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UBS Investment Research
Adani Power
Downgrade to Sell; risks not fully priced in
�� Lower price target by 31%, downgrade rating from Buy to Sell
Adani Power has remained relatively strong and has outperformed the BSE Sensex
5% YTD (UBS Indian Power Utilities coverage universe by 12% YTD). We like
the company for its strong execution, but we believe that the current stock price
does not fully factor in the risks for the projects such as: a) a decline in merchant
tariffs; and b) no fuel escalation in its long-term power purchase agreements
(PPAs). We downgrade the stock from Buy to Sell rating with a price target
reduction of 31% (lower merchant tariffs and exclusion of new projects).
�� Adani power has 1,320MW of operating capacity
Project execution is a key strength of the company. In addition to 1,320MW of
operating capacity, Adani Power synchronised its first super-critical unit of
660MW in Q3. The company expects to commission the entire 4,620MW in
Mundra by FY12. We expect the company to have 6,600MW by FY13. On a longterm
basis, the company maintains a target of 15,000MW by FY16/17.
�� Lower FY11/12/13 EPS estimates 56%/40%/38%
We lower our FY11/12/13 EPS estimates from Rs5.68/8.96/22.16 to
Rs2.38/5.41/13.68 on lower merchant tariff assumptions. We have lowered our
merchant tariff forecast by Rs1/unit for FY11/12/13 and Rs0.50/unit for FY14/15
and long term. We believe the assumption is reasonable after the last six months’
decline in merchant tariffs.
�� Valuation: lower price target from Rs160 to Rs110
We derive our price target using a plant-by-plant DCF assuming COE of 13.1% for
under-construction projects and 11.6% for operational projects. In our valuation,
we have not included the projects that are at early stages.
Adani Power
Adani Power is part of the Adani Group. With 6,600MW commissioned/under
construction and 3,300MW under development, Adani Power targets becoming
one of the largest private sector power generation companies in India by FY15
when we expect it will possess significant capacity. We believe the company has
significant non-replicable strengths due to fuel availability and competitive
pricing, good execution, and attractive tariffs from long-term PPAs and
merchant power.
Statement of Risk
We believe the key upside risks for Adani Power are: 1) pick up in merchant
tariffs; 2) faster-than-expected progress in the execution of projects; 3) new
project wins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Adani Power
Downgrade to Sell; risks not fully priced in
�� Lower price target by 31%, downgrade rating from Buy to Sell
Adani Power has remained relatively strong and has outperformed the BSE Sensex
5% YTD (UBS Indian Power Utilities coverage universe by 12% YTD). We like
the company for its strong execution, but we believe that the current stock price
does not fully factor in the risks for the projects such as: a) a decline in merchant
tariffs; and b) no fuel escalation in its long-term power purchase agreements
(PPAs). We downgrade the stock from Buy to Sell rating with a price target
reduction of 31% (lower merchant tariffs and exclusion of new projects).
�� Adani power has 1,320MW of operating capacity
Project execution is a key strength of the company. In addition to 1,320MW of
operating capacity, Adani Power synchronised its first super-critical unit of
660MW in Q3. The company expects to commission the entire 4,620MW in
Mundra by FY12. We expect the company to have 6,600MW by FY13. On a longterm
basis, the company maintains a target of 15,000MW by FY16/17.
�� Lower FY11/12/13 EPS estimates 56%/40%/38%
We lower our FY11/12/13 EPS estimates from Rs5.68/8.96/22.16 to
Rs2.38/5.41/13.68 on lower merchant tariff assumptions. We have lowered our
merchant tariff forecast by Rs1/unit for FY11/12/13 and Rs0.50/unit for FY14/15
and long term. We believe the assumption is reasonable after the last six months’
decline in merchant tariffs.
�� Valuation: lower price target from Rs160 to Rs110
We derive our price target using a plant-by-plant DCF assuming COE of 13.1% for
under-construction projects and 11.6% for operational projects. In our valuation,
we have not included the projects that are at early stages.
Adani Power
Adani Power is part of the Adani Group. With 6,600MW commissioned/under
construction and 3,300MW under development, Adani Power targets becoming
one of the largest private sector power generation companies in India by FY15
when we expect it will possess significant capacity. We believe the company has
significant non-replicable strengths due to fuel availability and competitive
pricing, good execution, and attractive tariffs from long-term PPAs and
merchant power.
Statement of Risk
We believe the key upside risks for Adani Power are: 1) pick up in merchant
tariffs; 2) faster-than-expected progress in the execution of projects; 3) new
project wins.
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