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India Equity Research Reports, IPO and Stock News
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Adani Power's medium term outlook looks nebulous given the imposition of 'Indonesian Coal
Reference Index', high probability of domestic linkage shortfall for Mundra-IV & Tiroda-I and no
coal linkage, so far, awarded for Tiroda-II and Kawai projects. Clarity on the issues will drive
medium term performance. Hold.
Adani Power’s (APL) seemingly near-perfect business model at IPO has been challenged by the
imposition of the Indonesian Coal Reference price, de-allocation of the captive coal block for
Tiroda-I, lower pre-PPA sales and a domestic fuel shortage hurting linkage plants. Our calculations
indicate the current share price partially factors in the negative impact of these issues. We think the
risk to the downside appears higher than to the upside (see Chart 1).
Indonesian Coal Reference price poses a significant problem
The Indonesian government has imposed a transfer price of coal based only on the Indonesian
Coal Reference price. In our view, this poses a significant problem for all Indian developers,
including APL. The new law makes us wonder again if the ‘sweet coal’ deal between Adani
Enterprise (AEL) and APL will still be honoured. APL’s management contends the contract will be
unaffected, but we remain cautious. We calculate that every US$10/ton increase in the coal price
will negatively affect APL’s share price by Rs16/share. Also, a lower-than-expected ramp-up in
the Bunyu mines could lead to APL importing spot coal to bridge the gap, thereby affecting
project economics. We presently assume the contract between AEL and APL at US$36/ton will
be continued.
No coal linkage, so far, for Tiroda II and Kawai
APL had tied up power to be generated from Tiroda II and Kawai (each 1.32GW) under the Case-
I competitive bid, presuming coal linkage (partial/full) would be allocated under the XIIth plan
dispensation route. However, as detailed in our sector thesis, the award of further coal linkage
looks highly unlikely to us, at least in the near term. Given the scenario, APL may have to use a
substantial amount of imported and/or e-auction coal to run the plants, which would affect project
profitability – allowed fuel price escalation is based on domestic coal (per bidding documents) and
all fuel risk must be borne by the developer. We assume linkage/e-auction/imported ratios of
60%/30%/10% for both Tiroda-II and Kawai. Initiate coverage with a hold rating and Rs 75 target
price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Adani Power's medium term outlook looks nebulous given the imposition of 'Indonesian Coal
Reference Index', high probability of domestic linkage shortfall for Mundra-IV & Tiroda-I and no
coal linkage, so far, awarded for Tiroda-II and Kawai projects. Clarity on the issues will drive
medium term performance. Hold.
Adani Power’s (APL) seemingly near-perfect business model at IPO has been challenged by the
imposition of the Indonesian Coal Reference price, de-allocation of the captive coal block for
Tiroda-I, lower pre-PPA sales and a domestic fuel shortage hurting linkage plants. Our calculations
indicate the current share price partially factors in the negative impact of these issues. We think the
risk to the downside appears higher than to the upside (see Chart 1).
Indonesian Coal Reference price poses a significant problem
The Indonesian government has imposed a transfer price of coal based only on the Indonesian
Coal Reference price. In our view, this poses a significant problem for all Indian developers,
including APL. The new law makes us wonder again if the ‘sweet coal’ deal between Adani
Enterprise (AEL) and APL will still be honoured. APL’s management contends the contract will be
unaffected, but we remain cautious. We calculate that every US$10/ton increase in the coal price
will negatively affect APL’s share price by Rs16/share. Also, a lower-than-expected ramp-up in
the Bunyu mines could lead to APL importing spot coal to bridge the gap, thereby affecting
project economics. We presently assume the contract between AEL and APL at US$36/ton will
be continued.
No coal linkage, so far, for Tiroda II and Kawai
APL had tied up power to be generated from Tiroda II and Kawai (each 1.32GW) under the Case-
I competitive bid, presuming coal linkage (partial/full) would be allocated under the XIIth plan
dispensation route. However, as detailed in our sector thesis, the award of further coal linkage
looks highly unlikely to us, at least in the near term. Given the scenario, APL may have to use a
substantial amount of imported and/or e-auction coal to run the plants, which would affect project
profitability – allowed fuel price escalation is based on domestic coal (per bidding documents) and
all fuel risk must be borne by the developer. We assume linkage/e-auction/imported ratios of
60%/30%/10% for both Tiroda-II and Kawai. Initiate coverage with a hold rating and Rs 75 target
price.
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