Adani Power - Weak 1Q12 results; procuring required fuel for domestic coal projects the key factor to watch::Credit Suisse,

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● Adani Power’s 1Q12 PAT at Rs1.8 bn was 6% below our
estimates and significantly below the street estimates of Rs3.3 bn.
Profits were impacted on account of: (1) lower PLF at 74% led by
maintenance shutdowns and grid restrictions to evacuate power,
(2) lower spot tariff at just Rs3.6/kWh dragged by high share of UI
sales and (3) higher fuel cost of Rs1.04/kWh led by higher coal
consumption on frequent project backdown and lower PLF.
● Profit could have been even lower had the company paid tax
based on MAT, as mandated by the recent budget for projects
setup in SEZ. As the matter is currently sub judice, the company
has not provided MAT in 1Q12. We factor MAT in our estimates
but expect MAT paid for contracted capacity as a pass-through
under the ‘change in law’ clause in power supply contracts.
● We cut EPS for FY12/ 13 by 15%/ 10% and lower target price by
7% to Rs108 on poor results and lower merchant tariff. Procuring
coal required for its domestic coal-based projects, expected to
commission during FY12–14, is going to be the key challenge in
the future. We maintain our NEUTRAL rating on the stock.


Weak results on poor PLF, spot tariff and higher fuel costs
Adani Power’s 1Q12 reported PAT at Rs1.8 bn (up 54% YoY) was
about 6% lower than our estimates and substantially lower than the
street estimates of Rs3.3 bn. Numbers would have appeared even poor
if the company would have paid tax based on MAT (effective rate of
19.9%), as mandated by the recent Budget for projects setup in a SEZ.
Results were impacted on (1) lower PLF at 74%, (2) lower blended spot
tariff at Rs3.6/kWh (bilateral spot tariff at Rs4.4/kWh but high share of UI
sales dragged overall spot tariff) and (2) high fuel cost at Rs1.04/kwh on
account of higher coal consumption led by frequent project backdown
and lower PLF. PLF was in turn impacted mostly on account of (1) the
planned shutdown of its Unit I and Unit V projects and (2) the backdown
of projects led by grid restrictions to evacuate power.
Numbers indicate that Adani is selling most of its output from Unit I of
the Mundra-III project of 0.66GW to GUVNL at contracted tariff of
Rs2.35/kWh, despite this contract’s effective date from February 2012.


Sourcing fuel for domestic coal based projects is the key
So far, Adani Power has commenced operations of its Mundra Phase
I–III projects (Unit-II of Phase-III project not announced commercial
yet). These projects are based on imported coal sourced from the
Bunyu coal mines in Indonesia under its coal procurement contract
with its parent company, Adani Enterprises. The parent company will
ensure that the required coal for these projects is supplied on time.
However, going forward, Adani Power would commission its domestic
coal-based projects—the 1.98GW Mundra Phase-IV project (70% of
fuel needs from domestic coal) and 3.3GW of Tiroda project (captive
mine allocated for 0.8GW but is currently stuck in forest clearances).
We expect these capacities to commission during FY12–14. Given
rising domestic coal deficits, we believe procuring requisite coal needs
for these projects would be a key challenge, despite Adani Power
having Letter of Assurance/ tapering coal linkages for these projects.
While we have currently assumed that any deficits from domestic coal
would be met through coal imports, we note that the sensitivity for
imported coal or the inability to procure the required coal is high, and
provides risk to our earnings estimates and is thus a key factor to
watch ahead. We maintain our NEUTRAL rating on the stock.