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Utilities
We expect 3QFY12 revenues to rise 76% on a YoY basis, primarily on the
back of new capacity additions (JSW Energy: Ramp up at Ratnagiri and
Barmer and Adani Power: Increased capacities at Mundra). However,
rising fuel costs and interest rates, results in lower earnings growth (43%
YoY).
High fuel cost is likely to spoil the party in the near term: Rising fuel prices
on the back of dismal growth in domestic coal production (over the last ten years
coal production has increased at merely ~5% CAGR), coupled with regulatory
changes at Indonesia (prices have jumped by at least 50% on a YoY basis since the
implementation of the new regulation). Notably, Coal India has not signed any
new FSA contracts since March 2009 given that its existing coal production is only
good enough to honour its existing commitments.
Apart from this there are also other issues pertaining to environment clearance
and land acquisition. ~40gW of operating and upcoming capacity has been
impacted due to the challenges discussed above. Whilst there is a logjam at the
centre and hence no policy level decisions are being taken we believe there are
other decisions such as: a) Eliminating 5% customs duty on imported coal, b)
Getting together the Ministry of Coal and the Ministry of Railways to make more
rakes available to transport coal, which has already been mined and is sitting at
pitheads, c) Asking MMTC and the State Trading Corporation (STC) to import more
coal, d) Ordering the Ministry of Coal to divert coal reserved for e-auction to
power projects with coal linkages, e) Allowing private players with captive mines to
sell surplus coal through their e-auction platforms and f) Taking urgent action on
environment clearance of coal blocks, which are critical for the power sector and
which can be considered.
Preparing for upcoming results
We downgrade our FY2012 EBITDA estimates by 4%-21% (except for Torrent
Power) and consequently our earnings by 14%-43%, primarily on the back of the
jump in Indonesian cost. As this is the first quarter wherein coal-based companies
will be paying higher costs to purchase Indonesian coal, the extent of QoQ rise in
fuel cost will be the key factor to watch out for in the 3QFY12E results.
Ambit v/s consensus
Whilst our earnings estimates for JSW and Adani Power are below consensus by
9% and 50% respectively, for Torrent Power we are higher by 18%. We believe our
assumptions for modelling higher fuel cost for Adani and JSW Energy and higher
realization for Torrent Power (aided by higher merchant realization) to be the
primary reasons for the lower and higher-than-consensus earnings respectively.
Recommendation
Torrent Power remains our strongest BUY idea in utilities.
Torrent Power is a recommended franchisee with one of the strongest balance
sheets in the sector (FY10 net debt:equity was 0.6x). Notably it is the only company
in the sector with positive free cash flows in FY10 (FCF yield in excess of 15% in
FY12). Further, our discussion with primary data sources suggests improving
visibility on the Dahej power project, which we believe will serve as a positive
catalyst.
Adani Power (ADANI IN, mcapUS$2.7bn, BUY, TP `87, 34% upside)
Why are we revising our estimates?
Since implementation of the new Indonesian coal price regulation (which
mandates exporting coal at market prices from September 23, 2011 onwards
compared to negotiated prices earlier), independent power producers (IPPs) using
Indonesian coal (like Tata Power and Adani Power) have been vocal on tariff
revisions. If this is not done, then Tata Power’s Mundra UMPP and Adani Power’s
Mundra Power plant are at a risk of running into losses and marginal profitability.
To factor this in, we are modelling a 50% increase in the cost of Indonesian coal.
We now assume this coal to land at a cost of US$69/tonne at the power plant in
2HFY12 and then increase at 5% every year from thereon. As a result, our fuel
cost per unit assumption for 2HFY12 increases from Re1 to `1.5per unit.
Consequently there is a reduction in EBITDA of 21% for FY12 and 13% in FY13
and in PAT of 43% in FY12 and 31% in FY13.
Valuation and recommendation: Whilst we lower our SOTP valuation to `87
per share (from earlier `116 per share), we continue to maintain our BUY
recommendation as we believe that Adani Power (along with Tata Power) is
amongst the best placed IPP given its 100% fuel linkage (for power plants getting
commissioned until FY13) and minimal exposure to merchant power. We also
believe that the Adani Group is likely to be the least impacted due to the change
in the Indonesian coal regulation, as the regulation stipulates exporting coal at the
market price. In Adani's case, the exporter is PT Adani Global which is a 100%
subsidiary of Adani Enterprises. Last, we note that Adani Power has demonstrated
good execution track record at a time when peers such as KSK, Lanco, JSW Energy,
Indiabulls Power are struggling with project delays.
Our revised valuation of `87, implies FY13 P/B and P/E of 2.2x and 10.3x
respectively. On a relative basis, the stock is trading at a 74% premium on P/B and
in line on P/E compared with peers, which we believe is justified given Adani’s
strong execution track record, stellar RoEs (23% v/s 13% for peers) and superior
growth rate in PAT CAGR over FY11-FY13 (90% v/s 13% for peers). We continue to
maintain our BUY recommendation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Utilities
We expect 3QFY12 revenues to rise 76% on a YoY basis, primarily on the
back of new capacity additions (JSW Energy: Ramp up at Ratnagiri and
Barmer and Adani Power: Increased capacities at Mundra). However,
rising fuel costs and interest rates, results in lower earnings growth (43%
YoY).
High fuel cost is likely to spoil the party in the near term: Rising fuel prices
on the back of dismal growth in domestic coal production (over the last ten years
coal production has increased at merely ~5% CAGR), coupled with regulatory
changes at Indonesia (prices have jumped by at least 50% on a YoY basis since the
implementation of the new regulation). Notably, Coal India has not signed any
new FSA contracts since March 2009 given that its existing coal production is only
good enough to honour its existing commitments.
Apart from this there are also other issues pertaining to environment clearance
and land acquisition. ~40gW of operating and upcoming capacity has been
impacted due to the challenges discussed above. Whilst there is a logjam at the
centre and hence no policy level decisions are being taken we believe there are
other decisions such as: a) Eliminating 5% customs duty on imported coal, b)
Getting together the Ministry of Coal and the Ministry of Railways to make more
rakes available to transport coal, which has already been mined and is sitting at
pitheads, c) Asking MMTC and the State Trading Corporation (STC) to import more
coal, d) Ordering the Ministry of Coal to divert coal reserved for e-auction to
power projects with coal linkages, e) Allowing private players with captive mines to
sell surplus coal through their e-auction platforms and f) Taking urgent action on
environment clearance of coal blocks, which are critical for the power sector and
which can be considered.
Preparing for upcoming results
We downgrade our FY2012 EBITDA estimates by 4%-21% (except for Torrent
Power) and consequently our earnings by 14%-43%, primarily on the back of the
jump in Indonesian cost. As this is the first quarter wherein coal-based companies
will be paying higher costs to purchase Indonesian coal, the extent of QoQ rise in
fuel cost will be the key factor to watch out for in the 3QFY12E results.
Ambit v/s consensus
Whilst our earnings estimates for JSW and Adani Power are below consensus by
9% and 50% respectively, for Torrent Power we are higher by 18%. We believe our
assumptions for modelling higher fuel cost for Adani and JSW Energy and higher
realization for Torrent Power (aided by higher merchant realization) to be the
primary reasons for the lower and higher-than-consensus earnings respectively.
Recommendation
Torrent Power remains our strongest BUY idea in utilities.
Torrent Power is a recommended franchisee with one of the strongest balance
sheets in the sector (FY10 net debt:equity was 0.6x). Notably it is the only company
in the sector with positive free cash flows in FY10 (FCF yield in excess of 15% in
FY12). Further, our discussion with primary data sources suggests improving
visibility on the Dahej power project, which we believe will serve as a positive
catalyst.
Adani Power (ADANI IN, mcapUS$2.7bn, BUY, TP `87, 34% upside)
Why are we revising our estimates?
Since implementation of the new Indonesian coal price regulation (which
mandates exporting coal at market prices from September 23, 2011 onwards
compared to negotiated prices earlier), independent power producers (IPPs) using
Indonesian coal (like Tata Power and Adani Power) have been vocal on tariff
revisions. If this is not done, then Tata Power’s Mundra UMPP and Adani Power’s
Mundra Power plant are at a risk of running into losses and marginal profitability.
To factor this in, we are modelling a 50% increase in the cost of Indonesian coal.
We now assume this coal to land at a cost of US$69/tonne at the power plant in
2HFY12 and then increase at 5% every year from thereon. As a result, our fuel
cost per unit assumption for 2HFY12 increases from Re1 to `1.5per unit.
Consequently there is a reduction in EBITDA of 21% for FY12 and 13% in FY13
and in PAT of 43% in FY12 and 31% in FY13.
Valuation and recommendation: Whilst we lower our SOTP valuation to `87
per share (from earlier `116 per share), we continue to maintain our BUY
recommendation as we believe that Adani Power (along with Tata Power) is
amongst the best placed IPP given its 100% fuel linkage (for power plants getting
commissioned until FY13) and minimal exposure to merchant power. We also
believe that the Adani Group is likely to be the least impacted due to the change
in the Indonesian coal regulation, as the regulation stipulates exporting coal at the
market price. In Adani's case, the exporter is PT Adani Global which is a 100%
subsidiary of Adani Enterprises. Last, we note that Adani Power has demonstrated
good execution track record at a time when peers such as KSK, Lanco, JSW Energy,
Indiabulls Power are struggling with project delays.
Our revised valuation of `87, implies FY13 P/B and P/E of 2.2x and 10.3x
respectively. On a relative basis, the stock is trading at a 74% premium on P/B and
in line on P/E compared with peers, which we believe is justified given Adani’s
strong execution track record, stellar RoEs (23% v/s 13% for peers) and superior
growth rate in PAT CAGR over FY11-FY13 (90% v/s 13% for peers). We continue to
maintain our BUY recommendation.
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