 2-8% and PT by 3%,
which still implies 49% upside: Our utility team
recently lowered its F11 net profit forecast for Adani
Power by 23% and its F12 forecast by 22%. However,
this is cushioned by the uptick in our port and coal
trading projections, bringing our overall AEL estimates
down 2-8%. Our price target moves down 3% to Rs874,
reflecting more conservative assumptions (an increased
holding company discount and higher execution
discount on Indian mining projects).
Investment Thesis: Why OW
• Indian energy deficit theme: Forays
into power, mining, O&G exploration,
and natural gas distribution,
supported by its port and trading
activities, make AEL one of the best
ways to play the theme, in our view.
• Scale / first-mover status in all
major businesses: AEL is the
majority owner in the second-largest
power company in India by F2013e
(70.25% holding in Adani Power) and
the largest private sector non-captive
port in India (81.2% holding in Mundra
Port & SEZ). It is the largest private
trading company in India and is also
set to become the largest private coal
mine development operator in India
(with 2bn tons of coal reserves).
• Strong internal cash generation:
Unlike most peer infrastructure
developers, AEL has several cash-cow
businesses (trading and real estate).
Even its asset-heavy businesses
(power and port) can finance
expansion via internal cash flow.
Key Value Drivers
• PPA sales and merchant tariffs at
Adani power.
• Domestic coal prices.
• Timelines on mining project
execution.
• Holding company discount.
• Port valuation.
Potential Catalysts
• Completion of land acquisition at
Parsa Kente mine.
• Securing of financing by Adani power
for the Tiroda III and Kawai projects.
• Increase in Coal India prices.
Key Risks
• Delays in execution of the power
plants or in coal mining.
• Land acquisition problems.
• Interdependence of businesses.
Adani Power – Execution Picking Up
• Adani Power reported F3Q revenue of
Rs5 bn (up 115% YoY), EBITDA of
Rs2.7 bn (up 115% YoY), and profits of
Rs1.1 bn (up 51% YoY).
• Reported profit was 30% lower than
MSe due to a Rs155 mn provision for
customs duty that was not passed
through to tariffs and excess deferred
tax provision of about Rs300 mn.
• Following F3Q11 results, our utilities
analyst, Parag Gupta, has lowered his
F2011 net profit estimate by 23%. This
reflects lower merchant assumption of
Rs4.8/unit (from Rs5/unit earlier) and
actual COD (Commercial Operations
Date) for unit 4 of Mundra I and II and
for unit 1 of Mundra III. F2012e net
profits are down by 22% primarily to
build in a lower merchant realization of
Rs4.4/unit versus Rs5/unit earlier.
• We cut our PT 11%, to Rs141: This is
based on weightings of 80% for our
base case and 20% for our bull case. In
our FCFe model, we assume 15% CoE
and a 2% terminal growth rate. We
believe that improving operational
efficiencies and commissioning of
additional units will increase confidence
in earnings, thereby driving stock
performance (for Adani Power, rated
Overweight).
Mundra Port – Strong Operating Results
• Mundra Port reported F3Q11 revenue of
Rs 4.2 bn (up 36% YoY), EBITDA of Rs
3.1 bn (up 34% YoY) and net profits of
Rs 2.3 bn (up 40% YoY). EBITDA
margins were flattish (down 80 bps to
73.6% in F3Q11
• Total cargo handled at Mundra for
F3Q11 was 12.4 MMT (up 26% YoY)
helped by strong growth in coal and
container volumes which were up 45%
and 44% YoY.
• Mundra has become the 7th largest
port in India with the cargo handled
at Mundra moving up to 37.6 MT for
9MF11- higher than several major
ports. It has also moved to being the
third largest Indian port for container
cargo.
• To account for the stronger than
expected growth in traffic, we have
increased our traffic estimates for F11e
by 3% to 50 mn tons (implying a growth
of 24% YoY in volumes in F4Q11e).
• This takes our F11-13e earnings up by
3-6% with our FCFE value moving up
by 6% (also helped by the time value) to
Rs209 / share for AEL.
Trading – Margin Uptrend Continues
• In F3Q11, the trading division reported
revenues of Rs26.8 bn (down 46% YoY)
as AEL focused only on coal trading and
trading its own power. Coal volumes
were flat at 6.4 mn tons in F3Q11.
• EBITDA margins surprised once again
on the upside with the company
registering a robust 12.4% (up 3.3%
QoQ) for the quarter, taking the ninemonth
margins for the division to 10.4%.
• While we believe that some of this
benefit would have come from the
inventories that the company would
maintain (given its status as the premier
coal importer in India), some of the
benefit of the rising prices is clearly also
going to the margins.
• We are upping our margin estimates by
50bps for F11-13e. This implies a QoQ
drop of 490 bps for F4Q11e, and a drop
of 340 and 390 bps from current levels
(F3Q11) for F12e and F13e.
• If we assume that the 9MF11 margins
(200 bps below F3Q11’s margins) are
sustainable, our earnings for F11-13e
would move up 41-43% for trading
and 12-13% for AEL as a whole.
Mining – What’s the Risk from Delays in Clearances
• Given the difficulty of getting clearances
(especially environment and forest), the
market has been concerned about the
coal mining business.
• We believe that the risk is mitigated by
two factors:
– AEL has foreign mines too (in
Indonesia and Australia) which are not
subject to the same risk.
– The earnings contribution from the
mining business starts up in F13e, which
means there is little risk to near term
earnings.
• That said, we agree that there is risk to
the value of the business in the SOP.
Hence, we are increasing the delay that
we built into the mines from 1 year to 2
years (or from 13.8% to 27.6%), to price
in the additional risk.
• We use a FCFE model with a 13.8%
cost of equity as the discount rate,
which gives us a value of Rs41bn for
the mine (after assuming a delay of two
years).
Financials – What’s Changed
• Among the four large businesses, only
our estimates on the earnings from
coal mining are unchanged.
• Given the lower merchant rate
assumptions by our utilities team, our
numbers on Adani power profits move
down 22-23% for F2011-12e, though
only 1% for F13e.
• Given the upside surprise in earnings
at the port (based on the uptick in
traffic) we are taking our earnings up
by 3-6% over F2011-13e.
• Our coal trading numbers move up 6-
20% for F11-13e, but there is still room
for upside surprise here. While we
continue to assume a decline in
margins, the margins continue to trend
up every quarter.
• While our net profits for F11e and F12e
move down 2% and 8% respectively,
for F13e, there is a 4% rise as power
estimates were relatively undisturbed
for F13e.
Price Target – What’s Changed
Positives:
• Around 2-3% increase across
businesses given the time value of
money (three months since our
November update.)
• Increase in the value of Mundra port,
given the uptick in our earnings
estimates.
• Increase in trading value as we
account for the margin upticks
Negatives:
• Accounting for the 11% dip in the
target price on Adani Power.
• Given lack of environmental
clearances, upping project discount on
Indian coal blocks from 14% to 28%.
• Increase in holding company discount
from 10% to 20% (adjusting to market
environment, though we continue to
believe that there shouldn’t be any
discount, given the dynamics).
Our target price on the company
moves down 3% to Rs874 to
account for the changes.
Valuation Methodology for Various Businesses
We use an FCFE model to value each of AEL’s businesses except for
the Agro and the CGD business, which we benchmark vs. peers
(forming 3% of our PT). In our view, the FCFE model is a good
measure of the intrinsic value of the company’s various business, as it
takes into account long-term free cash flows after factoring in capex
phasing, debt build-up/repayment, and working capital requirements.
The CoEs we use to calculate each of the business, listed below, take
into account the inherent risks of each business.
Power Business – Adani Power
Equity Beta 1.00
10- year risk free rate 8.00%
Equity risk premium 6.00%
Private project risk premium 1.00%
Cost of equity 15.0%
Port – Mundra Port and SEZ
Equity beta 0.80
10-year risk free rate (%) 8.0%
Equity risk premium (%) 6.0%
Cost of equity (%) 12.8%
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