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UBS Investment Research
Adani Power
Change in Indonesian coal export law
„ Event: Indonesia will not allow coal exports at prices below notified rates
According to media reports, the Indonesian government will not allow exporting
companies to sell coal at prices below notified rates after 23 September 2011. We
think the main reason for this decision is that the government wants to avoid
potential losses. Exports at notified prices may increase royalty and tax outgo from
miners (to the Indonesian government) for companies exporting coal to countries
such as India.
„ Impact: Adani Power’s coal supply arrangement with AEL may continue
Adani Enterprises (AEL) supplies coal to Adani Power at US$36/t from its Bunyu
mines in Indonesia. We understand that the cost of supplying coal from these
mines is reasonable. We believe this arrangement will continue and there should
not be any adverse impact on Adani Power. Adani Power has maintained that the
coal supply from AEL at below-market rates should not be at risk because AEL
can manage the adverse impact on royalty/tax payments.
„ Action: we are negative on the stock as risks do not seem to be priced in
We like the company for its strong execution but we believe that the current stock
price does not fully factor in risks such as: 1) a decline in merchant tariffs; and 2)
no provision for fuel price escalation in its long-term power purchase agreements
(PPAs). Hence, we believe the stock is expensive at current levels.
„ Valuation: maintain Sell rating and price target of Rs110.00
We derive our price target using a plant-by-plant DCF-based methodology,
assuming COE of 13.1% for projects under construction and 11.6% for operational
projects.
Q 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.
Q Statement of Risk
We believe the key downside risks for the power business including for Adani
Power are: 1) availability or pricing of imported coal; 2) slower-than-expected
progress in the execution of projects; 3) no project wins; 4) a sharp decline in
merchant tariffs; and 5) performance issues with Chinese equipment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Adani Power
Change in Indonesian coal export law
„ Event: Indonesia will not allow coal exports at prices below notified rates
According to media reports, the Indonesian government will not allow exporting
companies to sell coal at prices below notified rates after 23 September 2011. We
think the main reason for this decision is that the government wants to avoid
potential losses. Exports at notified prices may increase royalty and tax outgo from
miners (to the Indonesian government) for companies exporting coal to countries
such as India.
„ Impact: Adani Power’s coal supply arrangement with AEL may continue
Adani Enterprises (AEL) supplies coal to Adani Power at US$36/t from its Bunyu
mines in Indonesia. We understand that the cost of supplying coal from these
mines is reasonable. We believe this arrangement will continue and there should
not be any adverse impact on Adani Power. Adani Power has maintained that the
coal supply from AEL at below-market rates should not be at risk because AEL
can manage the adverse impact on royalty/tax payments.
„ Action: we are negative on the stock as risks do not seem to be priced in
We like the company for its strong execution but we believe that the current stock
price does not fully factor in risks such as: 1) a decline in merchant tariffs; and 2)
no provision for fuel price escalation in its long-term power purchase agreements
(PPAs). Hence, we believe the stock is expensive at current levels.
„ Valuation: maintain Sell rating and price target of Rs110.00
We derive our price target using a plant-by-plant DCF-based methodology,
assuming COE of 13.1% for projects under construction and 11.6% for operational
projects.
Q 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.
Q Statement of Risk
We believe the key downside risks for the power business including for Adani
Power are: 1) availability or pricing of imported coal; 2) slower-than-expected
progress in the execution of projects; 3) no project wins; 4) a sharp decline in
merchant tariffs; and 5) performance issues with Chinese equipment.
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