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India Equity Research Reports, IPO and Stock News
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Looming fuel shortage and growing leverage raises our concern that Adani
is growing beyond what cheap fuel sources can support. Merchant
assumptions are reducing as acceptability of supernormal profit is falling.
We believe a premium P/B due to superior RoE does not hold any more.
We still like the execution and growth, but downgrade to Neutral with new
PT of Rs90
Adani has delivered on execution and funding tie-ups, justifying our
preference for the stock, which has also been a relative outperformer
(in a sector that has seen severe value erosion). However, recent events
around Indonesian coal imports and June-quarter performance expose
Adani’s potential vulnerability.
The Indonesian government has come out strongly against belowmarket export of coal, even to affiliated companies. Adani
management is confident that the burden would be borne by Adani
Enterprises, but we think there is a material risk that the burden is
shared. Our imported coal prices go up by $12/ton, eating into the
bottomline. Adani’s PPAs have fixed tariffs and offer no protection.
There is an attempt to renegotiate one of these, Mundra-3: however, in
our view, given that the government is aware of the above-average
return on the merchant portion that Adani could potentially earn, a
renegotiation may be difficult to digest.
Imported coal is tied up for ~3GW only, and Adani’s dependence
upon scarce domestic coal is set to rise, as its MWs continue to grow
at scorching pace. Peers are already facing issues of idle / under-utilised
capacity and debt servicing due to fuel constraints. We reduce PLFs for
projects that are partly dependent upon linkage coal, to 75-85% and for
100% linkage projects to <75%. Potential captive coal mine allocation
for Tiroda is a long-term positive but incapable of providing near-term
respite, in our view.
Our estimates for Adani take a haircut of 7/33/22% for FY12/13/14,
with lower PLF, merchant realizations and higher fuel cost. With a
lower sustainable RoE of 15-22%, coupled with high leverage of 3.7x as
of FY11, we think the case for Adani to trade at 3x P/B has weakened.
We reduce to Neutral with a revised PT of Rs90. Further drop in
merchant realizations and implementation delays are key downside risks
to our PT, while lower-than-expected fuel import bill is an upside risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Looming fuel shortage and growing leverage raises our concern that Adani
is growing beyond what cheap fuel sources can support. Merchant
assumptions are reducing as acceptability of supernormal profit is falling.
We believe a premium P/B due to superior RoE does not hold any more.
We still like the execution and growth, but downgrade to Neutral with new
PT of Rs90
Adani has delivered on execution and funding tie-ups, justifying our
preference for the stock, which has also been a relative outperformer
(in a sector that has seen severe value erosion). However, recent events
around Indonesian coal imports and June-quarter performance expose
Adani’s potential vulnerability.
The Indonesian government has come out strongly against belowmarket export of coal, even to affiliated companies. Adani
management is confident that the burden would be borne by Adani
Enterprises, but we think there is a material risk that the burden is
shared. Our imported coal prices go up by $12/ton, eating into the
bottomline. Adani’s PPAs have fixed tariffs and offer no protection.
There is an attempt to renegotiate one of these, Mundra-3: however, in
our view, given that the government is aware of the above-average
return on the merchant portion that Adani could potentially earn, a
renegotiation may be difficult to digest.
Imported coal is tied up for ~3GW only, and Adani’s dependence
upon scarce domestic coal is set to rise, as its MWs continue to grow
at scorching pace. Peers are already facing issues of idle / under-utilised
capacity and debt servicing due to fuel constraints. We reduce PLFs for
projects that are partly dependent upon linkage coal, to 75-85% and for
100% linkage projects to <75%. Potential captive coal mine allocation
for Tiroda is a long-term positive but incapable of providing near-term
respite, in our view.
Our estimates for Adani take a haircut of 7/33/22% for FY12/13/14,
with lower PLF, merchant realizations and higher fuel cost. With a
lower sustainable RoE of 15-22%, coupled with high leverage of 3.7x as
of FY11, we think the case for Adani to trade at 3x P/B has weakened.
We reduce to Neutral with a revised PT of Rs90. Further drop in
merchant realizations and implementation delays are key downside risks
to our PT, while lower-than-expected fuel import bill is an upside risk.
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