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Adani Enterprises (ADEL.BO)
Maintain Hold (2L): Raising Our Target Price to Rs724
Strong coal trading momentum — ADE has guided to trade 45mn and 56 mn tons in
FY12E and FY13E respectively, up from 33.5mtpa in FY11. The company is confident
of reaching an EBITDA of US$10/ton at coal ASPs of US$100/ton.
Adani Power update — Guided for generation of 20-24 bnkWh in FY12E. Signed
contracts with UP & Maharashtra for 600MW (net ASP Rs4.40/kWh) & 800MW (net
ASP Rs4.05/kWh) respectively. Current capacity of 1.98GW and 660MW synchronized
in Jun11. Operational capacity 6.6GW at end-FY12E. The SLC has decided that the 3.6
mn tons linkage to Mundra I, II, III would not be honored. The GoM on coal has decided
that 3.3GW Tiroda should be given fast track clearance.
Indonesian coal purchase rights — The agreement gives ADE access to ~36 mntpa
coal at peak capacity at government notified prices (US$42/ton currently for 4200-5000
kcal coal). US$18/ton will be paid to MPSEZ for setting up and operating rail and port
infrastructure at a capex of US$1.7bn within 48 months.
Galilee coal @ US$47/ton for 5000kcal coal at MPSEZ — Galilee coal reserve
estimates have increased to 10.4bn tons from 7.8bn tons at the time of acquisition. The
company expects to start mining by CY14 with initial capacity of 3-5mtpa. ADE will
incur capex of US$3.5-4bn in increasing production capacity to 60mtpa by CY22 while
additional capex of US$1.5bn is required for the rail link.
Abbott point update — The port has take or pay contracts for 50mtpa for 10-12 years
@realizations of US$7-7.5/ton and will do volumes of ~18mn tons in FY12E.
Incremental land is available for 30 mntpa which will be used to increase capacity for
transporting coal from phase 1 of ADE’s coal mines in the Galilee Basin.
MDO business — Parsa East – Kente Basin block, which was stuck in no go zone has
got stage -1 nod, but Parsa block cannot be commercially exploited for five years.
Maintain Hold (2L) – Target price increased to Rs724
We continue to rate ADE Hold (2L) for the following reasons: ADE has taken
some very ambitious steps in the recent past: (1) purchase of a 100% interest in
the Galilee coal tenement for US$455mn (2) coal purchase agreement with
Regional Government of Sumatra Selatan and PT Bukit Asam and (3) MPSEZ
wining the AU$1.8bn bid for Abbott Point. At the heart of this strategy is forward/
backward integration and exploiting the synergies in its ports, power, contract
coal mining, coal ownership coal and coal trading businesses. We are in
consonance with the company’s strategy but do worry if the company is chewing
a little more and a little too fast, than it can digest. We believe the easy money is
off the table.
We revise our target price to Rs724 from Rs661 earlier to factor in (1) a -24% to
15% EPS revision (2) rolling forward P/BV, EV/EBITDA multiples to Sep12E
(Mar12E earlier) (3) rolling forward DCF values to Sep11E (Mar11E earlier) and
(4) Adani Power at CIRA target price of Rs125 (Rs130 earlier) and (5) Mundra
Ports and SEZ at CIRA target price of Rs185 (Rs163 earlier)
Coal trading business could see robust growth over the next 2 years
ADE traded 33.5mn tons of coal in FY11 up 16% YoY delivering Rs150bn of
sales and Rs15.1bn of EBITDA. According to the company, India imported 83mn
tons of coal in FY11 and out of this ~ 70mn tons was thermal coal. Given that
ADE dealt entirely in thermal coal, its market share was 48% of the thermal coal
imports into India.
Management has guided for trading 45mn tons in FY12 and 56mn tons in FY13.
At ASPs of US$100/ton management is confident of doing margins of US$10/ton.
Coal mining, development and operations (MDO) business
The process waterfall for each mine is as follows:
Getting the letter of intent (LoI)
Detailed agreement signing
Mining plan approval
Public hearing and land notification (Section 4 and section 9 approvals)
Acquire land and pay compensation
Start mining
The company is initially concentrating on Parsa Kente and Macchakata and will
follow up with Parsa and Chhendipada in that order of processing. For Parsa Kente
the company has completed the public hearing, but the process is stuck at the
environmental ministry level. For Macchakata the LoI, agreement signing, mining
plan approval has been completed but clearances are yet to come. For Parsa the
LoI, signing and mining plan approval has been completed.
Stage-1 nod for Parsa East - Kente Basin but Parsa still stuck
The Ministry of Environment and Forest (MoEF) has granted Stage-I forest
clearance to the Tara, Parsa East and Kante Basan coal blocks in Chhattisgarh. Six
reasons were cited for clearing these 3 blocks despite a recommendation by the
Forest Advisory Committee (FAC) against it. Incidentally, on 3 earlier occasions
when the FAC had considered the application for forest clearance for these blocks,
the minister had concurred with the committee. Reasons cited for the clearance:
Three coal blocks are in ‘fringe’ area and not in the biodiversity rich Hasdeo-
Arand forest region. Permission can be granted for mining in the fringe area,
separated from the main Hasdeo-Arand by a well defined and high hilly ridge.
Substantial changes have been introduced in the original mining plans, to
address MoEF’s concerns. These include: (1) medium density forest area
reduced to 778ha from 2,000ha; (2) number of trees to be felled have been
reduced to 0.12mn from 0.85mn; (3) proposed operation period of the mine
reduced to 25 years from 45 years; (4) movement of coal from mine to proposed
power plant (7km away) to be done by overhead conveyer systems only; (5)
revised proposal for Parsa East and Kante Basan envisages two phases (a)
Phase-1: first 15 years over 762 ha (b) Phase-2 : next 15 years covering
1,136ha; and (6) Renewal for phase-2 can be linked to Phase-1 reforestation and
biodiversity management, since reclamation of the mined out area is planned to
start from third year onwards
Concerns related to wildlife can and should be taken care of through a wellprepared
and well-executed wildlife management plan. Such a plan should be
prepared over next 4-6 months under aegis of institutions like Wildlife Institution
of India and with involvement of other independent expert organisations, and will
be monitored by MoEF.
The blocks are linked to supercritical thermal power generating stations (5-8%
lower emissions compared to subcritical technology).
Both Chattisgarh and Rajasthan governments have been persistently following
up for clearance of the blocks, since their power generation plans are closely
linked with the coal blocks.
Need to sustain the momentum generated in capacity additions in XIth plan.
While the FAC is rightly focused on forest-related issues, the MoEF needs to
have a broader developmental picture and balance different objectives.
Bunyu coal mine status update
Adani Indonesia, a 100% subsidiary of ADE, has been awarded coal mining
concessions in Bunyu Island, Indonesia, from which coal will be used for the
power projects being developed by Adani Power. Adani Indonesia through its
subsidiaries, PT Lamindo Inter Multikon and PT Mitra Niaga Mulia, has been
awarded these coal mining concessions. According to the company Bunyu has
180mn tons of coal reserves in the coal mines located in E.Kalimantan, near the
border of Malaysia to the north.
Adani Indonesia has excavated 2.75mn tons, 2.32 mn tons and 1.08mn tons
during FY11, FY10 and FY09, respectively. The company hopes to ramp up
production to 7mn tons in FY12 and 11mn tons by FY16
Indonesian coal purchase rights update
ADE through its step-down Indonesian subsidiary, PT Adani Global, has entered
into a binding tripartite agreement on 25th August, 2010 for setting up a dedicated
rail and port project with the Regional Government of Sumatra Selatan,
Indonesia and PT Bukit Asam (a Government of Indonesia coal mining
company). PT Bukit Asam is one of the leading producers of coal in Indonesia,
and owns the second largest coal reserves in Indonesia.
This project provides coal purchase rights to ADE and the infrastructure created
will be used for transportation of a minimum volume of 35mn tons of coal on a
take or pay basis from PT Bukit Asam concessions in South Sumatra. The
concession is initially valid for a maximum period of 30 years, which can be
extended by mutual agreement.
The project envisages the ownership, construction and operation by ADE
(through its various subsidiaries) of 250km rail line capable of transporting a
minimum 35 mn tons of coal (expandable to 60 mn tons). The rail line will
connect Tanjung Enim (a coal mining area) to Tanjung Carat where ADE will build
a port with matching capacity for evacuating the coal.
PT Bukit Asam will sell 60% of such coal to Adani at government notified price
(which is US$42/ton currently) and the balance tonnage would be a contract
carriage for Bukit Asam. The long term price for the transportation has been
linked to CPI and fuel prices in order to provide a fair return to both parties.
The project is estimated to cost US$1.7bn for the rail and the port to be done by
MPSEZ and will be constructed within 48 months. The Government of South
Sumatra, Indonesia has undertaken to provide and facilitate all permits and
approvals and arrange for all land for rail and port required for the project.
Adani has a large coal mining setup in East Kalimantan (Bunyu) and the present
initiative in Sumatra will further strengthen its coal sourcing reach from Indonesia.
Galilee coal tenement update
ADE through its step down Australian subsidiary, Adani Mining Pty has
purchased a 100% interest in their Galilee coal tenement in the Galilee Basin,
Queensland. The purchase consideration is A$500mn (US$455mn) plus a royalty
payment A$2/ton (US$1.8/ton) for a 20 year period linked to production. The
US$455mn has been financed through US$55mn of internal generation,
US$250mn loan from ICICI Bank and US$150mn loan from Bank of India.
Galilee tenement now has a JORC compliant resource of 10.37 bn tons (up from
7.8 bn tons at the time of acquisition) of coal, which makes it the largest single
coal tenement in Australia.
Company expects to spend US$3.5-4bn in mining capex over the next 8-9 years
and also spend US$1.5bn on a railway line to evacuate the coal
The company hopes to start mining by CY14 with an initial capacity of 3-5mn
tons which will be expanded first to 30mn tons and finally to 60mn tons by CY22.
The company expects to hire up to 5000 people during construction of the Galilee
project and 4000 when it hits peak capacity in ~ 2022.
Coal from the Galilee basin would support and enable the rapid expansion of the
power business of APL in India while also expanding ADE coal business where
Adani is already the largest importer of thermal coal in India.
According to the company the coal from Galilee can be brought to India at a cost
of US$47/ton as shown below.
Figure 11. Galilee Coal Cost Structure
Cost Item US$/ton
Cash cost of mining 15.2
Royalty cost to Linc Energy 1.8
Transportation to Abbott Point 7.0
Handling charges 7.0
FOB @ Australia 31.0
Transportation to Mundra 16.0
5000kcal/kg GCV coal cost @ Mundra 47.0
Source: Company and Citi Investment Research and Analysis
Abbott Point update
The State of Queensland in Australia has declared MPSEZ as the successful
bidder for long-term lease of Abbot Point X50 Coal Terminal (APCT) following
international competitive bidding. MPSEZ won the bid with a price of AU$1.8bn
which had full financial closure.
Abbot Point Coal Terminal has current coal handling capacity of 21mtpa being
expanded to 50mtpa by June 2011. All of this 50mtpa have take-or-pay
agreements with clients. The port has a potential to be further expanded to
handling additional 30mtpa of coal.
This additional 30mtpa capacity will be used for transporting coal from Adani
Enterprises’ coal mines in the Galilee Basin. This will take care of evacuation of
coal for the phase I of the mines. Eventual capacity for Adani's mines is 60mtpa.
The acquisition is debt funded; the whole amount will be paid to the State of
Queensland in Australia upfront.
APCT is expected to generate revenues of ~AUD110mn in 2011, with EBITDA
margin of 54%. MPSEZ management expects the port to grow at ~23% CAGR to
revenues of ~AUD305mn by 2016, with margins expanding to 70%.
About Abbot Point Coal terminal
The Port of Abbot Point, located 25km north of Bowen in North Queensland, is
Australia's most northerly coal port. It has been established to service coal mines
in the northern Bowen Basin and the developing Galilee Basin. The Port is of
strategic importance to the state as it is one of the few locations with deep waters
(>15m) so close in-shore.
The Abbot Point Coal Terminal (APCT) was commissioned in 1984. It is a multiuser
coal terminal which presently services three mines in the Bowen Basin, with
coal being transported to APCT by rail on the Newlands System.
APCT is operated by Abbot Point Bulkcoal Pty Ltd, a subsidiary of Xstrata Coal,
under an Operations and Maintenance contract. APCT is not subject to economic
regulation.
Growth plans at the port
APCT has been undergoing constant expansion since 2006. In 2007, as part of
the X21 project, the terminal capacity was increased from 15 to 21mtpa.
APCT is being expanded from a capacity of 21 million tonnes of coal per annum
(mtpa) to 50 mtpa (known as the X50 project). The construction is planned to be
completed by mid-2011.
In line with the current expansion of APCT, rail capacity is being expanded
through the Goonyella to Abbot Point expansion (known as the GAP50 project).
The initial operation of GAP50 is anticipated by January 2012 and project
completion is expected in June 2012.
There is also a scope of further addition taking the port capacity to 80 MMT. The
incremental 30mtpa capacity will be used to evacuate coal from Adani
Enterprises coal mine in Galilee Basin.
Distance from Galilee mine to Abbott Point is 470km and to access Abbott Point,
ADE will have to construct a 105km long rail link. MPSEZ is further evaluating
Dudgeon point port to evacuate coal from phase 2 of Galilee tenement. Distance
from mine to Dudgeon Point is 370km and ADE will have to construct 170km
long rail link to access the same.
More about Abbott Point
The overall plan of Abbott Point terminal is to have seven terminals with a capacity
of ~ 300mn tons.
T1 - APCT currently has 21 mntpa coal handling capacity being expanded to
50mntpa (called the X50 Project) which has been awarded to MPSEZ.
T2/T3 - Hancock and BHP Billiton have been awarded "preferred developer
status" - for 2 coal terminals with capacity of atl east 30mtpa each. These
are well under way with the design and necessary environmental approvals for
the terminals.
T4-T7 - NQBP has advertised expression of interest (EOI) for 4 additional
terminals in May 2011. These terminals will each have a capacity of 30 mntpa -
and be located within the Abbot Point state development area. Development of
T4-7 will also require areas of land to be reclaimed from the sea. According to
local media reports, construction could begin in 2015, with first coal exports from
the fourth terminal in 2017.
Rail infrastructure in Australia
Rail access to T1 is via a dedicated coal rail freight line owned and operated by
QR National. Trains have a coal-carrying capacity of upto 5000 tonnes which is
stockpiled through a bottom dump train receival system using rail-mounted
stacker reclaimers, capable of handling between 4000 and 6000 tonnes per hour
(tph). A 2nd rail loop is being developed as part of the T1 expansion. Two
additional rail loops will be developed as part of the T2 / T3 expansion.
QR National has begun laying railway tracks on the Northern Missing Link
in Central Queensland, marking a pivotal milestone in its $1.1 bn Goonyella to
Abbot Point (GAP) expansion project. The GAP project includes: (1) 69km of new
track across the ‘Missing Link’ to join the existing Goonyella and Newlands
systems. (2) Expansion and upgrading of existing track and 15 new bridges
along the Newlands rail system, including associated rail unloading infrastructure
at the Abbot Point Coal Terminal. Trains are on schedule to commence operating
across the Northern Missing Link from January 2012 with full project completion
expected in June 2012. When at full capacity, the GAP project will enable coal
companies to double the coal tonnages that can be railed to the Abbot Point Coal
Terminal to 50 mntpa.
Railway project from Hancock mines to Abbott Point (60mn tonnes): The
495km standard gauge rail corridor was approved as infrastructure facility of
significance by the State Government on 1 Oct 2010. IFS is an infrastructure
facility of particular economic or social interest to Queensland, Australia. The
primary benefit of this Declaration is that the State Government will consider
compulsory acquisition should voluntary agreements not be obtainable. This was
the first time that the IFS status was conceded to a railway for coal.
Rail link for ADE: To access Abbott Point, ADE will have to construct a 105km
long rail line (with a capacity of ~30mtpa) to meet the proposed rail corridor from
Hancock. In the event that the capacity of this line is insufficient, ADE will have to
construct a rail line for a further 70km (175km in total) to the existing rail line
operated by QR National. Accessing the Dudgeon Point Port will necessitate a
further construction of 195km (370km in total).
For T4-T7: Rail infrastructure requirements from the mine to the terminal rail in
loader will be the responsibility of the terminal owners to be arranged separately.
Dudgeon Point port update
MPSEZ has been awarded preferred proponent status for the development of
Dudgeon Point terminal in Mackay, Queensland which entitles Adani the right,
(subject to technical and commercial feasibility) to develop coal terminal of
between 30-60 MMTPA capacity.
Dudgeon Point is located within the Bowen Basin, the premier coal producing
basin supplying the world with coking coal, Pulverised Coal Injection (PCI) grade
and high grade thermal coal, and is located approximately 15 kilometres south of
Mackay on the Queensland Coast and lies within the Port of Hay Point about four
kilometres north of the existing coal terminals of Dalrymple Bay and Hay's Point.
The distance from the mine to Dudgeon Point is 370km and ADE will have to
construct 170km long rail link to access the same. Capex to set up the mine and
port is likely to be US$1.67bn in the 1st phase
Adani Power update
We highlighted in our FY11 results note that the crux of the FY12E Rs23.1bn
profit is 55% of power sales being merchant (Of 11.3 bnkWh Mundra III - 5.3
bnkWh, Mundra IV - 2.6 bnkWh and Tiroda - 1.9 bn kWh). If any of the long term
off takers (GUVNL, Haryana & MSEDCL) force Adani Power to sell power to
them at PPA rates even on pre PPA CoD there could be downside risks to our
numbers.
According to the company it will generate between 20-24 bnkWh in FY12E and a
significant portion will be merchant. The company has signed a contract with UP
for 600MW @ Rs4.71/kWh (net realization of Rs4.40/kWh) and with Maharashtra
for 800MW @ Rs4.10/kwh (net realization of Rs4.05/kWh)
Company currently has 1980MW and has synchronized another 660MW on June 6th
2011 which will get comissioned August 2011 (CIRA: August 2011).
The company believes it will have operational capacity of 6600MW by the end of
FY12E (CIRA: 5280MW)
The negative news is that at a meeting of the standing linkage committee (SLC) held
on April 18, 2011 it was decided that the 3.6 mn tons coal linkage to Mundra I, II and III
would not be honored given the coal shortages in India.
On the positive side the group of ministers (GoM) on coal decided at its third meeting to
speed up clearances for 8 critical infrastructure projects on a priority basis belonging to
Adani Power, R-Power, Aditya Birla Group and Essar. Adani Power had sought forest
clearance for Lohara West and Lohara Extension blocks to set up a power plant of
3,300MW at Tiroda in Maharashtra. It has already invested around Rs70bn in land
acquisition and placed orders for equipment. It has also signed a power purchase
agreement with the Maharashtra government.
Adani Enterprises
Company description
Adani Enterprises (ADE), founded in 1988 as a partnership firm, has interests in
trading, coal mining, real estate development, shipping, bunkering, city gas
distribution, power generation, edible oil refining, grain storage and food processing.
The company went public in 1994. In the initial years of operation, it focused on
trading activities including trading of agro products, mineral oils, metal scrap,
precious metals, textile products and fertilizers. With the onset of the infrastructure
development cycle in the earlier part of this decade, ADE moved away from being a
pure trader to being an infrastructure asset developer to reduce the risk from
fluctuating trading volumes. Today, the company has interests in coal mine
development, power generation, city gas distribution, real estate development, and
food storage and processing. Apart from moving into infrastructure asset
development, the company has diversified into the trading of coal (coal imports into
India) and power trading. Recently Mundra Ports and SEZ has also been
amalgamated into ADE.
Investment strategy
We rate ADE Hold/Low Risk for the following reasons: ADE has taken some very
ambitious steps in the recent past: 1) purchase of a 100% interest in the Galilee
coal tenement for US$455mn; 2) coal purchase agreement with Regional
Government of Sumatra Selatan and PT Bukit Asam; and 3) MPSEZ wining the
AU$1.8bn bid for Abbott Point. At the heart of this strategy is forward/ backward
integration and exploiting the synergies in its ports, power, contract coal mining,
coal ownership coal and coal trading businesses. We are in consonance with the
company’s strategy but we do worry if the company is chewing a little more and a
little too fast, than it can digest. We believe the easy money is off the table.
Valuation
Our Rs724 target price for Adani Enterprises is derived using a sum of the parts
(SOTP) methodology given the conglomerate nature of the business. By far the
biggest constituents of our fair value at 36% and 24% are the group's ports and
power divisions respectively, which we value using a DCF model in which FCFE is
discounted at a cost of equity of 12-14%. The next biggest contributors to the "value
pie" at respective weightings of 17% and 17% are Coal Mining (valued using a DCF
and CoE discount rate of 13%) and Trading (Sep12E EV/EBITDA of 6x). Real
Estate (7%), Agri (1%) and City Gas also contribute to an overall fair value of
Rs724/share (excluding net debt).
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to Adani Enterprises. Key downside risks to our
target price lie in: (1) poor project execution; (2) commodity trading; (3) financial
closure; (4) environmental and legal clearance; (5) coal license in Bunyu; (6) real
estate volumes; (7) resource estimation risk; and (8) inadequate coal in Bunyu to
fire the Mundra project. Key upside risks to our target price lie in: (1) better-thanexpected
project execution; (2) more project wins in coal mining, ports and power;
and (3) higher cash generation in trading businesses.
India Equity Research Reports, IPO and Stock News
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Adani Enterprises (ADEL.BO)
Maintain Hold (2L): Raising Our Target Price to Rs724
Strong coal trading momentum — ADE has guided to trade 45mn and 56 mn tons in
FY12E and FY13E respectively, up from 33.5mtpa in FY11. The company is confident
of reaching an EBITDA of US$10/ton at coal ASPs of US$100/ton.
Adani Power update — Guided for generation of 20-24 bnkWh in FY12E. Signed
contracts with UP & Maharashtra for 600MW (net ASP Rs4.40/kWh) & 800MW (net
ASP Rs4.05/kWh) respectively. Current capacity of 1.98GW and 660MW synchronized
in Jun11. Operational capacity 6.6GW at end-FY12E. The SLC has decided that the 3.6
mn tons linkage to Mundra I, II, III would not be honored. The GoM on coal has decided
that 3.3GW Tiroda should be given fast track clearance.
Indonesian coal purchase rights — The agreement gives ADE access to ~36 mntpa
coal at peak capacity at government notified prices (US$42/ton currently for 4200-5000
kcal coal). US$18/ton will be paid to MPSEZ for setting up and operating rail and port
infrastructure at a capex of US$1.7bn within 48 months.
Galilee coal @ US$47/ton for 5000kcal coal at MPSEZ — Galilee coal reserve
estimates have increased to 10.4bn tons from 7.8bn tons at the time of acquisition. The
company expects to start mining by CY14 with initial capacity of 3-5mtpa. ADE will
incur capex of US$3.5-4bn in increasing production capacity to 60mtpa by CY22 while
additional capex of US$1.5bn is required for the rail link.
Abbott point update — The port has take or pay contracts for 50mtpa for 10-12 years
@realizations of US$7-7.5/ton and will do volumes of ~18mn tons in FY12E.
Incremental land is available for 30 mntpa which will be used to increase capacity for
transporting coal from phase 1 of ADE’s coal mines in the Galilee Basin.
MDO business — Parsa East – Kente Basin block, which was stuck in no go zone has
got stage -1 nod, but Parsa block cannot be commercially exploited for five years.
Maintain Hold (2L) – Target price increased to Rs724
We continue to rate ADE Hold (2L) for the following reasons: ADE has taken
some very ambitious steps in the recent past: (1) purchase of a 100% interest in
the Galilee coal tenement for US$455mn (2) coal purchase agreement with
Regional Government of Sumatra Selatan and PT Bukit Asam and (3) MPSEZ
wining the AU$1.8bn bid for Abbott Point. At the heart of this strategy is forward/
backward integration and exploiting the synergies in its ports, power, contract
coal mining, coal ownership coal and coal trading businesses. We are in
consonance with the company’s strategy but do worry if the company is chewing
a little more and a little too fast, than it can digest. We believe the easy money is
off the table.
We revise our target price to Rs724 from Rs661 earlier to factor in (1) a -24% to
15% EPS revision (2) rolling forward P/BV, EV/EBITDA multiples to Sep12E
(Mar12E earlier) (3) rolling forward DCF values to Sep11E (Mar11E earlier) and
(4) Adani Power at CIRA target price of Rs125 (Rs130 earlier) and (5) Mundra
Ports and SEZ at CIRA target price of Rs185 (Rs163 earlier)
Coal trading business could see robust growth over the next 2 years
ADE traded 33.5mn tons of coal in FY11 up 16% YoY delivering Rs150bn of
sales and Rs15.1bn of EBITDA. According to the company, India imported 83mn
tons of coal in FY11 and out of this ~ 70mn tons was thermal coal. Given that
ADE dealt entirely in thermal coal, its market share was 48% of the thermal coal
imports into India.
Management has guided for trading 45mn tons in FY12 and 56mn tons in FY13.
At ASPs of US$100/ton management is confident of doing margins of US$10/ton.
Coal mining, development and operations (MDO) business
The process waterfall for each mine is as follows:
Getting the letter of intent (LoI)
Detailed agreement signing
Mining plan approval
Public hearing and land notification (Section 4 and section 9 approvals)
Acquire land and pay compensation
Start mining
The company is initially concentrating on Parsa Kente and Macchakata and will
follow up with Parsa and Chhendipada in that order of processing. For Parsa Kente
the company has completed the public hearing, but the process is stuck at the
environmental ministry level. For Macchakata the LoI, agreement signing, mining
plan approval has been completed but clearances are yet to come. For Parsa the
LoI, signing and mining plan approval has been completed.
Stage-1 nod for Parsa East - Kente Basin but Parsa still stuck
The Ministry of Environment and Forest (MoEF) has granted Stage-I forest
clearance to the Tara, Parsa East and Kante Basan coal blocks in Chhattisgarh. Six
reasons were cited for clearing these 3 blocks despite a recommendation by the
Forest Advisory Committee (FAC) against it. Incidentally, on 3 earlier occasions
when the FAC had considered the application for forest clearance for these blocks,
the minister had concurred with the committee. Reasons cited for the clearance:
Three coal blocks are in ‘fringe’ area and not in the biodiversity rich Hasdeo-
Arand forest region. Permission can be granted for mining in the fringe area,
separated from the main Hasdeo-Arand by a well defined and high hilly ridge.
Substantial changes have been introduced in the original mining plans, to
address MoEF’s concerns. These include: (1) medium density forest area
reduced to 778ha from 2,000ha; (2) number of trees to be felled have been
reduced to 0.12mn from 0.85mn; (3) proposed operation period of the mine
reduced to 25 years from 45 years; (4) movement of coal from mine to proposed
power plant (7km away) to be done by overhead conveyer systems only; (5)
revised proposal for Parsa East and Kante Basan envisages two phases (a)
Phase-1: first 15 years over 762 ha (b) Phase-2 : next 15 years covering
1,136ha; and (6) Renewal for phase-2 can be linked to Phase-1 reforestation and
biodiversity management, since reclamation of the mined out area is planned to
start from third year onwards
Concerns related to wildlife can and should be taken care of through a wellprepared
and well-executed wildlife management plan. Such a plan should be
prepared over next 4-6 months under aegis of institutions like Wildlife Institution
of India and with involvement of other independent expert organisations, and will
be monitored by MoEF.
The blocks are linked to supercritical thermal power generating stations (5-8%
lower emissions compared to subcritical technology).
Both Chattisgarh and Rajasthan governments have been persistently following
up for clearance of the blocks, since their power generation plans are closely
linked with the coal blocks.
Need to sustain the momentum generated in capacity additions in XIth plan.
While the FAC is rightly focused on forest-related issues, the MoEF needs to
have a broader developmental picture and balance different objectives.
Bunyu coal mine status update
Adani Indonesia, a 100% subsidiary of ADE, has been awarded coal mining
concessions in Bunyu Island, Indonesia, from which coal will be used for the
power projects being developed by Adani Power. Adani Indonesia through its
subsidiaries, PT Lamindo Inter Multikon and PT Mitra Niaga Mulia, has been
awarded these coal mining concessions. According to the company Bunyu has
180mn tons of coal reserves in the coal mines located in E.Kalimantan, near the
border of Malaysia to the north.
Adani Indonesia has excavated 2.75mn tons, 2.32 mn tons and 1.08mn tons
during FY11, FY10 and FY09, respectively. The company hopes to ramp up
production to 7mn tons in FY12 and 11mn tons by FY16
Indonesian coal purchase rights update
ADE through its step-down Indonesian subsidiary, PT Adani Global, has entered
into a binding tripartite agreement on 25th August, 2010 for setting up a dedicated
rail and port project with the Regional Government of Sumatra Selatan,
Indonesia and PT Bukit Asam (a Government of Indonesia coal mining
company). PT Bukit Asam is one of the leading producers of coal in Indonesia,
and owns the second largest coal reserves in Indonesia.
This project provides coal purchase rights to ADE and the infrastructure created
will be used for transportation of a minimum volume of 35mn tons of coal on a
take or pay basis from PT Bukit Asam concessions in South Sumatra. The
concession is initially valid for a maximum period of 30 years, which can be
extended by mutual agreement.
The project envisages the ownership, construction and operation by ADE
(through its various subsidiaries) of 250km rail line capable of transporting a
minimum 35 mn tons of coal (expandable to 60 mn tons). The rail line will
connect Tanjung Enim (a coal mining area) to Tanjung Carat where ADE will build
a port with matching capacity for evacuating the coal.
PT Bukit Asam will sell 60% of such coal to Adani at government notified price
(which is US$42/ton currently) and the balance tonnage would be a contract
carriage for Bukit Asam. The long term price for the transportation has been
linked to CPI and fuel prices in order to provide a fair return to both parties.
The project is estimated to cost US$1.7bn for the rail and the port to be done by
MPSEZ and will be constructed within 48 months. The Government of South
Sumatra, Indonesia has undertaken to provide and facilitate all permits and
approvals and arrange for all land for rail and port required for the project.
Adani has a large coal mining setup in East Kalimantan (Bunyu) and the present
initiative in Sumatra will further strengthen its coal sourcing reach from Indonesia.
Galilee coal tenement update
ADE through its step down Australian subsidiary, Adani Mining Pty has
purchased a 100% interest in their Galilee coal tenement in the Galilee Basin,
Queensland. The purchase consideration is A$500mn (US$455mn) plus a royalty
payment A$2/ton (US$1.8/ton) for a 20 year period linked to production. The
US$455mn has been financed through US$55mn of internal generation,
US$250mn loan from ICICI Bank and US$150mn loan from Bank of India.
Galilee tenement now has a JORC compliant resource of 10.37 bn tons (up from
7.8 bn tons at the time of acquisition) of coal, which makes it the largest single
coal tenement in Australia.
Company expects to spend US$3.5-4bn in mining capex over the next 8-9 years
and also spend US$1.5bn on a railway line to evacuate the coal
The company hopes to start mining by CY14 with an initial capacity of 3-5mn
tons which will be expanded first to 30mn tons and finally to 60mn tons by CY22.
The company expects to hire up to 5000 people during construction of the Galilee
project and 4000 when it hits peak capacity in ~ 2022.
Coal from the Galilee basin would support and enable the rapid expansion of the
power business of APL in India while also expanding ADE coal business where
Adani is already the largest importer of thermal coal in India.
According to the company the coal from Galilee can be brought to India at a cost
of US$47/ton as shown below.
Figure 11. Galilee Coal Cost Structure
Cost Item US$/ton
Cash cost of mining 15.2
Royalty cost to Linc Energy 1.8
Transportation to Abbott Point 7.0
Handling charges 7.0
FOB @ Australia 31.0
Transportation to Mundra 16.0
5000kcal/kg GCV coal cost @ Mundra 47.0
Source: Company and Citi Investment Research and Analysis
Abbott Point update
The State of Queensland in Australia has declared MPSEZ as the successful
bidder for long-term lease of Abbot Point X50 Coal Terminal (APCT) following
international competitive bidding. MPSEZ won the bid with a price of AU$1.8bn
which had full financial closure.
Abbot Point Coal Terminal has current coal handling capacity of 21mtpa being
expanded to 50mtpa by June 2011. All of this 50mtpa have take-or-pay
agreements with clients. The port has a potential to be further expanded to
handling additional 30mtpa of coal.
This additional 30mtpa capacity will be used for transporting coal from Adani
Enterprises’ coal mines in the Galilee Basin. This will take care of evacuation of
coal for the phase I of the mines. Eventual capacity for Adani's mines is 60mtpa.
The acquisition is debt funded; the whole amount will be paid to the State of
Queensland in Australia upfront.
APCT is expected to generate revenues of ~AUD110mn in 2011, with EBITDA
margin of 54%. MPSEZ management expects the port to grow at ~23% CAGR to
revenues of ~AUD305mn by 2016, with margins expanding to 70%.
About Abbot Point Coal terminal
The Port of Abbot Point, located 25km north of Bowen in North Queensland, is
Australia's most northerly coal port. It has been established to service coal mines
in the northern Bowen Basin and the developing Galilee Basin. The Port is of
strategic importance to the state as it is one of the few locations with deep waters
(>15m) so close in-shore.
The Abbot Point Coal Terminal (APCT) was commissioned in 1984. It is a multiuser
coal terminal which presently services three mines in the Bowen Basin, with
coal being transported to APCT by rail on the Newlands System.
APCT is operated by Abbot Point Bulkcoal Pty Ltd, a subsidiary of Xstrata Coal,
under an Operations and Maintenance contract. APCT is not subject to economic
regulation.
Growth plans at the port
APCT has been undergoing constant expansion since 2006. In 2007, as part of
the X21 project, the terminal capacity was increased from 15 to 21mtpa.
APCT is being expanded from a capacity of 21 million tonnes of coal per annum
(mtpa) to 50 mtpa (known as the X50 project). The construction is planned to be
completed by mid-2011.
In line with the current expansion of APCT, rail capacity is being expanded
through the Goonyella to Abbot Point expansion (known as the GAP50 project).
The initial operation of GAP50 is anticipated by January 2012 and project
completion is expected in June 2012.
There is also a scope of further addition taking the port capacity to 80 MMT. The
incremental 30mtpa capacity will be used to evacuate coal from Adani
Enterprises coal mine in Galilee Basin.
Distance from Galilee mine to Abbott Point is 470km and to access Abbott Point,
ADE will have to construct a 105km long rail link. MPSEZ is further evaluating
Dudgeon point port to evacuate coal from phase 2 of Galilee tenement. Distance
from mine to Dudgeon Point is 370km and ADE will have to construct 170km
long rail link to access the same.
More about Abbott Point
The overall plan of Abbott Point terminal is to have seven terminals with a capacity
of ~ 300mn tons.
T1 - APCT currently has 21 mntpa coal handling capacity being expanded to
50mntpa (called the X50 Project) which has been awarded to MPSEZ.
T2/T3 - Hancock and BHP Billiton have been awarded "preferred developer
status" - for 2 coal terminals with capacity of atl east 30mtpa each. These
are well under way with the design and necessary environmental approvals for
the terminals.
T4-T7 - NQBP has advertised expression of interest (EOI) for 4 additional
terminals in May 2011. These terminals will each have a capacity of 30 mntpa -
and be located within the Abbot Point state development area. Development of
T4-7 will also require areas of land to be reclaimed from the sea. According to
local media reports, construction could begin in 2015, with first coal exports from
the fourth terminal in 2017.
Rail infrastructure in Australia
Rail access to T1 is via a dedicated coal rail freight line owned and operated by
QR National. Trains have a coal-carrying capacity of upto 5000 tonnes which is
stockpiled through a bottom dump train receival system using rail-mounted
stacker reclaimers, capable of handling between 4000 and 6000 tonnes per hour
(tph). A 2nd rail loop is being developed as part of the T1 expansion. Two
additional rail loops will be developed as part of the T2 / T3 expansion.
QR National has begun laying railway tracks on the Northern Missing Link
in Central Queensland, marking a pivotal milestone in its $1.1 bn Goonyella to
Abbot Point (GAP) expansion project. The GAP project includes: (1) 69km of new
track across the ‘Missing Link’ to join the existing Goonyella and Newlands
systems. (2) Expansion and upgrading of existing track and 15 new bridges
along the Newlands rail system, including associated rail unloading infrastructure
at the Abbot Point Coal Terminal. Trains are on schedule to commence operating
across the Northern Missing Link from January 2012 with full project completion
expected in June 2012. When at full capacity, the GAP project will enable coal
companies to double the coal tonnages that can be railed to the Abbot Point Coal
Terminal to 50 mntpa.
Railway project from Hancock mines to Abbott Point (60mn tonnes): The
495km standard gauge rail corridor was approved as infrastructure facility of
significance by the State Government on 1 Oct 2010. IFS is an infrastructure
facility of particular economic or social interest to Queensland, Australia. The
primary benefit of this Declaration is that the State Government will consider
compulsory acquisition should voluntary agreements not be obtainable. This was
the first time that the IFS status was conceded to a railway for coal.
Rail link for ADE: To access Abbott Point, ADE will have to construct a 105km
long rail line (with a capacity of ~30mtpa) to meet the proposed rail corridor from
Hancock. In the event that the capacity of this line is insufficient, ADE will have to
construct a rail line for a further 70km (175km in total) to the existing rail line
operated by QR National. Accessing the Dudgeon Point Port will necessitate a
further construction of 195km (370km in total).
For T4-T7: Rail infrastructure requirements from the mine to the terminal rail in
loader will be the responsibility of the terminal owners to be arranged separately.
Dudgeon Point port update
MPSEZ has been awarded preferred proponent status for the development of
Dudgeon Point terminal in Mackay, Queensland which entitles Adani the right,
(subject to technical and commercial feasibility) to develop coal terminal of
between 30-60 MMTPA capacity.
Dudgeon Point is located within the Bowen Basin, the premier coal producing
basin supplying the world with coking coal, Pulverised Coal Injection (PCI) grade
and high grade thermal coal, and is located approximately 15 kilometres south of
Mackay on the Queensland Coast and lies within the Port of Hay Point about four
kilometres north of the existing coal terminals of Dalrymple Bay and Hay's Point.
The distance from the mine to Dudgeon Point is 370km and ADE will have to
construct 170km long rail link to access the same. Capex to set up the mine and
port is likely to be US$1.67bn in the 1st phase
Adani Power update
We highlighted in our FY11 results note that the crux of the FY12E Rs23.1bn
profit is 55% of power sales being merchant (Of 11.3 bnkWh Mundra III - 5.3
bnkWh, Mundra IV - 2.6 bnkWh and Tiroda - 1.9 bn kWh). If any of the long term
off takers (GUVNL, Haryana & MSEDCL) force Adani Power to sell power to
them at PPA rates even on pre PPA CoD there could be downside risks to our
numbers.
According to the company it will generate between 20-24 bnkWh in FY12E and a
significant portion will be merchant. The company has signed a contract with UP
for 600MW @ Rs4.71/kWh (net realization of Rs4.40/kWh) and with Maharashtra
for 800MW @ Rs4.10/kwh (net realization of Rs4.05/kWh)
Company currently has 1980MW and has synchronized another 660MW on June 6th
2011 which will get comissioned August 2011 (CIRA: August 2011).
The company believes it will have operational capacity of 6600MW by the end of
FY12E (CIRA: 5280MW)
The negative news is that at a meeting of the standing linkage committee (SLC) held
on April 18, 2011 it was decided that the 3.6 mn tons coal linkage to Mundra I, II and III
would not be honored given the coal shortages in India.
On the positive side the group of ministers (GoM) on coal decided at its third meeting to
speed up clearances for 8 critical infrastructure projects on a priority basis belonging to
Adani Power, R-Power, Aditya Birla Group and Essar. Adani Power had sought forest
clearance for Lohara West and Lohara Extension blocks to set up a power plant of
3,300MW at Tiroda in Maharashtra. It has already invested around Rs70bn in land
acquisition and placed orders for equipment. It has also signed a power purchase
agreement with the Maharashtra government.
Adani Enterprises
Company description
Adani Enterprises (ADE), founded in 1988 as a partnership firm, has interests in
trading, coal mining, real estate development, shipping, bunkering, city gas
distribution, power generation, edible oil refining, grain storage and food processing.
The company went public in 1994. In the initial years of operation, it focused on
trading activities including trading of agro products, mineral oils, metal scrap,
precious metals, textile products and fertilizers. With the onset of the infrastructure
development cycle in the earlier part of this decade, ADE moved away from being a
pure trader to being an infrastructure asset developer to reduce the risk from
fluctuating trading volumes. Today, the company has interests in coal mine
development, power generation, city gas distribution, real estate development, and
food storage and processing. Apart from moving into infrastructure asset
development, the company has diversified into the trading of coal (coal imports into
India) and power trading. Recently Mundra Ports and SEZ has also been
amalgamated into ADE.
Investment strategy
We rate ADE Hold/Low Risk for the following reasons: ADE has taken some very
ambitious steps in the recent past: 1) purchase of a 100% interest in the Galilee
coal tenement for US$455mn; 2) coal purchase agreement with Regional
Government of Sumatra Selatan and PT Bukit Asam; and 3) MPSEZ wining the
AU$1.8bn bid for Abbott Point. At the heart of this strategy is forward/ backward
integration and exploiting the synergies in its ports, power, contract coal mining,
coal ownership coal and coal trading businesses. We are in consonance with the
company’s strategy but we do worry if the company is chewing a little more and a
little too fast, than it can digest. We believe the easy money is off the table.
Valuation
Our Rs724 target price for Adani Enterprises is derived using a sum of the parts
(SOTP) methodology given the conglomerate nature of the business. By far the
biggest constituents of our fair value at 36% and 24% are the group's ports and
power divisions respectively, which we value using a DCF model in which FCFE is
discounted at a cost of equity of 12-14%. The next biggest contributors to the "value
pie" at respective weightings of 17% and 17% are Coal Mining (valued using a DCF
and CoE discount rate of 13%) and Trading (Sep12E EV/EBITDA of 6x). Real
Estate (7%), Agri (1%) and City Gas also contribute to an overall fair value of
Rs724/share (excluding net debt).
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to Adani Enterprises. Key downside risks to our
target price lie in: (1) poor project execution; (2) commodity trading; (3) financial
closure; (4) environmental and legal clearance; (5) coal license in Bunyu; (6) real
estate volumes; (7) resource estimation risk; and (8) inadequate coal in Bunyu to
fire the Mundra project. Key upside risks to our target price lie in: (1) better-thanexpected
project execution; (2) more project wins in coal mining, ports and power;
and (3) higher cash generation in trading businesses.
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