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Adani Power (ADANI)
Utilities
Higher merchant realizations help absorb fuel cost. Adani Power’s (APL) net
income at Rs2.3 bn for 2QFY12 met estimates—as the incremental cost of generation
(Rs1.3/kwh) due to a depreciating local currency was compensated by a favorable
change in sales mix with merchant sales at Rs4.7/kwh (+7% qoq) bucking the industry
trend of overall weakness in the monsoon season. We maintain our REDUCE rating with
revised PT of Rs81/share noting potential pitfalls from (1) imposition of MAT for Mundra
projects, (2) non-availability of domestic coal for projects at Tiroda, and (3) potentially
higher purchase price for imported coal.
Favorable shift in sales mix and higher realization counter currency depreciation for imported coal
APL reported revenues of Rs10.7 bn (171% yoy, 31% qoq), operating profit of Rs5.2 bn (148%
yoy, 27% qoq) and net income of Rs2.3 bn (210% yoy, 32% qoq) against our estimate of Rs9.7
bn, Rs5.3 bn and Rs2.3 bn, respectively. Higher-than-estimated realizations (Rs3.62/kwh against
our estimate of Rs3.05/kwh) helped offset (1) higher fuel cost (Rs1.33/kwh against our estimate of
Rs1.0/kwh) on account of currency depreciation and (2) lower generation during the quarter
yielding an in-line operating income. We note that fuel cost includes Rs939 mn of incremental cost
on account of currency depreciation while reported PAT of Rs1.8 bn includes Rs558 mn of MTM
loses on account of currency depreciation. We note that sharp jump in realizations (22% yoy and
28% qoq) is on account of higher proportion of merchant sale as the entire power from Mundra III
units is likely being sold in the short-term market.
Earnings pitfall still not sufficiently factored, we remain cautious
Despite an absolute correction by 12% in past three months, APL, at current levels, still doesn’t
sufficiently factor the earnings risk emanating from (1) potential incidence of MAT (as per
amendment proposed in Union Budget 2011) which could erode Rs11/share from our fair value
estimate, (2) pricing and availibility of domestic coal for Tiroda plants and (3) potential
renegotiation of coal price by AEL (currently at US$36/ton) in light of the minimum price obligation
on all coal export contracts being implemented by Indonesia. We highlight that APL has not
provided for MAT in 1HFY12 (amounting to Rs902 mn as disclosed by the company) as it has
challenged the constitutional validity of Section 18 of the Finance Act 2011.
Maintain REDUCE with a revised target price of Rs81/share
We maintain our REDUCE rating on the stock noting potential earnings risks from as highlighted
above. We have revised our target price to Rs81/share (previously Rs100/share) as we adjust for (1)
delay in commercial generation from Mundra and Tiroda and (2) Rupee depreciation
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Adani Power (ADANI)
Utilities
Higher merchant realizations help absorb fuel cost. Adani Power’s (APL) net
income at Rs2.3 bn for 2QFY12 met estimates—as the incremental cost of generation
(Rs1.3/kwh) due to a depreciating local currency was compensated by a favorable
change in sales mix with merchant sales at Rs4.7/kwh (+7% qoq) bucking the industry
trend of overall weakness in the monsoon season. We maintain our REDUCE rating with
revised PT of Rs81/share noting potential pitfalls from (1) imposition of MAT for Mundra
projects, (2) non-availability of domestic coal for projects at Tiroda, and (3) potentially
higher purchase price for imported coal.
Favorable shift in sales mix and higher realization counter currency depreciation for imported coal
APL reported revenues of Rs10.7 bn (171% yoy, 31% qoq), operating profit of Rs5.2 bn (148%
yoy, 27% qoq) and net income of Rs2.3 bn (210% yoy, 32% qoq) against our estimate of Rs9.7
bn, Rs5.3 bn and Rs2.3 bn, respectively. Higher-than-estimated realizations (Rs3.62/kwh against
our estimate of Rs3.05/kwh) helped offset (1) higher fuel cost (Rs1.33/kwh against our estimate of
Rs1.0/kwh) on account of currency depreciation and (2) lower generation during the quarter
yielding an in-line operating income. We note that fuel cost includes Rs939 mn of incremental cost
on account of currency depreciation while reported PAT of Rs1.8 bn includes Rs558 mn of MTM
loses on account of currency depreciation. We note that sharp jump in realizations (22% yoy and
28% qoq) is on account of higher proportion of merchant sale as the entire power from Mundra III
units is likely being sold in the short-term market.
Earnings pitfall still not sufficiently factored, we remain cautious
Despite an absolute correction by 12% in past three months, APL, at current levels, still doesn’t
sufficiently factor the earnings risk emanating from (1) potential incidence of MAT (as per
amendment proposed in Union Budget 2011) which could erode Rs11/share from our fair value
estimate, (2) pricing and availibility of domestic coal for Tiroda plants and (3) potential
renegotiation of coal price by AEL (currently at US$36/ton) in light of the minimum price obligation
on all coal export contracts being implemented by Indonesia. We highlight that APL has not
provided for MAT in 1HFY12 (amounting to Rs902 mn as disclosed by the company) as it has
challenged the constitutional validity of Section 18 of the Finance Act 2011.
Maintain REDUCE with a revised target price of Rs81/share
We maintain our REDUCE rating on the stock noting potential earnings risks from as highlighted
above. We have revised our target price to Rs81/share (previously Rs100/share) as we adjust for (1)
delay in commercial generation from Mundra and Tiroda and (2) Rupee depreciation
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