Adani Power - Value accretive acquisition of minority to support valuations 􀂄BofA Merrill Lynch,

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Adani Power Ltd.
Value accretive acquisition of
minority to support valuations
􀂄 APL buys minority @Tiroda; We factor-in coal shortage; Buy
APL’s acquisition 26% equity in its Tiroda project (54% of SOTP) we think is value
accretive as it is priced at 50% discount to our valuation, however, the stock-swap
would create a stock over-hang. Maintain PO at Rs140 as we neutralize value
accretive deal by factor-in 35% slippage in linkage coal by CIL @ Tiroda with an
expensive E-auction coal. We cut FY12E EPS by ~3.5% to factor-in dilution as Tiroda
will be fully operational in FY13E and raise FY13E EPS 1.5% on value accretive deal.
Buy APL on (1) a 4.7x scale-up in capacity by FY14E via an unregulated business
model (no cap on RoE) and (2) visibility of 3.8x EPS over FY11-13E led by 77%
power pre-sold at remunerative tariffs, secured fuel / funding, location advantage &
business model (assured shift to PPAs from FY13E (Chart 8).
Value accretive acquisition but risk of stock over-hang…
APL approved the amalgamation of 26% stake owner in Tiroda SPV - Growmore
through stock-swap leading to issuance of 213mn shares or ~9.8% equity. Apart
from valuation, the deal is positive as it cleans-up corporate structure with 100%
ownership in all subsidiaries. However, 9.8% rise in equity could create a stock
over-hang 9-12 months down the line, when the stock will be issued.
Competitive advantages - coal, location and visible growth
APL has secured low-cost fuel via coal linkages (38% of capacity) and contracts
with parent (23%). It has 86% of capacity located in the Western region - highest
peak power deficit (14.7%) vs India (9.8%) in FY11. These competitive
advantages and healthy pre-sales tariffs at ~Rs2.9 (see Table 1) make APL the
top margin (56% in FY13E) and RoE (23%) earner in our IPP universe.
More projects – 15.9GW, PPAs and risk mitigation since IPO
Its project pipeline is now 15.9GW vs 9.9GW at its IPO (July09). Risk: execution,
lower delivery of coal v/s linkage by Ministry of Coal, imported coal - exposes it to
country, currency & freight risks and fall in power rates on lower power deficit.