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India Equity Research Reports, IPO and Stock News
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ADE was the best performing conglomerate stock last year, outperforming the
index most of the time. But given the current valuation disparity between
ADE and peers, we think it makes sense to switch to RELI. We downgrade
ADE to UW, with a reduced PT of Rs475.
ADE’s residual value1, at Rs240B, has seen a sharp rally since Adani
Power and Mundra Port became significant subs (circa Jan-10). We
think this is due to (1) the rub-off of strong execution of power and port
ventures, (2) it being a unique play on mine development and coal trading,
and (3) its relatively low leverage despite global acquisitions. Despite these
advantages, we think 20x FY12E EV/EBITDA is too much of a premium to
pay for a trading and MDO business, and we downgrade the stock to UW.
What could change? (1) Potential return of risk appetite could reduce
investor preference for less-leveraged plays and cause a shift-back to the
names that are currently perceived as risky. (2) ADE enjoys the halo effect
from strong execution at power and port subs, but any slippage in its core
mining business execution could be a risk to this perception.
Recent events and our take: (1) Karnataka Lokayukta report alleges illegal
gratification by Adani group but management has denied this and stated it
would take appropriate legal measures. (2) Change in Indonesian
government policy on coal export, mandating notified market prices for all
contracts. ADE exports coal to Adani Power at US$36/ton, below estimated
market price of US$60/ton. ADE is contractually obliged to supply coal at
the above price and might be liable to additional royalty / tax. In our base
case though, we have loaded the burden on Adani Power.
Our new Mar-12 PT of Rs475 (down from Rs665 earlier) factors in our
recent sharp PT cut for Adani Power, and lower value attributed to trading
businesses and mining businesses. Our earnings estimate cuts of 10-20% for
FY12-14 are on account of Adani Power estimate cuts, MDO slippages and
lower trading margins assumed.
click below for Sector update
R-Infra, Adani and Jaiprakash - A stark price-value mismatch ::JPMorgan
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ADE was the best performing conglomerate stock last year, outperforming the
index most of the time. But given the current valuation disparity between
ADE and peers, we think it makes sense to switch to RELI. We downgrade
ADE to UW, with a reduced PT of Rs475.
ADE’s residual value1, at Rs240B, has seen a sharp rally since Adani
Power and Mundra Port became significant subs (circa Jan-10). We
think this is due to (1) the rub-off of strong execution of power and port
ventures, (2) it being a unique play on mine development and coal trading,
and (3) its relatively low leverage despite global acquisitions. Despite these
advantages, we think 20x FY12E EV/EBITDA is too much of a premium to
pay for a trading and MDO business, and we downgrade the stock to UW.
What could change? (1) Potential return of risk appetite could reduce
investor preference for less-leveraged plays and cause a shift-back to the
names that are currently perceived as risky. (2) ADE enjoys the halo effect
from strong execution at power and port subs, but any slippage in its core
mining business execution could be a risk to this perception.
Recent events and our take: (1) Karnataka Lokayukta report alleges illegal
gratification by Adani group but management has denied this and stated it
would take appropriate legal measures. (2) Change in Indonesian
government policy on coal export, mandating notified market prices for all
contracts. ADE exports coal to Adani Power at US$36/ton, below estimated
market price of US$60/ton. ADE is contractually obliged to supply coal at
the above price and might be liable to additional royalty / tax. In our base
case though, we have loaded the burden on Adani Power.
Our new Mar-12 PT of Rs475 (down from Rs665 earlier) factors in our
recent sharp PT cut for Adani Power, and lower value attributed to trading
businesses and mining businesses. Our earnings estimate cuts of 10-20% for
FY12-14 are on account of Adani Power estimate cuts, MDO slippages and
lower trading margins assumed.
click below for Sector update
R-Infra, Adani and Jaiprakash - A stark price-value mismatch ::JPMorgan
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