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Adani Power (ADAN.BO): Down to Neutral on higher fuel costs
What happened
We downgrade Adani Power to Neutral from Buy with a 12-month SOTPbased
target price of Rs93 (from Rs134 earlier), implying potential upside
of 1%. Three reasons drive the downgrade:
1. Negative news flow on Bunyu mine: Per our ASEAN commodities
team, the Indonesian government is likely to benchmark all coal produced in
Indonesia to the International coal indices. Even though this regulation is
applicable on a case-by-case basis and implementation timelines are
uncertain, we calculate that the fuel costs for its Mundra complex will likely
increase by 23%, as Adani Power may have to pay higher royalties and taxes
at their Indonesian subsidiary. Consequently, we expect the delivered cost of
coal at Mundra to increase by about US$10/ton to US$54/ton from the
current US$44/ton.
Furthermore, the Indonesian government is contemplating a ban on exports
of low grade coal for meeting their domestic fuel obligations. The current cut
off calorific value is about 5100kcal (as per APL the coal from Bunyu is about
5200kcal) and is likely to be implemented from 2014 onward. As these
regulations are still in the drafting stage, we do not reflect the adverse effect of
this regulation in our valuations and earnings estimates. Nevertheless, we
believe this regulation will be a key overhang on the stock.
2. Decline in utilization levels: We believe APL has higher risk of
utilization levels as Gujarat has largely became power surplus and the
utilization levels particularly for Mundra I & II during the off season will get
impacted. As a result, we reduce the utilization levels to about 75%-80%
from earlier estimates of about 80% -85%.
3. Equity dilution from acquisition of minority stake in Tiroda project:
APL’s equity issuance for the purpose of acquiring a 26% stake in the
Tiroda project is dilutive and the consideration paid is at a 42% premium
to our valuation. We now update our earnings estimates to reflect the
dilution.
Since we initiated on Adani Power with a Buy on April 20, 2010, the stock
declined 21.4% vs. a BSE Sensex down 1.7%. We attribute its
underperformance primarily due to concerns on fuel supplies – both
domestic and international and softening of merchant rates
Valuation:
We valued Adani Power on SOTP based FCFE methodology. We reduce
our TP and EPS estimates by 31% and 37%-42% over FY12E-14E primarily
to reflect the above risks. Adani now looks fairly valued both on P/B vs
ROE and DC methodology. Although APL execution of new capacities has
been impressive, we believe the fuel issues for both the Mundra and
Tiroda projects will remain a key overhang on the stock.
Key upside risk includes reduction in coal prices and key downside risk
includes delay in commissioning of capacities under construction and
higher than expected increase in coal prices. On our calculations, a 1%
increase in coal price would lead to a 3% decline in FY12E EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Adani Power (ADAN.BO): Down to Neutral on higher fuel costs
What happened
We downgrade Adani Power to Neutral from Buy with a 12-month SOTPbased
target price of Rs93 (from Rs134 earlier), implying potential upside
of 1%. Three reasons drive the downgrade:
1. Negative news flow on Bunyu mine: Per our ASEAN commodities
team, the Indonesian government is likely to benchmark all coal produced in
Indonesia to the International coal indices. Even though this regulation is
applicable on a case-by-case basis and implementation timelines are
uncertain, we calculate that the fuel costs for its Mundra complex will likely
increase by 23%, as Adani Power may have to pay higher royalties and taxes
at their Indonesian subsidiary. Consequently, we expect the delivered cost of
coal at Mundra to increase by about US$10/ton to US$54/ton from the
current US$44/ton.
Furthermore, the Indonesian government is contemplating a ban on exports
of low grade coal for meeting their domestic fuel obligations. The current cut
off calorific value is about 5100kcal (as per APL the coal from Bunyu is about
5200kcal) and is likely to be implemented from 2014 onward. As these
regulations are still in the drafting stage, we do not reflect the adverse effect of
this regulation in our valuations and earnings estimates. Nevertheless, we
believe this regulation will be a key overhang on the stock.
2. Decline in utilization levels: We believe APL has higher risk of
utilization levels as Gujarat has largely became power surplus and the
utilization levels particularly for Mundra I & II during the off season will get
impacted. As a result, we reduce the utilization levels to about 75%-80%
from earlier estimates of about 80% -85%.
3. Equity dilution from acquisition of minority stake in Tiroda project:
APL’s equity issuance for the purpose of acquiring a 26% stake in the
Tiroda project is dilutive and the consideration paid is at a 42% premium
to our valuation. We now update our earnings estimates to reflect the
dilution.
Since we initiated on Adani Power with a Buy on April 20, 2010, the stock
declined 21.4% vs. a BSE Sensex down 1.7%. We attribute its
underperformance primarily due to concerns on fuel supplies – both
domestic and international and softening of merchant rates
Valuation:
We valued Adani Power on SOTP based FCFE methodology. We reduce
our TP and EPS estimates by 31% and 37%-42% over FY12E-14E primarily
to reflect the above risks. Adani now looks fairly valued both on P/B vs
ROE and DC methodology. Although APL execution of new capacities has
been impressive, we believe the fuel issues for both the Mundra and
Tiroda projects will remain a key overhang on the stock.
Key upside risk includes reduction in coal prices and key downside risk
includes delay in commissioning of capacities under construction and
higher than expected increase in coal prices. On our calculations, a 1%
increase in coal price would lead to a 3% decline in FY12E EPS.
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