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UBS Investment Research
Adani Power
Lower price target to Rs80, maintain Sell
„ Event: lower price target by 27%, maintain Sell rating
Adani Power’s 1Q FY12 results were below UBS expectations and significantly
below consensus estimates as well. The company reported a sharp decline in plant
utilisation in 1Q. The average Plant Load Factor (PLF) was only 74% versus 80%
in 1Q FY11. We like the company for its strong execution but we believe that the
current stock price still does not fully factor in the risks. We maintain our Sell
rating on the stock and lower our price target by 27% (Rs25 on lower PLFs from
90% to 85% and Rs5 on the updated discounting rate).
„ Impact: lower FY12/FY13/FY14 EPS estimates by 43%/48%/16%
We lower our FY12/FY13/FY14 EPS estimates from Rs5.80/14.15/20.41 to
Rs3.29/7.37/17.08 due to our lower PLF assumptions. We have lowered our
steady-state PLF forecast by 500bps from 90% to 85% over the medium- and longterm. We believe the assumption is reasonable given the industry-wide decline in
utilisation levels.
„ Action: we are negative on the stock as risks do not seem to be priced in
We like the company for its strong execution, but we believe that the current stock
price does not fully factor in risks such as: 1) a decline in merchant tariffs; and 2)
no fuel price escalation clauses in its long-term power purchase agreements
(PPAs). Hence, we believe the stock may have some more downside at current
levels.
„ Valuation: lower price target from Rs110.00 to Rs80.00
We derive our price target using a plant-by-plant DCF assuming COE of 13.8% for
projects under construction and 12.3% for operational projects. We currently value
6,600MW capacity (4,620MW of Mundra and 1,980MW of Tiroda).
Q 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.
Q Statement of Risk
We believe the key upside risks for our Sell rating are: 1) pick-up in merchant
tariffs; and 2) better-than-expected utilisation (PLFs). We believe the key
downside risks for the power business including 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
Lower price target to Rs80, maintain Sell
„ Event: lower price target by 27%, maintain Sell rating
Adani Power’s 1Q FY12 results were below UBS expectations and significantly
below consensus estimates as well. The company reported a sharp decline in plant
utilisation in 1Q. The average Plant Load Factor (PLF) was only 74% versus 80%
in 1Q FY11. We like the company for its strong execution but we believe that the
current stock price still does not fully factor in the risks. We maintain our Sell
rating on the stock and lower our price target by 27% (Rs25 on lower PLFs from
90% to 85% and Rs5 on the updated discounting rate).
„ Impact: lower FY12/FY13/FY14 EPS estimates by 43%/48%/16%
We lower our FY12/FY13/FY14 EPS estimates from Rs5.80/14.15/20.41 to
Rs3.29/7.37/17.08 due to our lower PLF assumptions. We have lowered our
steady-state PLF forecast by 500bps from 90% to 85% over the medium- and longterm. We believe the assumption is reasonable given the industry-wide decline in
utilisation levels.
„ Action: we are negative on the stock as risks do not seem to be priced in
We like the company for its strong execution, but we believe that the current stock
price does not fully factor in risks such as: 1) a decline in merchant tariffs; and 2)
no fuel price escalation clauses in its long-term power purchase agreements
(PPAs). Hence, we believe the stock may have some more downside at current
levels.
„ Valuation: lower price target from Rs110.00 to Rs80.00
We derive our price target using a plant-by-plant DCF assuming COE of 13.8% for
projects under construction and 12.3% for operational projects. We currently value
6,600MW capacity (4,620MW of Mundra and 1,980MW of Tiroda).
Q 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.
Q Statement of Risk
We believe the key upside risks for our Sell rating are: 1) pick-up in merchant
tariffs; and 2) better-than-expected utilisation (PLFs). We believe the key
downside risks for the power business including 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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