Adani Power (BOM:533096)

Company Description

Adani Power Limited is a power project development company. The Company is developing, and will operate and maintain, power projects in India. It has four thermal power projects under various stages of development, with a combined installed capacity of 6,600 megawatts. The Mundra Phase I and II Power Project will have four sub-critical generation units of 330 megawatts each, with combined capacity of 1,320 megawatts. Mundra III power project will have two super-critical generation units of 660 megawatts each, with combined capacity of 1,320 megawatts. Mundra IV power project will have three super-critical generation units of 660 megawatts each, with combined capacity of 1,980 megawatts. Tiroda power project will have three super-critical generation units of 660 megawatts each, with combined capacity of 1,980 megawatts. The Company focuses to develop two thermal power projects at Dahej and Kawai with a combined installed capacity of 3,300 megawatts.

Changing colours

Brief

We initiate Adani Power (APL) with buy rating. Since IPO, APL has had ongoing issues on fuel, tariffs and delays to its projects, and the consensus EPS over FY11-12E has been lowered by 30%. The stock though has risen by 20% from the IPO price aided by seasonally high merchant tariffs, and the likelihood that APL might be able to convert the 1,000MW of Mundra Phase-III to one based on short term merchant tariffs. Our fair value of projects based on existing contracts works out to Rs135/sh and if one were to value the 1,000MW as merchant, we get to Rs150/sh. Excluding the 1,000MW, APL has the highest MW of upcoming merchant capacity until 2013E in the sector, and hence despite higher fuel costs, we expect APL to report FY10-13E earnings CAGR of 221%. We think until the contract issues are settled, one should value the plant as merchant. Hence, we initiate with Buy rating. Key downside risks to our call are a) higher than estimated fuel costs b) lower than estimated tariffs.

It is better to be conservative on fuel

As of now, technically the contract from AEL kicks in only when the respective last units of Mundra projects are commissioned and until then, APL will likely take the burden of higher coal costs. As against the CIF cost of US$36/te for the 5,200kcal/kg coal from its Indonesian mine, we estimate imported coal costs at > Rs2,250/te (US$50/te) blended with domestic coal at Rs1,600/te.

Tariff uncertainty on a few projects

There are two uncertainties – 1) merchantrates and 2) tariffs on Mundra Phase-III. In our estimate, we expect the company might be in a position to walk out of the contract with GUVNL for the next 2- 3years, and hence, we expect merchant tariffs even for the 1,000MW. If we were to assume merchant tariffs higher than by 10% in FY11 and FY12, the value increases by 17%.

Strong point is likely to be sales growth, and in turn EPS, ROE

We estimate tenfold increase in sales and five-fold increase in EPS. We also expect ROE to increase from 4% to 46% by FY13E. We also do not expect any dilution.

Valuation

initiate with Buy: Our PT of Rs150 is based on valuation of the projects. The value of the 13,260MW of projects (including Dahej and Kawai) works out to Rs150/sh. Taking the plant as under original contract, the fair value is Rs135/sh. While we are at the higher end of the consensus EPS estimates for FY11E, there could be downgrades to EPS estimates for FY12.