Adani Power (ADANI) Initiate OW: Ahead of the curve  HSBC Research

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Adani Power (ADANI)
Initiate OW: Ahead of the curve
 Strong EPS growth – at a 53% CAGR over FY12-14e – as
capacity ramps up backed by a strong operational plan
 Fuel risk manageable thanks to the parent’s presence in coal
trading, coal mining and logistics
 Initiate with OW and TP of INR85; best positioned for growth
among peers, with sector risks likely to have limited impact
Strong growth ahead with capacity trebling. Adani Power (Adani) is expected to expand
its capacity from 2.6GW to 6.6GW by March 2013, driving volumes up from 6.8bn units to
43.5bn units during the period FY11-14. As a result, we expect EPS to surge at a 53%
CAGR over FY12-14, with ROE set to rise from 8.5% in FY11 to 18% in FY14.
Strong operational plan. The company’s robust operational planning includes boilers
designed for fuel-mix flexibility, evacuation lines and 25-year sales contracts for 70-80%
of its capacity. Additionally, its plants are located close to sales or fuel centres. Thus,
major slippages in price recovery, plant load factor or fuel supply seem unlikely.
Superior fuel risk management. Adani Enterprises, the parent, dominates India’s coal
trading market and owns mines in Indonesia, assuring a minimum supply for Adani’s
power projects. The parent also owns both land and sea transportation fleets and
infrastructure interests, minimizing logistics risks. The parent’s strength in developing and
operating mines globally positions it to exploit new opportunities in this space, including
its mines in Australia.
Sector-wide risks more than priced in, with impact limited for Adani Power. The stock
has fallen 52% in the last 12 months, underperforming the Sensex by 30%, on concerns
that its projects will make losses due to the new Indonesian coal pricing law. The concerns,
however, appear exaggerated. While we have conservatively factored in increased costs –
our earnings estimates are 18-21% below consensus for FY12-13 – we still expect EPS
growth to be strong. At the current levels, we see limited downside from sector risks, while
any policy relief, which is plausible, could provide potential upside surprise.
Attractive value. The stock is trading at 1.5x PB and 7.9x FY13e PE, attractive versus
the historical levels (averaging 3.1x PB and 18x PE on 1-yr fwd earnings) and large cap
peers (1.7-1.8x PB and c.13x PE on FY13e). Based on our DCF-based SOTP valuations
for individual projects, our TP is INR85, implying 10.1x PE and 1.7x PB on FY14
estimates. The key downside risk is higher-than-expected imported coal prices.