Adani Power (APL) reported PAT of INR1.8bn in Q2FY12. Adjusted for
forex related fluctuations of INR1.2bn, earnings are in line with our
INR3bn estimate. However, considering marginal delay in commissioning
of pipeline projects and lower than expected PLF we have recalibrated
FY12E and FY13E earnings. Hence, our revised SOTP is INR78/share (INR
90/share earlier). Maintain ‘REDUCE’ as fuel supply issues persist.
Adjusted earnings in line
APL reported Q2FY12 earnings of INR1.8bn which include MTM loss of INR558mn on
derivative instruments and forex fluctuations on creditor dues aggregating INR939mn.
Adjusting for these, earnings are in line with our estimate and significantly higher than
consensus estimate of INR2.2bn.
Gross merchant realisation high at INR4.7/kwh
The key reason behind the robust earnings was high gross merchant realisation of
INR4.7/kwh (open access and transmission related cost of INR0.3/kwh booked in other
expenses) and maintaining costs at the same level. PLFs were at 75%, but auxillary
consumption was high at ~9% against the normalised 7-8%.
Capacity addition behind schedule; revising down FY12‐13 earnings
APL is slightly behind schedule with respect to its capacity addition plans and is likely to
end FY12 with 3,300 MW, of which 1x660 MW may contribute marginally to earnings.
However, in terms of installed capacity, we could see ~ 5GW as most of these units will
be in the testing/synchronisation stage. PLF during H1 has been lower than our
expectation of 91% for FY12. Hence, we have revised our earnings estimates down for
FY12 and FY13 by 49% and 28%.
Outlook and valuations: Fuel issues persist; maintain ‘REDUCE’
In addition to the fuel linkage issue (domestic coal supplies), the recent coal pricing
regulation in Indonesia could likely impact fuel costs going ahead. This, along with
delay in capacity addition, has impacted our SOTP by INR12 to INR78/share. We
maintain ‘REDUCE/SU’ recommendation/rating on the stock.
Company Description
APL commercialised its first unit of 330 MW at Mundra, Gujarat, in 2009 and scaled up
plans to build India’s largest and one of the world’s top 5 single location thermal power
plants with a capacity of 4,620 MW. The company has also made inroads into power
generation in Maharashtra, Rajasthan and Madhya Pradesh with an ambitious vision of
being a 20,000 MW company by 2020. It commissioned the first supercritical 660 MW unit
in the country and also the world’s first supercritical technology project to have received
‘clean development mechanism (CDM) project’ certification from United Nations
Framework Convention on Climate Change (UNFCCC).
Investment theme
The company has operational capacity of 1.98 GW (at Mundra, Gujarat) and another 7.2
GW to be commissioned by FY14. APL envisages achieving total commercial capacity of 20
GW by FY20. The company has a good blend of projects in terms of diverse locations,
imported and domestic coal, long-term PPAs and merchant sales. Out of the expected 9.24
GW capacity by FY14, APL plans to sell ~80% (7.14 GW) under long-term PPAs and the
balance in merchant market which imparts earnings visibility. APL’s entire capacity (9.24
GW) is thermal with a blend of imported (AEL) and domestic (CIL) coal procured through
linkages. Though linkages are in place (except 1.3 GW Kawai where linkage is applied for)
we anticipate risk to domestic coal supply because of the likely production shortage from
CIL in the medium term. The Bunyu mines (reserves of 140 MT) owned by AEL can scale up
to ~10 MTPA, which will be sufficient to fuel only ~2.5 GW capacity, but supplies from other
overseas mines acquired by AEL are expected only post FY15. Hence during FY13-15 coal for
additional capacities will have to be procured on spot basis until domestic supply improves,
impacting earnings.
Key Risks
CIL honouring its coal contracts
The company expects domestic linkages from CIL to meet coal requirements for much of
the 9,240 MW capacity. Our hypothesis is that CIL will not be able to honour its existing
contracts in totality (we have factored in 30% of the coal requirement of Mundra IV i.e.
3x660 and Tirora I i.e. 3x660 to be met by CIL till 2015) due to current problems in scaling
up and logistics (rake availability). CIL honouring its existing contracts (pooling, imported,
etc) at the current price level is a risk to our call.
Commissioning of plants ahead of CEA dates
We have assumed the timeline of commissioning of power units based on the recent status
updated by the CEA. However, faster execution and commissioning of plants ahead of the
expected schedule (gives them time to generated power and sell on merchant basis) is a
risk to our assumptions which is in line with the CEA schedule report.
forex related fluctuations of INR1.2bn, earnings are in line with our
INR3bn estimate. However, considering marginal delay in commissioning
of pipeline projects and lower than expected PLF we have recalibrated
FY12E and FY13E earnings. Hence, our revised SOTP is INR78/share (INR
90/share earlier). Maintain ‘REDUCE’ as fuel supply issues persist.
Adjusted earnings in line
APL reported Q2FY12 earnings of INR1.8bn which include MTM loss of INR558mn on
derivative instruments and forex fluctuations on creditor dues aggregating INR939mn.
Adjusting for these, earnings are in line with our estimate and significantly higher than
consensus estimate of INR2.2bn.
Gross merchant realisation high at INR4.7/kwh
The key reason behind the robust earnings was high gross merchant realisation of
INR4.7/kwh (open access and transmission related cost of INR0.3/kwh booked in other
expenses) and maintaining costs at the same level. PLFs were at 75%, but auxillary
consumption was high at ~9% against the normalised 7-8%.
Capacity addition behind schedule; revising down FY12‐13 earnings
APL is slightly behind schedule with respect to its capacity addition plans and is likely to
end FY12 with 3,300 MW, of which 1x660 MW may contribute marginally to earnings.
However, in terms of installed capacity, we could see ~ 5GW as most of these units will
be in the testing/synchronisation stage. PLF during H1 has been lower than our
expectation of 91% for FY12. Hence, we have revised our earnings estimates down for
FY12 and FY13 by 49% and 28%.
Outlook and valuations: Fuel issues persist; maintain ‘REDUCE’
In addition to the fuel linkage issue (domestic coal supplies), the recent coal pricing
regulation in Indonesia could likely impact fuel costs going ahead. This, along with
delay in capacity addition, has impacted our SOTP by INR12 to INR78/share. We
maintain ‘REDUCE/SU’ recommendation/rating on the stock.
Company Description
APL commercialised its first unit of 330 MW at Mundra, Gujarat, in 2009 and scaled up
plans to build India’s largest and one of the world’s top 5 single location thermal power
plants with a capacity of 4,620 MW. The company has also made inroads into power
generation in Maharashtra, Rajasthan and Madhya Pradesh with an ambitious vision of
being a 20,000 MW company by 2020. It commissioned the first supercritical 660 MW unit
in the country and also the world’s first supercritical technology project to have received
‘clean development mechanism (CDM) project’ certification from United Nations
Framework Convention on Climate Change (UNFCCC).
Investment theme
The company has operational capacity of 1.98 GW (at Mundra, Gujarat) and another 7.2
GW to be commissioned by FY14. APL envisages achieving total commercial capacity of 20
GW by FY20. The company has a good blend of projects in terms of diverse locations,
imported and domestic coal, long-term PPAs and merchant sales. Out of the expected 9.24
GW capacity by FY14, APL plans to sell ~80% (7.14 GW) under long-term PPAs and the
balance in merchant market which imparts earnings visibility. APL’s entire capacity (9.24
GW) is thermal with a blend of imported (AEL) and domestic (CIL) coal procured through
linkages. Though linkages are in place (except 1.3 GW Kawai where linkage is applied for)
we anticipate risk to domestic coal supply because of the likely production shortage from
CIL in the medium term. The Bunyu mines (reserves of 140 MT) owned by AEL can scale up
to ~10 MTPA, which will be sufficient to fuel only ~2.5 GW capacity, but supplies from other
overseas mines acquired by AEL are expected only post FY15. Hence during FY13-15 coal for
additional capacities will have to be procured on spot basis until domestic supply improves,
impacting earnings.
Key Risks
CIL honouring its coal contracts
The company expects domestic linkages from CIL to meet coal requirements for much of
the 9,240 MW capacity. Our hypothesis is that CIL will not be able to honour its existing
contracts in totality (we have factored in 30% of the coal requirement of Mundra IV i.e.
3x660 and Tirora I i.e. 3x660 to be met by CIL till 2015) due to current problems in scaling
up and logistics (rake availability). CIL honouring its existing contracts (pooling, imported,
etc) at the current price level is a risk to our call.
Commissioning of plants ahead of CEA dates
We have assumed the timeline of commissioning of power units based on the recent status
updated by the CEA. However, faster execution and commissioning of plants ahead of the
expected schedule (gives them time to generated power and sell on merchant basis) is a
risk to our assumptions which is in line with the CEA schedule report.
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