Macquarie Research, Adani Power Best of the bunch, but tough market

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Adani Power
Best of the bunch, but tough market
Event
 We are downgrading our recommendation on Adani Power to Neutral from
Outperform. While Adani Power continues to be our preferred IPP,
demonstrating solid execution and a competitive fuel sourcing position, power
markets continue to get tougher on both pricing and fuel supply.
 In our view, there are few positive catalysts over the next six months, while
the market is already factoring in strong execution at Mundra. Assuming
higher fuel costs at Tiroda, we are bringing down our FY13 EPS forecast by
14% and our target price by 11%, to Rs119 from Rs134.
Impact
 Tough demand environment to put further pressure on pricing: Feedback
from industry contacts on the ground still points to worsening conditions
regarding Indian power demand and pricing. Price expectations from traders
over the next 12 months have fallen from ~Rs4/kWh three months ago to
Rs3.30–3.80/kWh. Appetite from some seasonal monsoon buyers
(Haryana/Delhi) is expected to be weaker this year, while new supply is
expected to overload both bilateral and exchange markets.
 Factoring in more conservative fuel costs for Tiroda: Due to ongoing coal
shortages and the potential for CEA to prioritise coal allocations to older
plants with coal linkages, we are increasing our fuel cost assumption at Adani
Power’s Tiroda, assuming a higher amount of requisite imported/e-auction
coal (~50%). We anticipate that this would be more of an issue initially when
the plants are commissioned (FY12 and FY13) and could dissipate from
FY14.
 Lowering ROE of growth potential: We also reduce the valuation given to
growth projects to Rs8/share from Rs13/share, based on the changing ROE
profiles of additional investments in Indian power generation.
Earnings and target price revision
 We are reducing our FY12 and FY13 EPS forecasts by 2% and 14%,
respectively, and lowering our target price to Rs119 from Rs134.
Price catalyst
 12-month price target: Rs119.00 based on a PER methodology.
 Catalyst: execution of the first Tiroda 660MW unit by October 2011 (our
estimate).
Action and recommendation
 Downgrading to Neutral from Outperform. While the stock still trades at a
slight discount to the sector on our lower earnings forecast, 9.7x FY13E NPAT
(IPP’s at 10.3x FY13E NPAT), in our view there are few upcoming catalysts in
the next six months to take this stock in a tougher power market.