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Adani Power (ADAN.BO)
Downgrade to Hold: Is the Supernormal RoE Business Model Intact?
1QFY12 PAT 26% below expectations — We are not disappointed that: (1) due to
maintenance shutdowns PLFs were lower; (2) merchant tariffs were down 44% YoY;
(3) fuel costs were high at Rs1.04/kWh of generation (CIRA Rs0.95/kWh).
Our disappointment stems from the fact — That just like 4Q11 when merchant sales
% was low at 11.7%, in 1Q12 it was once again low at 9.3%. This is the second time
the company has disappointed on quantum of merchant sales. Despite management’s
expectations of selling a big portion of the output from 4 units of 330MW in merchant
markets, most of it got sold to GUVNL at PPA rates before the start of the PPA.
Is the supernormal RoE business model intact? — Lower merchant sales in 1Q12
suggest a big quantum from unit # 1 660MW was sold at PPA rates even before start of
PPA. This raises questions on 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) pre PPA.
Downgrade to Hold (2L) - Target price cut to Rs105 — To factor in (1) EPS cuts of 2-
40% over FY12E-20E; (2) cut in target P/BV multiple to 2.4x (2.7x). Our EPS cut
factors in (1) lower sales on maintenance shutdowns and PLF of 88% (vs. 90% earlier);
(2) % of merchant sales cut by 5-19%; and (3) 6% cut in merchant tariffs in FY12E.
Our merchant quantum assumption in FY12E - Not conservative — We assume
5.1bn units of merchant sales in FY12E. According to management 480MW PPA with
UP at net ASP of Rs4/kWh starts from Jul11 implying in next 9 months this will lead to
3.2bn units of merchant sales. To this If we add 1Q12 merchant sales of 270mn units
and 3 months of the highest merchant sales done from 4X330MW = 320X3 = 960mn
units one arrives at 4.4bn units of merchant sales vs. our assumption of 5.1bn units.
Upside/downside risks – Upsides: higher merchant sales and lower fuel costs.
Downsides: lower merchant sales and higher fuel costs.
Downgrade to Hold (2L)
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) pre PPA.
As a consequence we downgrade Adani Power to Hold (2L) from Buy (1L) and
cut our target price to Rs105 (from Rs131 earlier) to factor in (1) EPS cuts of 2-
40% over FY12E-20E; (2) cut in our target P/BV multiple to 2.4x (from 2.7x
earlier). Our target P/BV multiple is supported by EPS CAGR of 72% over FY11-
14E and average RoEs of 20% over FY12-14E.
Earnings revised downwards
We revise down our EPS estimates by 2-40% over FY12E-20E to factor in:
Lower generation/sales on account of maintenance shutdowns and lower
assumed PLFs of 88% (vs. 90% earlier).
5-19% reduction in quantum of merchant sales over FY12E-14E.
6% reduction in merchant tariffs to Rs4.00/kWh in FY12E.
Our EPS estimates are 25-52% below consensus expectations over FY12E-15E.
1QFY12 PAT 26% below expectations
We were not disappointed that: (1) unit #1 330MW and unit #5 660MW were shut
down in the month of June for maintenance, which resulted in PLFs being lower
(2) auxiliary consumption was high at 9.2% (3) merchant tariffs were down 44%
to Rs3.60/kWh (CIRA at Rs4.39/kWh) or (4) fuel costs were higher at
Rs1.04/kWh of generation (CIRA at Rs0.95.kWh of generation).
Our disappointment stems from the fact that just like 4Q11 when merchant as a
% of total sales was low at 11.7%, in 1Q12 it is once again low at 9.3%.
We have already lived through the disappointment that despite Adani Power’s
management 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 1Q12 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).
Quants View − Unattractive
Adani Power Ltd currently lies in the Extreme corner of the Unattractive quadrant of
our Value-Momentum map with weak momentum and weak value scores.
Compared to its peers in the Utilities sector, Adani Power Ltd fares worse on the
valuation metric and on the momentum metric. Similarly, compared to its peers in its
home market of India, Adani Power Ltd fares worse on the valuation metric and on
the momentum metric.
From a macro perspective, Adani Power Ltd has a low Beta to the region, so can be
expected to hold its own given a decline in the regional market. It is also likely to
benefit from weaker US Dollar.
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 Hold/ Low Risk (2L).
We have already lived through the disappointment that despite Adani Power’s
management 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).
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 2.4x. Our target multiple is well supported by EPS
CAGR of 72% over FY11-14E with average RoE of 20%
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to Adani Power.
Downside risks 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.
Upside risks include: 1) Better than expected operating parameters; 2) Faster than
expected execution; 3) Higher than expected merchant tariffs; and 4) Significant
progress on 3300MW of projects now in planning stages.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Adani Power (ADAN.BO)
Downgrade to Hold: Is the Supernormal RoE Business Model Intact?
1QFY12 PAT 26% below expectations — We are not disappointed that: (1) due to
maintenance shutdowns PLFs were lower; (2) merchant tariffs were down 44% YoY;
(3) fuel costs were high at Rs1.04/kWh of generation (CIRA Rs0.95/kWh).
Our disappointment stems from the fact — That just like 4Q11 when merchant sales
% was low at 11.7%, in 1Q12 it was once again low at 9.3%. This is the second time
the company has disappointed on quantum of merchant sales. Despite management’s
expectations of selling a big portion of the output from 4 units of 330MW in merchant
markets, most of it got sold to GUVNL at PPA rates before the start of the PPA.
Is the supernormal RoE business model intact? — Lower merchant sales in 1Q12
suggest a big quantum from unit # 1 660MW was sold at PPA rates even before start of
PPA. This raises questions on 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) pre PPA.
Downgrade to Hold (2L) - Target price cut to Rs105 — To factor in (1) EPS cuts of 2-
40% over FY12E-20E; (2) cut in target P/BV multiple to 2.4x (2.7x). Our EPS cut
factors in (1) lower sales on maintenance shutdowns and PLF of 88% (vs. 90% earlier);
(2) % of merchant sales cut by 5-19%; and (3) 6% cut in merchant tariffs in FY12E.
Our merchant quantum assumption in FY12E - Not conservative — We assume
5.1bn units of merchant sales in FY12E. According to management 480MW PPA with
UP at net ASP of Rs4/kWh starts from Jul11 implying in next 9 months this will lead to
3.2bn units of merchant sales. To this If we add 1Q12 merchant sales of 270mn units
and 3 months of the highest merchant sales done from 4X330MW = 320X3 = 960mn
units one arrives at 4.4bn units of merchant sales vs. our assumption of 5.1bn units.
Upside/downside risks – Upsides: higher merchant sales and lower fuel costs.
Downsides: lower merchant sales and higher fuel costs.
Downgrade to Hold (2L)
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) pre PPA.
As a consequence we downgrade Adani Power to Hold (2L) from Buy (1L) and
cut our target price to Rs105 (from Rs131 earlier) to factor in (1) EPS cuts of 2-
40% over FY12E-20E; (2) cut in our target P/BV multiple to 2.4x (from 2.7x
earlier). Our target P/BV multiple is supported by EPS CAGR of 72% over FY11-
14E and average RoEs of 20% over FY12-14E.
Earnings revised downwards
We revise down our EPS estimates by 2-40% over FY12E-20E to factor in:
Lower generation/sales on account of maintenance shutdowns and lower
assumed PLFs of 88% (vs. 90% earlier).
5-19% reduction in quantum of merchant sales over FY12E-14E.
6% reduction in merchant tariffs to Rs4.00/kWh in FY12E.
Our EPS estimates are 25-52% below consensus expectations over FY12E-15E.
1QFY12 PAT 26% below expectations
We were not disappointed that: (1) unit #1 330MW and unit #5 660MW were shut
down in the month of June for maintenance, which resulted in PLFs being lower
(2) auxiliary consumption was high at 9.2% (3) merchant tariffs were down 44%
to Rs3.60/kWh (CIRA at Rs4.39/kWh) or (4) fuel costs were higher at
Rs1.04/kWh of generation (CIRA at Rs0.95.kWh of generation).
Our disappointment stems from the fact that just like 4Q11 when merchant as a
% of total sales was low at 11.7%, in 1Q12 it is once again low at 9.3%.
We have already lived through the disappointment that despite Adani Power’s
management 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 1Q12 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).
Quants View − Unattractive
Adani Power Ltd currently lies in the Extreme corner of the Unattractive quadrant of
our Value-Momentum map with weak momentum and weak value scores.
Compared to its peers in the Utilities sector, Adani Power Ltd fares worse on the
valuation metric and on the momentum metric. Similarly, compared to its peers in its
home market of India, Adani Power Ltd fares worse on the valuation metric and on
the momentum metric.
From a macro perspective, Adani Power Ltd has a low Beta to the region, so can be
expected to hold its own given a decline in the regional market. It is also likely to
benefit from weaker US Dollar.
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 Hold/ Low Risk (2L).
We have already lived through the disappointment that despite Adani Power’s
management 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).
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 2.4x. Our target multiple is well supported by EPS
CAGR of 72% over FY11-14E with average RoE of 20%
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to Adani Power.
Downside risks 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.
Upside risks include: 1) Better than expected operating parameters; 2) Faster than
expected execution; 3) Higher than expected merchant tariffs; and 4) Significant
progress on 3300MW of projects now in planning stages.
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