Adani Power -Discoms wear the pants ::Macquarie Research,

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Adani Power
Discoms wear the pants
Event
 The Appellate Tribunal of Electricity overruled the appeal by Adani Power to
terminate its 1000MW contract with GUVNL at Rs2.35/kWh. Feedback from
the company is that it is still contemplating whether to appeal this decision to
the Supreme Court. We previously factored in higher realisation for the
1000MW contract and therefore recalibrating to Rs2.35/kWh reduces our
valuation from Rs106 to Rs94. Retain Neutral.
Impact
 The 1000MW contract with GUVNL: Since December 2009, Adani Power
has been disputing the contract from its Mundra Phase 3 with GUVNL
(Gujarat discom) at the levelised bid price of Rs2.35/kWh partly due to the bid
assuming coal supply from Gujarat Mining Corporation’s Morga II coal block.
 The Appellate Tribunal judgement on the Appeal: “In view of the findings,
we do not find any merit in the Appeal as there is no infirmity in the impunged
order of Gujarat Electricity Regulatory Commission dated 31/08/2010 which in
our view is perfectly justified.” The summary of the findings further noted:
The PPA was not based on the premise of the availability of coal from
Gujarat Mineral Corporation.
The right of either party to terminate the contract and subsequent
payment of liquidated damages is not applicable, as both parties need to
mutually agree on the happening of events leading to the termination.
Additionally, the provision for liquidated damages in the PPA does not in
any manner affect the right of GUVNL to seek performance from the PPA
– therefore the directions issued by the State Commission (GERC) to
Adani to supply the power as per the PPA is perfectly legal.
 A consistent takeaway: is that discoms often hold the upper hand when it
comes to contract negotiations with IPPs, while recent Ministry meetings
we’ve had suggest Government lacks intention to intervene in such contracts.
There seems little recourse to many IPPs in negotiating higher payment from
discoms (Mundra/GUVNL, Amarkantak/Kondapalli, Rajwest/Rajasthan).
Earnings and target price revision
 -12% FY13E EPS, -8% FY14E EPS, -8% FY15E EPS. TP reduced to Rs94
from Rs106.
Price catalyst
 12-month price target: Rs94.00 based on a PER methodology.
 Catalyst: 2Q12 results reflecting lower merchant realisations
Action and recommendation
 Retain Neutral. Our concern is that demand in the power market will unlikely
see a material pick-up until 4Q12, and so earnings downside could overhang
Adani Power, having an increasing proportion of merchant power sales in the
near term, and other IPPs over the next six months.