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Adani Power (ADAN.BO)
Neutral: Recurring PAT 11% Below Expectations
Recurring PAT 11% below CIRA — APL’s 2Q12 Recurring PAT at Rs2.0bn (CIRA
Rs2.3bn) was +59% YoY/ +13% QoQ. Reported PAT was Rs1.8bn due to (1) Rs558m
loss on derivative MTM and (2) Rs332m on recovery of old receivables net of taxes.
Lower sale units - Higher merchant rates — Net sales at 2959m kWh was lower
than CIRA at 3388m kWh on lower generation and high auxiliary consumption.
Merchant realizations were high at Rs4.70/kWh on account of sales to UPPCL. APL
also made some opportunistic purchases in the UI market at Rs2.53/kWh and sold the
same at higher rates in the merchant market.
Other takeaways — (1) APL is not providing cash MAT taxes (Rs902m in 1H12) yet
and is disputing the amendments in the Budget. Taxes in P&L are deferred in nature;
(2) Receivable days have moved up from 58 days to 74 days over the last year.
Fuel costs - Higher than expected — At Rs1.33/kWh of generation on (1) rupee
depreciation and (2) because the company has provided for outstanding costs of
imported coal. Ex the above two reasons, fuel costs were in line at Rs1.04/kwh of
generation.
Update on capacity addition — APL has commissioned (CoD) 2640MW of Mundra
capacity. The 6th unit of 660MW could not supply power because of a transmission
constraint. The 7th unit of 660MW has also been CoD. The 8th unit will be CoD in next
1.5 months. The 9th unit of Mundra will be CoD by Feb12. APL also expects two units
of Tiroda to be synchronized by Apr12.
Target price Rs86 — Revise down EPS estimates by 7-25% over FY12E-20E to factor
in: (1) lower PLFs, (2) higher fuel costs and (3) higher O&M costs. Adjust our target
price to Rs86 (Rs87) to factor in (1) EPS revision and (2) roll forward of target P/BV of
2.0x to Mar13E (Dec12E). We remain cautious on APL given domestic coal shortages,
high imported/ e-auction coal prices and APL’s case-I PPAs.
Adani Power
Company description
Adani Power Limited (APL) has five thermal power projects in various stages of
development, with combined capacity of 16,500 MW, namely: (i) Mundra Power
Project with 4,620MW (ii) Tiroda Power Project with 3,300MW (iii) Kawai Power
Project with 1,320MW (iv) Dahej Power Project with a capacity of 2,640MW (v)
Chhindwara Power Project with a capacity of 1320MW and (vi) Bhadreshwar with a
capacity of 3300MW.
Investment strategy
We rate Adani Power Neutral.
We have already lived through the disappointment that despite Adani Power
management's expectations of selling a big portion of the output from the first 4
units of 330MW in the merchant markets, most of it got sold to GUVNL at PPA rates
before the start of the PPA.
The low quantum of merchant power getting sold in 1QFY12 suggests a big
quantum of the output from the first unit 660MW is getting sold at PPA rates of
Rs2.35/kWh even before the start of the PPA. This raises questions on the business
model of making supernormal RoEs by selling power at merchant rates (Rs3.50-
4.50/kWh) vs. PPA rates (Rs2.35-2.90/kWh) before the start of the PPA
Valuation
The Indian power sector has seen a sea change over the last 4-5 years from an era
of: (1) assured RoE where fuel cost was a pass-through; (2) Coal India honored its
coal linkages most of the time; (3) imported coal was a small quantum of India’s
requirement; (4) analysts/ investors did not have to bother about merchant
prices/fuel costs; and (5) though SEBs were making losses, they were not asking
generators to back down generation to an era where (1) case 1 and case 2 are
becoming more common than assured RoE; (2) one is worried if Coal India will
honor its coal linkage contracts; (3) imported coal is becoming increasing important;
(4) analysts/investors have to bother about merchant prices/fuel costs; and (5)
SEBs are asking generators to back down generation.
This means one has to adapt valuation approaches to keep up with the sudden
changes in operating outlook for companies. As a consequence we now use a pure
P/BV multiple set on Dec12E at 2x. Our target multiple is well supported by EPS
CAGR of 72% over FY11-14E with average RoE of 20%
Risks
Downside risks to our target price include: 1) Insufficient quantity of coal in Bunyu to
fire the Mundra project; 2) The total reserves of 150mn tonnes have three licenses.
While the counterparties of 2 of the 3 mines have procured long-term exploitation
licenses the third license has not yet been granted to the counterparty; 3)
Regulatory risk in Indonesia; 4) Fuel supply to Mundra Phase IV and Tiroda is
contingent on AEL achieving certain milestones and finalizing the coal supply
agreements and timely mining; 5) Fuel pricing risk for the Indonesian coal; 6)
Merchant tariff risks; 7) Execution risks; 8) Chinese equipment quality risks; and 8)
Interest rate risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Adani Power (ADAN.BO)
Neutral: Recurring PAT 11% Below Expectations
Recurring PAT 11% below CIRA — APL’s 2Q12 Recurring PAT at Rs2.0bn (CIRA
Rs2.3bn) was +59% YoY/ +13% QoQ. Reported PAT was Rs1.8bn due to (1) Rs558m
loss on derivative MTM and (2) Rs332m on recovery of old receivables net of taxes.
Lower sale units - Higher merchant rates — Net sales at 2959m kWh was lower
than CIRA at 3388m kWh on lower generation and high auxiliary consumption.
Merchant realizations were high at Rs4.70/kWh on account of sales to UPPCL. APL
also made some opportunistic purchases in the UI market at Rs2.53/kWh and sold the
same at higher rates in the merchant market.
Other takeaways — (1) APL is not providing cash MAT taxes (Rs902m in 1H12) yet
and is disputing the amendments in the Budget. Taxes in P&L are deferred in nature;
(2) Receivable days have moved up from 58 days to 74 days over the last year.
Fuel costs - Higher than expected — At Rs1.33/kWh of generation on (1) rupee
depreciation and (2) because the company has provided for outstanding costs of
imported coal. Ex the above two reasons, fuel costs were in line at Rs1.04/kwh of
generation.
Update on capacity addition — APL has commissioned (CoD) 2640MW of Mundra
capacity. The 6th unit of 660MW could not supply power because of a transmission
constraint. The 7th unit of 660MW has also been CoD. The 8th unit will be CoD in next
1.5 months. The 9th unit of Mundra will be CoD by Feb12. APL also expects two units
of Tiroda to be synchronized by Apr12.
Target price Rs86 — Revise down EPS estimates by 7-25% over FY12E-20E to factor
in: (1) lower PLFs, (2) higher fuel costs and (3) higher O&M costs. Adjust our target
price to Rs86 (Rs87) to factor in (1) EPS revision and (2) roll forward of target P/BV of
2.0x to Mar13E (Dec12E). We remain cautious on APL given domestic coal shortages,
high imported/ e-auction coal prices and APL’s case-I PPAs.
Adani Power
Company description
Adani Power Limited (APL) has five thermal power projects in various stages of
development, with combined capacity of 16,500 MW, namely: (i) Mundra Power
Project with 4,620MW (ii) Tiroda Power Project with 3,300MW (iii) Kawai Power
Project with 1,320MW (iv) Dahej Power Project with a capacity of 2,640MW (v)
Chhindwara Power Project with a capacity of 1320MW and (vi) Bhadreshwar with a
capacity of 3300MW.
Investment strategy
We rate Adani Power Neutral.
We have already lived through the disappointment that despite Adani Power
management's expectations of selling a big portion of the output from the first 4
units of 330MW in the merchant markets, most of it got sold to GUVNL at PPA rates
before the start of the PPA.
The low quantum of merchant power getting sold in 1QFY12 suggests a big
quantum of the output from the first unit 660MW is getting sold at PPA rates of
Rs2.35/kWh even before the start of the PPA. This raises questions on the business
model of making supernormal RoEs by selling power at merchant rates (Rs3.50-
4.50/kWh) vs. PPA rates (Rs2.35-2.90/kWh) before the start of the PPA
Valuation
The Indian power sector has seen a sea change over the last 4-5 years from an era
of: (1) assured RoE where fuel cost was a pass-through; (2) Coal India honored its
coal linkages most of the time; (3) imported coal was a small quantum of India’s
requirement; (4) analysts/ investors did not have to bother about merchant
prices/fuel costs; and (5) though SEBs were making losses, they were not asking
generators to back down generation to an era where (1) case 1 and case 2 are
becoming more common than assured RoE; (2) one is worried if Coal India will
honor its coal linkage contracts; (3) imported coal is becoming increasing important;
(4) analysts/investors have to bother about merchant prices/fuel costs; and (5)
SEBs are asking generators to back down generation.
This means one has to adapt valuation approaches to keep up with the sudden
changes in operating outlook for companies. As a consequence we now use a pure
P/BV multiple set on Dec12E at 2x. Our target multiple is well supported by EPS
CAGR of 72% over FY11-14E with average RoE of 20%
Risks
Downside risks to our target price include: 1) Insufficient quantity of coal in Bunyu to
fire the Mundra project; 2) The total reserves of 150mn tonnes have three licenses.
While the counterparties of 2 of the 3 mines have procured long-term exploitation
licenses the third license has not yet been granted to the counterparty; 3)
Regulatory risk in Indonesia; 4) Fuel supply to Mundra Phase IV and Tiroda is
contingent on AEL achieving certain milestones and finalizing the coal supply
agreements and timely mining; 5) Fuel pricing risk for the Indonesian coal; 6)
Merchant tariff risks; 7) Execution risks; 8) Chinese equipment quality risks; and 8)
Interest rate risk.
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