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Strong, but priced-in Fundamentals
Adani Power (APL) is expected to have 6,600MW power capacity by
FY13E, which will make the Company one of the largest private sector
players. Out of 13.2GW capacity, APL has tied-up 51% in Case-I bids,
while the balance is untied. APL is largely dependent on Indonesian coal
having entered into long-term off-take agreements, which ensures stability.
However, we believe cheaper fuel price and strong operational asset are
priced-in, which validate our “HOLD” recommendation.
Long-term Fuel Security – A Major Concern
The Company is planning to fuel its plants with Indonesian coal procured
from its promoter Adani Enterprises (AEL). However, in our view the
long-term fuel security still remains a concern considering the likely
disruptions of coal supply due to lower production in Bunyu mines, and
new laws restricting exports from Indonesia. Again, the Fuel Supply
Agreement (FSA) with AEL is only for 15 years, as against the total plant
life of over 30 years.
PPA Structure with Risks related to Pricing & Availability
The Power Purchase Agreement (PPA) structure renders APL prone to
risks associated with fuel pricing and availability, as most of its underconstruction
capacity has been tied-up through fixed tariffs having no fuelescalation
clause. Out of 9.2GW capacity, long-term PPAs have been
contracted for 7.8GW , while 1.4GW will be available on merchant basis.
Thus any variations in fuel costs will have a direct impact on project
profitability.
Pre-PPA sales to result in high merchant volumes till FY14E
As the projects in Mundra are expected to be commissioned ahead of the
schedule, well before the start of commitment to supply under long-term
PPAs, the power generated during the lag time can be sold through
merchant route.
Mundra to account for 60% value of proposed 6,600MW capacity
APL's total capacity, which currently stands at 1,980MW, is set to increase
to 6,600MW by FY12E. It enjoys good medium- to near-term revenue
visibility due to huge operational capabilities. Given the low fuel cost from
AEL’s captive mine at CIF of US$36 per tonne, Mundra projects seem to be
very profitable. As per our valuation, Mundra projects constitute 60%
value on account of cheap fuel supply agreements with AEL.
Stock Fairly -priced – Limited Upside from CMP
APL has been traded at premium to other players on account of higher
RoE. However, at the CMP the stock is trading at P/BV of 2.8x and 2.2x its
FY12E and FY13E and EV/EBITDA of 7.7 x FY13E, which we believe fairly
valued. We have arrived at an SOTP-based value of Rs. 117 for the stock.
We initiate coverage on the stock with a “HOLD” recommendation.
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