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UBS Investment Research
Adani Power
M ay appeal in SC against tribunal order
Event: Adani Power may appeal to Supreme Court in 1,000MW PPA case
According to media reports, Adani Power plans to appeal against the order of the
Appellate Tribunal for Electricity after the tribunal rejected the company's
argument that a low tariff bid (Rs2.35/unit) was contingent on Adani Power
receiving coal supply from GMDC (a Gujarat government company). Please refer
to our note, Adani Power: Appellate Tribunal rejects company’s plea, published on
8 September 2011.
Impact: the issue is relevant for other imported coal-based projects as well
We think that if Adani Power files an appeal in the Supreme Court for a review of
the coal cost recovery mechanism, the court’s view on this issue will be important
for other imported coal-based power projects which do not have fuel cost passthrough.
Our estimates for Adani Power remain unchanged as we assumed the
power purchase agreement (PPA) will remain valid and that tariffs will not be
raised.
Action: we are negative on the stock as risks do not seem to be priced in
We acknowledge the company’s strong execution, but we believe that the current
stock price does not fully factor in risks such as: a) a decline in merchant tariffs;
and b) no fuel escalation in its long-term PPAs. Hence, we believe the stock may
have some more downside at current levels.
Valuation: maintain Sell rating and price target of Rs80.00
We derive our price target using a plant-by-plant DCF assuming COE of 13.8% for
under-construction projects and 12.3% for operational projects. We currently value
6,600MW capacity (4,620MW at Mundra and 1,980MW at Tiroda
Background
In 2007, Adani Power had signed a PPA with Gujarat Urja Vikas Nigam
Limited (GUVNL) to supply 1,000MW at a levelised tariff of Rs2.35/unit.
However, in 2008, Adani Power sent a notice to the state utility seeking
termination of the agreement as it could not secure domestic coal. Adani Power
was relying on fuel supply from Gujarat Mineral Development Corp. Ltd’s
(GMDC) coal mines in Morgha block in Chhattisgarh but this did not
materialize. The company argued that the imported coal sourced from countries
like Indonesia is expensive and it is not feasible to sell it at the earlier decided
tariff.
However, the state regulator, Gujarat Electricity Regulator Commission
(GERC), ruled in favor of GUVNL saying Adani Power can not terminate the
agreement on the basis of its failure to execute a fuel supply agreement with
GMDC. Following this, Adani Power approached the Appellate Tribunal for
Electricity challenging the GERC order.
In a verdict delivered in the first week of September 2011, the Appellate
Tribunal for Electricity said that the PPA can not be terminated. The tribunal
rejected the company's argument that a low tariff bid (Rs2.35/unit) was
contingent on Adani Power receiving coal supply from GMDC. The tribunal has
directed that Adani Power’s 1,000MW PPA with GUVNL remains valid and the
company would have to supply power to GUVNL at these rates (levelised tariff
of Rs2.35/unit). Please refer to our note, Appellate Tribunal rejects company’s
plea, published on 8 September 2011.
No impact on our estimates
The Appellate Tribunal’s verdict was negative for Adani Power as in the
absence of domestic coal supply from GMDC, the Mundra projects will use
imported coal. However, there is no adverse impact on our numbers as we
assumed the PPA will remain valid and the tariffs would not be raised. We have
also not factored in domestic coal availability in our estimates.
Maintain Sell rating
We acknowledge the company’s strong execution but we believe that the current
stock price still does not fully factor in the risks for projects such as: a) decline
in merchant tariffs; b) no fuel escalation in its long-term PPAs.
Our price target of Rs80 is based on a plant-by-plant DCF assuming COE of
13.8% for under-construction projects (earlier 13.1%) and 12.3% (earlier 11.6%)
for operational projects. We have not included in our valuation the projects
which are in the early stages.
Adani Power
Adani Power is part of the Adani Group. With 6,600MW commissioned/under
construction and 3,300MW under development, Adani Power targets becoming
one of the largest private sector power generation companies in India by FY15
when we expect it will possess significant capacity. We believe the company has
significant non-replicable strengths due to fuel availability and competitive
pricing, good execution, and attractive tariffs from long-term PPAs and
merchant power.
Statement of Risk
We believe the key upside risks are: 1) a pick-up in merchant tariffs; and 2)
better-than-expected utilisation (PLFs). We believe the key downside risks for
the power business including for Adani Power are: 1) availability or pricing of
imported coal; 2) slower-than-expected progress in the execution of projects; 3)
no project wins; 4) a sharp decline in merchant tariffs; and 5) performance
issues with Chinese equipment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Adani Power
M ay appeal in SC against tribunal order
Event: Adani Power may appeal to Supreme Court in 1,000MW PPA case
According to media reports, Adani Power plans to appeal against the order of the
Appellate Tribunal for Electricity after the tribunal rejected the company's
argument that a low tariff bid (Rs2.35/unit) was contingent on Adani Power
receiving coal supply from GMDC (a Gujarat government company). Please refer
to our note, Adani Power: Appellate Tribunal rejects company’s plea, published on
8 September 2011.
Impact: the issue is relevant for other imported coal-based projects as well
We think that if Adani Power files an appeal in the Supreme Court for a review of
the coal cost recovery mechanism, the court’s view on this issue will be important
for other imported coal-based power projects which do not have fuel cost passthrough.
Our estimates for Adani Power remain unchanged as we assumed the
power purchase agreement (PPA) will remain valid and that tariffs will not be
raised.
Action: we are negative on the stock as risks do not seem to be priced in
We acknowledge the company’s strong execution, but we believe that the current
stock price does not fully factor in risks such as: a) a decline in merchant tariffs;
and b) no fuel escalation in its long-term PPAs. Hence, we believe the stock may
have some more downside at current levels.
Valuation: maintain Sell rating and price target of Rs80.00
We derive our price target using a plant-by-plant DCF assuming COE of 13.8% for
under-construction projects and 12.3% for operational projects. We currently value
6,600MW capacity (4,620MW at Mundra and 1,980MW at Tiroda
Background
In 2007, Adani Power had signed a PPA with Gujarat Urja Vikas Nigam
Limited (GUVNL) to supply 1,000MW at a levelised tariff of Rs2.35/unit.
However, in 2008, Adani Power sent a notice to the state utility seeking
termination of the agreement as it could not secure domestic coal. Adani Power
was relying on fuel supply from Gujarat Mineral Development Corp. Ltd’s
(GMDC) coal mines in Morgha block in Chhattisgarh but this did not
materialize. The company argued that the imported coal sourced from countries
like Indonesia is expensive and it is not feasible to sell it at the earlier decided
tariff.
However, the state regulator, Gujarat Electricity Regulator Commission
(GERC), ruled in favor of GUVNL saying Adani Power can not terminate the
agreement on the basis of its failure to execute a fuel supply agreement with
GMDC. Following this, Adani Power approached the Appellate Tribunal for
Electricity challenging the GERC order.
In a verdict delivered in the first week of September 2011, the Appellate
Tribunal for Electricity said that the PPA can not be terminated. The tribunal
rejected the company's argument that a low tariff bid (Rs2.35/unit) was
contingent on Adani Power receiving coal supply from GMDC. The tribunal has
directed that Adani Power’s 1,000MW PPA with GUVNL remains valid and the
company would have to supply power to GUVNL at these rates (levelised tariff
of Rs2.35/unit). Please refer to our note, Appellate Tribunal rejects company’s
plea, published on 8 September 2011.
No impact on our estimates
The Appellate Tribunal’s verdict was negative for Adani Power as in the
absence of domestic coal supply from GMDC, the Mundra projects will use
imported coal. However, there is no adverse impact on our numbers as we
assumed the PPA will remain valid and the tariffs would not be raised. We have
also not factored in domestic coal availability in our estimates.
Maintain Sell rating
We acknowledge the company’s strong execution but we believe that the current
stock price still does not fully factor in the risks for projects such as: a) decline
in merchant tariffs; b) no fuel escalation in its long-term PPAs.
Our price target of Rs80 is based on a plant-by-plant DCF assuming COE of
13.8% for under-construction projects (earlier 13.1%) and 12.3% (earlier 11.6%)
for operational projects. We have not included in our valuation the projects
which are in the early stages.
Adani Power
Adani Power is part of the Adani Group. With 6,600MW commissioned/under
construction and 3,300MW under development, Adani Power targets becoming
one of the largest private sector power generation companies in India by FY15
when we expect it will possess significant capacity. We believe the company has
significant non-replicable strengths due to fuel availability and competitive
pricing, good execution, and attractive tariffs from long-term PPAs and
merchant power.
Statement of Risk
We believe the key upside risks are: 1) a pick-up in merchant tariffs; and 2)
better-than-expected utilisation (PLFs). We believe the key downside risks for
the power business including for Adani Power are: 1) availability or pricing of
imported coal; 2) slower-than-expected progress in the execution of projects; 3)
no project wins; 4) a sharp decline in merchant tariffs; and 5) performance
issues with Chinese equipment.
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