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We took a closer look at the potential impact of the Indonesian
government’s September 2011 deadline to modify coal export
contracts at below-market prices. Adani Power / Enterprises and Tata
Power are the potentially affected IPPs. We had earlier quantified the
impact on TPWR at Rs71/share (our current PT is Rs1,500 – see
attached note for details), and now believe Adani Power could see a
~Rs26/share impact in an extreme case (our current PT is Rs138).
Adani Power has an agreement with Adani Enterprises (ADE) to
source coal for its Mundra projects at US$36/ton. ADE in turn
sources coal from PT Adani, which owns mines at Bunyu Island, at our
estimated FOB price of US$20. The Indonesian government has asked
exporters to use reference prices for contracts, including older ones,
starting Sep-2011. The reference prices form the basis for royalties and
taxes for the Indonesian government.
Indonesian ministry of minerals publishes reference prices of coal
(HPB) every month. Based on its published formulae for nonbenchmark prices, we estimate the reference price for PT Adani to be in
the range of US$55-65, based on calorific value of 4500Kcal.kg and
moisture content of around 35%. We note that most reference prices
published by the ministry have seen 20%+ escalation in the past year.
We discussed this issue with Adani management, who was of the view
that the maximum possible hit for power would be to the tune of 9%
(royalty) of the price difference (9%*(60-20)). Management is still
studying the tax impact, given its step-down subsidiary structure.
In a more cautious approach, we have analyzed the sensitivity of
earnings to a US$16/ton increase in the cost of coal (including
royalties and potential taxes), assuming Adani Power is not able to
invoke any force-majeure for its PPAs and ADE passes on all extra
liabilities to the former; this leads to earnings downside of 24% in
FY12E, 20% in FY13E and 17% in FY14E for Adani Power. While it
appears that the current valuation of 10x FY13E factors in investor
skepticism of the sustainability of the sweet coal deal, we think this event
could be a key near-term risk to the stock rally. Conversely, clarity on
the revised costing structure would be a stock price catalyst, in our view.
We see other medium-term catalysts as well, including potential
resolution of domestic coal constraints and strong execution leading to
pre-PPA merchant power upsides
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We took a closer look at the potential impact of the Indonesian
government’s September 2011 deadline to modify coal export
contracts at below-market prices. Adani Power / Enterprises and Tata
Power are the potentially affected IPPs. We had earlier quantified the
impact on TPWR at Rs71/share (our current PT is Rs1,500 – see
attached note for details), and now believe Adani Power could see a
~Rs26/share impact in an extreme case (our current PT is Rs138).
Adani Power has an agreement with Adani Enterprises (ADE) to
source coal for its Mundra projects at US$36/ton. ADE in turn
sources coal from PT Adani, which owns mines at Bunyu Island, at our
estimated FOB price of US$20. The Indonesian government has asked
exporters to use reference prices for contracts, including older ones,
starting Sep-2011. The reference prices form the basis for royalties and
taxes for the Indonesian government.
Indonesian ministry of minerals publishes reference prices of coal
(HPB) every month. Based on its published formulae for nonbenchmark prices, we estimate the reference price for PT Adani to be in
the range of US$55-65, based on calorific value of 4500Kcal.kg and
moisture content of around 35%. We note that most reference prices
published by the ministry have seen 20%+ escalation in the past year.
We discussed this issue with Adani management, who was of the view
that the maximum possible hit for power would be to the tune of 9%
(royalty) of the price difference (9%*(60-20)). Management is still
studying the tax impact, given its step-down subsidiary structure.
In a more cautious approach, we have analyzed the sensitivity of
earnings to a US$16/ton increase in the cost of coal (including
royalties and potential taxes), assuming Adani Power is not able to
invoke any force-majeure for its PPAs and ADE passes on all extra
liabilities to the former; this leads to earnings downside of 24% in
FY12E, 20% in FY13E and 17% in FY14E for Adani Power. While it
appears that the current valuation of 10x FY13E factors in investor
skepticism of the sustainability of the sweet coal deal, we think this event
could be a key near-term risk to the stock rally. Conversely, clarity on
the revised costing structure would be a stock price catalyst, in our view.
We see other medium-term catalysts as well, including potential
resolution of domestic coal constraints and strong execution leading to
pre-PPA merchant power upsides
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