UBS; Adani Power -Meeting with management—key takeaways

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UBS Investment Research
Adani Power
Meeting with management—key takeaways
􀂄 We met with Adani Power on Saturday in Ahmedabad
We met with Adani Power to get an update on the company. We also discussed the
outlook for the power generation sector in the country and the key related issues, 1)
coal availability, 2) the financial health of state electricity boards (SEB), and 3)
execution challenges. We remain confident on the capacity addition outlook for the
company after our meeting.

􀂄 Adani Power has 1,320MW of operating capacity
Project execution is a key strength of the company, in our view. In addition to
1,320MW of operating capacity, Adani Power synchronized its first super-critical
unit of 660MW in Q3 FY11 and expects to commission a total 4,620MW in
Mundra by FY12. We expect the company to have 6,600MW by FY13. On a longterm
basis, the company maintains its target of 15,000MW by FY16/17.
􀂄 Captive mines and coal linkages limit security risk
We think Adani Power has a significant advantage in the form of captive coal
available from Adani Enterprises Ltd’s mines in Indonesia (currently, 100% of the
requirement for its operating units is met with this imported captive coal, as per
the company). In addition, it has very actively pursued coal linkages for domestic
coal supplied by Coal India (currently, the company has linkages for around
18MTPA).
􀂄 Valuation: maintain Sell rating and price target of Rs110.00
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. We like the
company for its strong execution but do not think the current stock price fully
factors in the risks: 1) lower merchant tariffs; and 2) no fuel escalation in PPAs


Meeting with Adani Power: key takeaways
We met with Adani Power management on Saturday to get an update on the
company. The key takeaways from the meeting are as follows:
Capacity addition
1. Adani Power has maintained its capacity addition estimates and expressed
confidence that it can achieve operating capacity of 6,600MW as early as H1
FY13.
2. According to the company, the construction at Mundra (4,620MW) and
Tiroda (1,980MW) is underway and no delays have been reported yet.
3. On a long-term basis, the company maintains its target of 15,000MW by
FY16/17.
Fuel security
1. Adani Power believes fuel is a big challenge for the Indian Power generation
companies and having adequate fuel security is a key success factor in the space.
2. Adani Power has a significant advantage in the form of captive coal available
from Adani Enterprises Ltd’s mines in Indonesia (currently, 100% of its
requirement is met with this imported captive coal and these mines can supply
10-11MTPA at peak levels, according to the company).
3. In addition, the company has very actively pursued coal linkages for domestic
coal supplied by Coal India (currently, the company has the linkages of around
10MTPA for Mundra 4,620MW and of around 8MTPA for Tiroda 1,980MW).
Industrial orders contribute 20-25% of order inflows and revenue.
Other projects
1. Adani Power has started work on Kawai (1,320MW) and Tiroda expansion
(1,320MW) and according to the company, the construction activity has begun
at project sites. As of now, the company expects both of these projects to be
commissioned in FY14.
2. The development pipeline includes Pench (1,320MW), Dahej (2,640MW) and
Bhadreshwar (3,300MW). Depending on the progress on various preconstruction
activity, the company expects these projects to be commissioned
FY15 onwards.
Valuation
We like the company for its strong execution but we do not believe the current
stock price fully factors in the risks for projects such as 1) a decline in merchant
tariffs, 2) no fuel escalation in its long-term PPAs for Mundra (4,620MW) and
Tiroda (1,980MW).
We maintain our Sell rating on Adani Power with a price target of Rs110.


􀁑 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/downside risks for Adani Power are: 1) pick up/drop
in merchant tariffs and 2) faster/slower than expected progress in the execution
of projects. New project wins would also present upside for Adani Power.