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Downgrade earnings
Adani Power’s power project execution has been better than its peers but it
faces challenges of fuel availability and power off-take. The guidance for FY12
coal supply from AEL mines has been cut from 7-8mt to 5-6mt leaving a gap of
5.5mt. We are cutting earnings by 28-35% to factor in higher cost imported
coal and lower merchant tariffs. DCF based TP is now Rs100/sh and we
maintain O-PF. A critical assumption here is the group’s claim that coal from
AEL’s Bunyu mines will command a lower price than dictated by Indonesian
govt. for similar calorific value coal and any such impact will not be passed on
to Adani Power. Any disappointment on this front can have big –ve impact.
Execution on track; fuel and off-take under cloud
Adani Power has the best execution track record amongst Indian utilities and we
expect the full commissioning of 9.2GW capacity by FY14. While the company has
fuel tie-ups for its Mundra projects with AEL, Adani Power would still need a large
quantum of coal from domestic sources i.e. Coal India. The supplies from AEL are
also likely to be in range of 5-6mt in FY12 as compared to 7-8mt guided earlier.
(Please see our 6
th
July note “Management Q&A”). States backing down on power
procurement is an added risk for the utilization rate of the power plants.
Change in Indonesian law not impacting Adani Power as of now
The benchmark price determined by Indonesian government for 4,200 -
4,400Kacl/kg coal is in the range of US$62-66/t. We estimate that additional tax
expenses for AEL (25% income tax and 3% royalty) would have been ~US$64-
US$100m at US$64/t realization for FY12-13. However, after speaking to AEL we
are given to understand that the Bunyu coal though similar in CV has got much
higher moisture and sulphur and thus the government approved price for that coal
is much lower at US$29/t (fob) as compared to US$23/t earlier. This increase is
apparently not being passed on to Adani Power as of now.
Cutting earnings for FY12-14 by 28-35%
We are cutting earnings estimates for FY12-14 by 28-35% factoring in 1) lower
quantum of coal from AEL 2) lower utilization rates for Mundra and Tiroda 3)
lower merchant sales and tariffs and 4) marginal delays in projects. Our earnings
assume that the coal contract with AEL continues (@ US$36/t coal price cif
Mundra) despite the change in Indonesian mining law. Our DCF based target price
is now Rs100/sh which factors in earnings cuts and higher discounting rate for the
Tiroda and Kawai projects given the increased risks. Adani Power’s stock price has
fallen by 31% YTD (21% in last 1 month) and stock could remain under pressure
till there are uncertainties about the impact of Indonesian change in law and till
the macro conditions don’t improve for the sector. We expect the stock to do
better in longer term and the timely execution of projects would be a key for that.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Downgrade earnings
Adani Power’s power project execution has been better than its peers but it
faces challenges of fuel availability and power off-take. The guidance for FY12
coal supply from AEL mines has been cut from 7-8mt to 5-6mt leaving a gap of
5.5mt. We are cutting earnings by 28-35% to factor in higher cost imported
coal and lower merchant tariffs. DCF based TP is now Rs100/sh and we
maintain O-PF. A critical assumption here is the group’s claim that coal from
AEL’s Bunyu mines will command a lower price than dictated by Indonesian
govt. for similar calorific value coal and any such impact will not be passed on
to Adani Power. Any disappointment on this front can have big –ve impact.
Execution on track; fuel and off-take under cloud
Adani Power has the best execution track record amongst Indian utilities and we
expect the full commissioning of 9.2GW capacity by FY14. While the company has
fuel tie-ups for its Mundra projects with AEL, Adani Power would still need a large
quantum of coal from domestic sources i.e. Coal India. The supplies from AEL are
also likely to be in range of 5-6mt in FY12 as compared to 7-8mt guided earlier.
(Please see our 6
th
July note “Management Q&A”). States backing down on power
procurement is an added risk for the utilization rate of the power plants.
Change in Indonesian law not impacting Adani Power as of now
The benchmark price determined by Indonesian government for 4,200 -
4,400Kacl/kg coal is in the range of US$62-66/t. We estimate that additional tax
expenses for AEL (25% income tax and 3% royalty) would have been ~US$64-
US$100m at US$64/t realization for FY12-13. However, after speaking to AEL we
are given to understand that the Bunyu coal though similar in CV has got much
higher moisture and sulphur and thus the government approved price for that coal
is much lower at US$29/t (fob) as compared to US$23/t earlier. This increase is
apparently not being passed on to Adani Power as of now.
Cutting earnings for FY12-14 by 28-35%
We are cutting earnings estimates for FY12-14 by 28-35% factoring in 1) lower
quantum of coal from AEL 2) lower utilization rates for Mundra and Tiroda 3)
lower merchant sales and tariffs and 4) marginal delays in projects. Our earnings
assume that the coal contract with AEL continues (@ US$36/t coal price cif
Mundra) despite the change in Indonesian mining law. Our DCF based target price
is now Rs100/sh which factors in earnings cuts and higher discounting rate for the
Tiroda and Kawai projects given the increased risks. Adani Power’s stock price has
fallen by 31% YTD (21% in last 1 month) and stock could remain under pressure
till there are uncertainties about the impact of Indonesian change in law and till
the macro conditions don’t improve for the sector. We expect the stock to do
better in longer term and the timely execution of projects would be a key for that.
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