Goldman Sachs, :: Adani Power- Merger implies low cost fuel supplies to Tiroda; likely dilutive near-term

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Adani Power (ADAN.BO) Rs108.95
   Equity Research
Merger implies low cost fuel supplies to Tiroda; likely dilutive near-term
News
Adani Power’s (APL) board of directors approved its merger with Growmore
Trade and Investment Private Limited, Mauritius through issuance of 213mn
shares (9.8% of current equity outstanding). The merger (subject to approval
of various stakeholders) would be effective from April 1, 2011. Growmore
holds about a 26% stake in 5x660MW domestic coal-based Tiroda project.
Analysis
At APL’s current market price, the merger would value the Tiroda Project at
about US$2.0bn (implied P/B of 3X) vs. our estimate of about US$1.4bn
(implied P/B of 2X). Tiroda constitutes about 15% of our SOTP-based TP of
Rs135/share. We believe the 38% premium to our valuation of the Tiroda
project is primarily based on lower fuel cost assumptions under two scenarios:
1) Higher supplies from Coal India (CIL): While we assume 50% of fuel
supplies through FY14E and 70% thereon from CIL in our base case, the
merger would imply that 85% of fuel requirements (from FY12E onwards)
of the entire Tiroda project are met by supplies from CIL.
2) Receipt of coal from captive mine, either through environmental
clearance to Lohara mines originally allocated to the project or allocation
of alternative coal block. The merger value would imply that about 30% of
the requirement would be met through captive coal, 50% from CIL and the
remaining 20% using imported coal.
We think the merger reflects APL’s confidence in receipt of low cost fuel
supplies to the Tiroda project; we, however, wait for more clarity on the
fuel supplies from CIL and news flows on captive mines.
Implications
On a pro forma basis (assuming higher share count and removal of
minority interest), we believe the merger could have a dilutive impact of
about 5% on our SOTP value and 5%-7% on our FY12-14E EPS as we
expect the Tiroda project to become fully operational in FY14E. We retain
our Buy rating. Our target price (which excludes the merger) is unchanged.
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