Adani Power : Acquires 22.6% In Tiroda (3300MW) Project Citi

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Adani Power (ADAN.BO)
Alert: Acquires 22.6% In Tiroda (3300MW) Project
 Acquisition of 22.6% stake in Tiroda project – Adani Power has approved a scheme
of amalgamation of Growmore Trade and Investment Private Limited Mauritius
(“Growmore”) from appointed date of April 01, 2011. Growmore holds balance stake of
22.6% in 3300MW Tiroda Project of Adani Power. With this amalgamation Adani Power
will now have 100% stake in Tiroda Project.
 Tiroda valuation appears expensive – Adani Power will issue 213.2mn equity shares
for Growmore. This values Tiroda Project at Rs104bn/ Rs118bn at CMP of Rs110/CIRA
TP of Rs125, higher than our Sep11 DCF value for Tiroda project of Rs76bn.
 Impact on target price – Our target price of Rs125 for Adani Power factors in Sep11
DCF value of Rs110 and Sep12 3x P/BV value of Rs140 in 50:50 ratio. Assuming
completion of the amalgamation without hitches, and using our current valuation
framework, our target price would notionally reduce to Rs118 due to higher than
expected value paid by Adani Power for the remaining 22.6% stake in Tiroda





Adani Power
Valuation
The Indian power sector has seen a sea change over the last 4-5 years from an era of:
(1) assured RoE where fuel cost was a pass-through; (2) Coal India honored its coal
linkages most of the time; (3) imported coal was a small quantum of India’s
requirement; (4) analysts/ investors did not have to bother about merchant prices/fuel
costs; and (5) though SEBs were making losses, they were not asking generators to
back down generation to an era where (1) case 1 and case 2 are becoming more
common than assured RoE; (2) one is worried if Coal India will honor its coal linkage
contracts; (3) imported coal is becoming increasing important; (4) analysts/investors
have to bother about merchant prices/fuel costs; and (5) SEBs are asking generators to
back down generation.
This means one has to adapt valuation approaches to keep up with the sudden
changes in operating outlook for companies. As a consequence we now use a mix of
DCF and P/BV. The weight for DCF and P/BV will be subjective and dependent on the
near-term outlook for the sector and that particular company.
For Adani Power we have currently set the weightage at 50:50% between DCF: PBV
leading us to take the average of Rs110 (from DCF approach) and Rs140 (from P/BV
approach) to arrive at a target price of Rs125.
To arrive at our DCF value we use FCFE and a cost of equity of 13%. Given that Adani
Power is set to deliver average RoEs of 29% over FY12E-14E, which is at a significant
premium to the sector, we attribute a target P/BV multiple of 3x to get a fair value of
Rs140 as of Sep12E.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price volatility,
assigns a Low Risk rating to Adani Power.
Downside risks include: 1) Insufficient quantity of coal in Bunyu to fire the Mundra
project; 2) The total reserves of 150mn tonnes have three licenses. While the
counterparties of 2 of the 3 mines have procured long-term exploitation licenses the
third license has not yet been granted to the counterparty; 3) Regulatory risk in
Indonesia; 4) Fuel supply to Mundra Phase IV and Tiroda is contingent on AEL
achieving certain milestones and finalizing the coal supply agreements and timely
mining; 5) Fuel pricing risk for the Indonesian coal; 6) Merchant tariff risks; 7) Execution
risks; 8) Chinese equipment quality risks; and 8) Interest rate risk.
Upside risks include: 1) Better than expected operating parameters; 2) Faster than
expected execution; 3) Higher than expected merchant tariffs; and 4) Significant
progress on 3300MW of projects now in planning stages.