Adani Power — Factor-in Coal price & MAT hit :BofA Merrill Lynch

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Adani Power — Factor-in Coal price & MAT hit
Price Objective Change
Cut EPS & PO on 18.8% coal price hike and MAT; Maintain Buy
We cut our FY12-13E consolidated EPS of Adani Power (APL) by 16-24% to
factor in 18.8% coal price hike on MCL linkages and the proposed Minimum
Alternate tax (MAT) @ 20% on SEZs in the Budget, which impacts APL’s Mundra
plant. An 18.8% price hike by Mahanadi coalfields (MCL), to align its price with
SECL, shall impact APL’s ~8mtpa of F grade coal linkage from MCL. Cut PO to
Rs140 (153) to factor in EPS cut. Buy on (1) a 4.7x scale-up in capacity by
FY14E via an unregulated business model (no cap on RoE) and (2) visibility of
3.7x EPS over FY11-13E led by 77% power pre-sold at remunerative tariff,
secured fuel/funding, location advantage & business model - front-loaded
merchant power with assured shift to PPAs from FY13E (see Chart 8).

Double whammy on Mundra to shave 18% of asset value
We cut FY12-13E consolidated EPS by 16-24% to factor in 28-29% earning cut in
Mundra plant hit by MAT & MCL coal price hike. CIL coal price hike impacts APL
4.6GW (55% of valued equity capacity) Mundra plant as it hikes coal costs on
~30% of its requirement (MCL linkages) by 6% (6paise/kWh). Mundra has PPA of
3.4GW (74% of its capacity) - GUVNL (2GW) and DHBVNL & UHBVNL (1.4GW)
without any pass-through and balance as merchant, hence, we have assumed no
pass-through. Levy of MAT on SEZ units shall lead to additional cash outflow for
Mundra. APL claims that levy of MAT shall qualify as ‘change of law’ and hence,
shall be pass-through.
Competitive advantages - coal, location and visible growth
APL has secured low-cost fuel via coal linkages (38% of capacity) and contracts
with parent (23%). It has 86% of capacity located in the Western region - highest
peak power deficit (17.7%) vs India (13.3%) in FY10. These competitive
advantages and healthy pre-sales tariffs at ~Rs2.9 (see Table 1) make APL the
top margin (57% in FY13E) and RoE (21%) earner in our IPP universe.
More projects – 15.9GW, PPAs and risk mitigation since IPO
APL plans to acquire 26% stake in its Tiroda through a stock swap. Its project
pipeline is now 15.9GW vs 9.9GW at its IPO (July09). Risks: execution, delivery
of coal in-line with linkage letters of Ministry of coal, imported coal - exposes it to
country, currency & freight risks, and fall in power rates on lower power deficit.


Adani Power Ltd. (XADPF)
Our PO of Rs140 is based on sum-of-the-part valuation basis at CoE of 13.0-
14.0%. We have valued the Parent capacity of 4620MW Mundra project at Rs54
per share based on DCF at CoE of 13.0-13.4%. We have valued the 74% stake in
3300MW Tiroda project at Rs75 per share on DCF basis at CoE of 14%. The
100% stake in 1320MW Kawai project is valued at Rs11 per share on DCF basis
at CoE of 13.9%. Risks: Project execution, financing, imported coal exposes it to
potential country, currency and freight risks, Chinese labour, denial of SEZ
benefits, Infra bottleneck and fall in power rates on potential match of demandsupply
of power in India.