Base Report | April 2011 Sector: Utilities
Adani Power
Sailing on synergies Nalin Bhatt (
[email protected]) +91 22 3982 5429 / Satyam Agarwal (
[email protected]); Tel: +91 22 3982 5410 Vishal Periwal (
[email protected]) +91 22 3982 5417
Adani Power
Adani Power: Sailing on synergies Page No. Summary .......................................................................................................... 3-4 Accelerated project execution; comfortably positioned on several parameters .......................................................................................... 5-7 Well placed to fund 6.6GW of initial projects pipeline ................................... 8-9 PPA structure exposes to fuel price/availability risks ................................. 10-11 Merchant contribution to profitability sizable, exposes to near term earnings volatility ....................................................................... 12-13 Multi-fold earnings growth; initiate coverage with Neutral ...................... 14-15 Annexure 1: APL's project portfolio ................................................................. 16 Financials and valuation .............................................................................. 17-18
11 April 2011
2
Initiating Coverage SECTOR: UTILITIES
Adani Power BSE SENSEX
S&P CNX
19,263
5,786
Target price: Rs113
Neutral
Sailing on synergies Accelerated project execution, leveraging on group synergies
Bloomberg CMP (Rs) Equity Shares (m) 52-Week Range (Rs) 1,6,12 Rel. Perf. (%) M.Cap. (Rs b) M.Cap. (US$ b)
ADANI IN 117 2,180.0 145/108 -1/-9/-7 256.0 5.8
Adani Power (APL) is in an accelerated execution phase with expected capacity of 4.6GW by end FY12 (largest private IPP) and capex spending of Rs129b in FY11 (amongst the largest capex spenders in the economy). Mundra (4.6GW) is the most profitable project in the portfolio, contributing 67% to SOTP and 90%+ of FY12/FY13 consolidated earnings. At Mundra, as large parts of the capacity have fuel tied-up under long-term contracts and power sales under PPA, 'coal earnings' have been successfully converted into 'annuity streams'. Consolidated DER in FY11/12 is high at 3.3x; funding is however comfortable as 82% of the capex on an initial 6.6GW pipeline, to be commissioned by FY13, has been incurred. Fuel availability is a challenge in the interim for Tiroda (3.3GW) and Kawai (1.3GW), given constraints of coal linkages.
Y/E March
2011E
Sales (Rs b)
2012E 2013E
21.2
76.5
133.0
EBITDA (Rs b) 12.5 NP (Rs b) 7.2 EPS (Rs) 3.3 EPS Gr. (%) 323.5 BV/Share (Rs) 29.3 P/E (x) 35.5 P/BV (x) 4.0 EV/EBITDA (x) 37.1 EV/ Sales (x) 21.9 RoE (%) 11.9 RoCE (%) 5.1
46.4 24.7 11.3 242.5 38.7 10.4 3.0 11.3 6.9 33.3 12.9
72.4 30.2 13.9 22.5 50.2 8.5 2.3 7.4 4.0 31.2 15.6
Shareholding pattern % (Mar-11) Promoter, 73.5 Others, 6.4
Foreign, 18.9
Domestic Inst, 1.3
Stock performance (1 year) Adani Pow er Sensex - Rebased
8 April 2011
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
150 135 120 105 90
Accelerated project execution, comfortably positioned on several parameters: APL's generation capacity is expected to increase to 4.6GW by FY12 / 6.6GW by FY13, and will be the largest private sector IPP in the country. Capex incurred in FY10 / FY11 stands at Rs200b - amongst the highest spenders in the economy (and compares with ~Rs230b by NTPC). In addition, 2.6GW capacity is under construction (to be commissioned by FY14-15) and project pipeline stands at 7.2GW. Given the strong parent advantage, APL is comfortably positioned on several key parameters including land availability, fuel security, etc. Of the 16.5GW of project portfolio, 10.6GW are being commissioned at Mundra and Dahej, where Adani Enterprises (AEL, 70.3% stake) has access to vast tracks of land. On the fuel front, AEL has access to 8b tons of reserves in Indonesia and Australia and also controls ~50%+ market share in overall coal trading/imports into India. The group strengths are an advantage, given the recent issues in terms of acquiring land and fuel security. Mundra project contributes 67% to SOTP, 90%+ of FY12/13 earnings as 'coal earnings' converted into 'annuity streams': Mundra (4.6GW) is the most profitable project for APL, given contracted fuel supplies from AEL's captive mine in Indonesia at CIF of USD36/t, entailing competitive fuel cost of Rs1.1-1.2/unit. While the imported coal requirement stands at 7m tons, we understand that part of the shortfall in terms of domestic linkages (10m tons requirement) will also be met by AEL on similar terms. Peak capacity of Bunyu mines stands at 11m tons, and can support 3.1GW of operational capacity. Further, as 80% of the 4.6GW capacity has been tied up under long term PPAs at levelized tariffs of Rs2.8/unit, the Mundra project largely has an annuity earnings stream. Merchant profitability to contribute 75% to FY12/13 earnings, various moving parts exposes to near term earnings volatility: Merchant profitability will be the key near term earnings driver, as the trigger point in terms of PPAs for large part of the capacities commissioned is in phases from mid FY13 onwards; leading to increased merchant sales in the interim period. The key risks are delays in terms of project commissioning (as the merchant sales have a limited window opportunity), volatility in merchant prices and fuel availability / pricing. Use of eauction coal for Mundra project / imported coal on spot purchases (given shortages in domestic linkages) would impact profitability. 3
Adani Power
Multi-fold earnings growth; initiate with Neutral: APL's net profit is expected to increase from Rs1.7b in FY10 to Rs30b in FY13 given increase in operational capacity from 990MW as at March 2010 to 6.6GW by FY13E. Consolidated DER in FY11/12 is high at 3.3x; funding is comfortable as 82% of the capex on 6.6GW to be commissioned by FY13 has been incurred. Fuel availability is a risk for Tiroda (3.3GW) and Kawai (1.3GW) given constraints in terms of coal linkages. We have valued APL on SOTP methodology for 9.2GW of projects portfolio and arrive at a valuation of Rs113/sh, including Rs9/sh towards growth option for an additional 7.3GW of projects in the initial pipeline stages. We initiate coverage with a Neutral rating.
Operational matrix FY10
FY11E
FY12E
FY13E
Operational Capacity (MW) Net Generation (BUs) - Case 1 - Merchant
660 1.2 0.9 0.4
1,980 6.5 5.5 1.0
4,620 21.9 8.9 12.9
6,600 43.4 23.8 19.7
Average Realization (Rs/unit) Generation Cost (Rs/unit) Net Profit (Rs b) Net Profit (Rs/unit)
3.6 2.2 1.7 1.4
3.1 1.9 7.2 1.1
3.5 2.1 24.7 1.1
3.0 2.1 30.2 0.7 Source: MOSL
Comparative valuation Company
Rating
NTPC PGCIL Tata Power Reliance Infra CESC PTC India Adani Power CIL * * Adjusted for OB
Buy 1,516 Buy 483 Neutral 313 Buy 182 Buy 39 Buy 26 Neutral 256 Buy 2,255 reserves provisions
11 April 2011
M.cap (Rs b)
EPS (Rs) FY11E FY12E FY13E 10.1 5.6 76.3 34.8 37.8 5.4 3.3 16.2
12.0 6.8 111.2 53.8 38.8 10.2 11.3 20.9
14.0 7.8 98.3 60.8 39.6 13.9 13.9 26.8
RoE (%) FY11E FY12E FY13E 12.8 13.8 7.3 5.6 13.3 6.2 11.9 31.6
14.0 13.9 9.7 8.2 12.2 7.1 33.3 24.7
15.1 14.4 6.7 8.6 11.2 9.4 31.2 25.8
P/BV (x) FY11E FY12E FY13E 2.2 2.2 2.7 1.1 1.1 1.2 4.0 6.9
2.1 2.0 2.5 1.0 1.0 1.2 3.0 5.4
1.9 1.8 2.4 0.9 0.9 1.1 2.3 4.3
P/E (x) FY11E FY12E FY13E 18.2 18.7 17.3 19.5 8.3 16.3 35.5 22.9
15.3 13.1 15.3 13.3 11.8 13.4 12.6 11.2 8.1 7.9 8.6 6.4 10.4 8.5 22.0 17.1 Source: MOSL
4
Adani Power
Accelerated project execution; comfortably positioned on several parameters APL's generation capacity is expected to increase to 4.6GW by FY12 / 6.6GW by FY13, and will be the largest private sector IPP in India. Capex incurred in FY10 / FY11 stands at Rs200b amongst the highest spenders in the economy (and compares with ~Rs230b by NTPC). In addition, 2.6GW capacity is under construction (to be commissioned by FY14-15) and project pipeline stands at 7.3GW. Given the strong parent advantage, APL is comfortably positioned on several key parameters including land availability, fuel security, etc. Of the 16.5GW of project portfolio, 10.6GW are being commissioned at Mundra and Dahej, where Adani Enterprises (AEL, 70.3% stake) has access to vast tracks of land. On the fuel front, AEL has access to 8b tons of reserves in Indonesia and Australia and controls ~50%+ market share in overall coal trading/imports into India. The group strengths are an advantage, given the recent issues in terms of acquiring land and fuel security.
In FY12, APL will be the largest private sector IPP
Capacity addition of 6.6GW by FY13E, 9.2GW by FY15E APL currently has a project pipeline of 16.5GW in various stages of construction, development and planning. Operational capacity stands at 2GW, and projects under construction at ~7.2GW (of which ~4.7GW will be commissioned by FY13). Several issues including restrictions on Chinese worker visas, have led to initial delays in capacity commissioning. Under the Eleventh Plan (FY08-12), APL is likely to commission 4.6GW of capacity. This will be the highest capacity addition amongst private players and contribute 7.4% of the capacity addition in the country. Capacity commissioning set to accelerate (GW)
10
Mundra Phase 1&2 Mundra Phase 4
Mundra Phase 3 Maharashtra (Tiroda)
Rajasthan (Kaw ai)
Maharashtra Exp (Tiroda)
9.24 7.92
8
Initial phase of 6.6GW capacity will be operational by FY13E
6.60
6
4.60
4 1.98
2 0
0.66 FY10
FY11E
FY12E
FY13E
FY14E
FY15E
Source: Company/MOSL
11 April 2011
5
Adani Power
APL will have the highest capacity addition amongst IPPs in the Eleventh Plan 13.0
APL will have a market share of 7.4% in terms of capacity additions in the country
4.6 1.0
0.3 CESC
1.2
Jindal Power
JP Power
1.5
Essar Energy
1.8
Reliance Power
2.0
NHPC
2.1
Tata Power
2.4
Sterlite Energy
2.6
JSW Energy
Lanco Infra
Adani Power
NTPC
3.3
Source: Company/MOSL
Projects of 7.2GW in the planning stage: large part of land already acquired Dahej Gujarat
Project pipeline of 7.2GW is in initial stages and fuel linkages have been applied for. These projects could enter the construction phase over the next 12-18 months, based on the progress of fuel tie ups, environment clearances, etc
Chhindwara MP
Bhadreshwar Gujarat
Capacity (MW)
2,640
1,320
3,300
Configuration (MW, Units) Stake (%) Project Clearances Land
660x4 100
660x2 100
660x5 100
100% land available Sea Water
100% land Land is available available Water Water reserved from Sea Water Pench River Environ TOR approved, TOR approved, TOR approved, EIA study commenced EIA study commenced EIA study commenced BTG NIT issued NIT issued NIT issued Fuel Requirement (m ton) 11.7 5.85 14.63 Fuel Agreement Linkages applied Linkages applied Linkages applied Offtake Not tied-up 10% of capacity on variable rates Not tied-up and 40% capacity on first right of refusal to state on CERC norms Source: Company/MOSL
Strong parent advantage = well covered on key aspects Key issues facing players in the Indian power sector include: (1) land availability, (2) fuel security, (3) funding. APL is comfortably positioned on several of these key aspects given its strong parent advantage. Of the 16.5GW portfolio, projects of 10.6GW are being commissioned at Mundra and Dahej, where Adani Enterprises (AEL, 70.3% stake) has access to vast tracts of land, given SEZ development plans. On the fuel front, AEL has access to 8b tonnes of coal reserves in Indonesia and Australia and it controls ~50%+ market share in overall coal trading/imports into India. This, coupled with control of the logistics chain, including shipping, ports (Mundra, Dahej), entails that APL is comfortably positioned on several parameters.
11 April 2011
6
Adani Power
Strong parent advantage could enable accelerated execution for sizable part of the project portfolio
SEZ at Mundra (32,355 acres) and Dahej (GIDC SEZ 4,300 hectares).
Land
Access to Sea water
Water Adani Enterprises
Beneficial for 10.6GW of total 16.5GW capacity
(70.3% stake in APL)
AEL has access to 8b tons of coal reserves at Indonesia (150m tons) and Australia (7.8b tons)
Fuel
Mundra port would have 100m tons of capacity (50m tons of coal handling terminal) and Dahej would have 15-20m tons of coal hanlding (mix of solid+liquid cargo)
Port
Source: Company/MOSL
AEL controls 8b tonnes of coal reserves in Australia and Indonesia
AEL has access 8b tonnes of coal reserves in Indonesia and partly controls the logistics channel through port/shipping operations
Mines
Country
Reserves (m tons)
CoD
Remarks
East Kalimantan block
Indonesia
150
FY11
Linc Energy
Australia
7,800
FY15
140m tons minable reserves, 300m resources Production of 5m tons in FY11 Peak production of 11mtpa Possible peak production of 60m tons MPSEZ to develop coal terminal at Dudgeon in Macay, Queensland to export 30-60mtpa
Total 7,950 Note: In addition, Adani Enterprise has “Coal purchase rights” for 60% of coal through a rail/port project development for PT Bukit Asam, Indonesia. It will develop rail/port under “Take or Pay” mechanism and initial capacity is 35mtpa, extendable upto 60mtpa of coal handling. This, would be however subject to Indonesia Reference Price Index.
AEL accounts for 50% of total coal imported to India (m tonnes) AEL
AEL is the largest coal importer/aggregator in India. The Adani group has significant advantage over other players, given captive shipping/port and mining operations
India thermal coal import
Market share (%) 49%
39% 32%
7.7
FY06
8.1
FY07
38.2
36% 28.3
25.3
19.7
50% 50.0
25.0 18.7
10.2
FY08
FY09
FY10 Source: Company/MOSL
11 April 2011
7
Adani Power
Well placed to fund 6.6GW of initial projects pipeline Funding requirement towards the initial 6.6GW of the project portfolio has been largely met through funds raised from an IPO (Rs30.2b), PE investments (Rs8.3b) and internal accruals. Given the accelerated pace of project commissioning and increased internal cash generation, APL is comfortably positioned in terms of funding the development pipeline. For the initial 6.6GW capacity, APL has incurred 82%+ of the total project cost and invested ~100% of the total equity requirement. Outstanding equity requirement as at December 2010 stands at ~Rs16.2b - Rs0.9b towards the initial 6.6GW and Rs15.4b towards an incremental 2.6GW. Debt equity ratio at 3.3x for FY11/12 is high and exposes it to cash flow volatility risks. Operating cashflows are likely to improve from Rs18.6b in FY11 to Rs31b in FY12 and Rs60b in FY13.
Equity funding requirement for 9.9GW projects has already peaked (Rs m) 26,399
For the initial 6.6GW capacity, APL has already incurred 82%+ of the total project cost and invested ~100% of the total equity requirement
26,068
12,014 8,117
6,892
6,500 544
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY14E
APL: CF from operations to remain strong (Rs b), consolidated DER(x) to peak in FY11/12 60.1
3.3
3.2 2.7
Given robust internal accruals from FY12, we believe the growth option will not be equity dilutive; however consolidated DER at 3.3x is high
1.8
31.0 18.6 3.5 FY10
FY11E
FY12E
FY13E
FY10
FY11E
FY12E
FY13E
Source: Company/MOSL
Amongst the largest capex spenders in the Indian power sector On the initial 6.6GW of capacity (comprising Mundra's 4.6GW and Tiroda's 2GW), APL has incurred 82% of the total project cost. Over FY10 and FY11, the capex incurred by APL was Rs200b, making it one of the highest spenders in the economy (NTPC’s cumulative capex over FY10-11E is Rs230b). Timely project commissioning will enable APL to retain part of the capacity on a merchant basis upfront - we estimate that APL's proportionate operational merchant capacity will increase from 189MW in FY10 to 3.3GW by FY12 and 3.1GW by FY13. Upfront merchant capacity not only improves project IRRs, but also cash flows, providing growth capital. 11 April 2011
8
Adani Power
Significant capex incurred on projects under construction (Rs b) Projects
Capex incurred on its 6.6GW capacity project is 80%+ of total project cost (as at December 2010); Tiroda expansion and Kawai (1.3GW each) are in initial ramp-up phase
Mundra Phase-I & II (1,320MW) Mundra Phase-III (1,320MW) Mundra Phase-IV (1,980MW) Tiroda Project (1,980MW) Tiroda Exp. Project (1,320MW) Kawai project (1,320MW) Total *As at Dec-10
Debt
Total Equity
36,440 44,540 84,288 74,104 50,336 56,240 345,948
7,060 13,420 21,072 18,526 12,584 14,060 86,722
Incurred* Debt Equity 36,440 43,720 69,118 37,010 4,680 2,063 193,031
7,060 13,420 21,072 17,660 4,660 6,610 70,482
Outstanding Debt Equity 0 0 820 0 15,170 0 37,094 866 45,656 7,924 54,177 7,450 152,917 16,240 Source: Company/MOSL
FY10/11 capex incurred by APL is the highest amongst IPPs (Rs b) 260.0
36.2
31.8
JSW Energy
41.8
Reliance Power
Tata Power
APL
Powergrid
51.2
KSK Energy
Capex incurred by APL is equivalent to that of combined for other five IPPs
61.6
NTPC*
Over FY10-11E, the capex incurred by APL was Rs216b, which makes it among the highest spenders in the economy (NTPC’s cumulative capex over FY10-11E is Rs230b)
216.1
JP Power
224.9
Source: Company/MOSL
11 April 2011
9
Adani Power
PPA structure exposes APL to fuel price/availability risks The PPA structure exposes APL to risks of fuel pricing and availability. Of the 9.2GW capacity, long-term PPAs have been contracted for 7.8GW and 1.4GW will be available on a merchant basis. Of the long-term PPAs, 4.7GW (3.4GW from Mundra and 1.3GW from Tiroda) have fixed energy charges. Thus, variations in fuel costs will have a direct impact on project profitability. 6.8GW of capacity are based on coal linkages and thus exposed to fuel availability risks in the interim. For the Tiroda expansion and Kawai project (2,640MW), fuel and freight charges can be escalated. Lower operating rates will impact recovery of capacity charges and use of Eauction coal will impact profitability. Re-allocation of coal blocks at Tiroda could be a key value driver.
We have assumed linkages from CIL at 50% (increasing upto 65%), and 20% could would be available through E-auctions. Thus, the operating factor for Tiroda and Kawai projects are lower in the initial years. We believe the economics of imported coal may not be favourable given the location of projects in Central India. Evaluation of 9.2GW of project portfolio on the fuel/offtake front
9,240MW Capacity
Fuel availability (linkage) and costs are the key aspects to monitor, given higher proportion of fixed energy charges out of the initial 6.6GW (4.7GW) and the balance being merchant
2,442 MW on im ported coal
The Tiroda (3.3GW) and Kawai (1.3GW) projects depend on coal linkages and are exposed to availability risks in the interim For Tiroda Expansion and Kawai project (2.6GW), fuel and freight charges can be escalated, guarding against a fuel cost increase under PPA
Offtake m ix
Fuel portfolio
6,798MW on Dom estic linkage
Imports from AEL are at fixed CIF price of USD36/t for 5 years. Price increase 10% every 5 years
7,144 MW tieup under LTPPA 4,744MW capacity w ith fixed fuel cost
2,096MW (gross) on m erchant basis 2,400MW capacity w ith escalation on fuel/freight cost
Key takeaways: 1. 4,620MW Mundra project: 53% of the fuel requirement (for 2,442MW) will be met through imports by AEL at fixed prices for 15 years. A shortfall in terms of linkages for 2,178MW can also be met through imports in the interim. Parent advantages including access to coal reserves of 8b tons abroad, control of port infrastructure, dominant market share in coal imports into India (~50%) etc provide comfort. AS PER PPA, ENERGY CHARGES ARE FIXED AND THUS ANY INCREASE IN PRICES / MIX CHANGE WILL IMPACT PROFITABILITY. 2.
Tiroda 3,300MW and Kawai 1,320MW: The projects are dependant on coal linkages and thus there are risks in terms of availability in the interim. Large distance from coast (located in Central India) will entail that economics of imported coal will be challenging. As per PPA, energy and freight charges are escalable for Tiroda Expansion (1,320MW) and Kawai (1,320MW). LOWER OPERATING RATES WILL IMPACT RECOVERY OF CAPACITY CHARGES AND USE OF E-AUCTION COAL WILL IMPACT PROFITABILITY. Merchant capacity is limited at ~550MW. RE-ALLOCATION of coal block at Tiroda CAN LEAD TO IMPROVED PROFITABILITY. Source: Company/MOSL
11 April 2011
10
Adani Power
Fuel supply status for 9.2GW capacity; 6.8GW based on domestic linkages Projects
Capacity (MW)
Mundra Phase 1 & 2
6.8GW is based on domestic linkages, which exposes APL to availability risks in the interim. For coal imports from Indonesia through AEL, we understand the regulatory and related risks in Indonesia are being borne by AEL; thus, APL is protected to that extent
Requirement Coal GCV (m tons) (Kcal/kg)
1,320
3.68
5,200
Mundra Phase 3 1,320
4.06
5,200
Mundra Phase 4 1,980
6.09
5,200
Tiroda
1,980
6.18
4,895
Kawai (Rajasthan) Tiroda Power (Expansion) Total
1,320
6.04
3,500
1,320
5.87
3,600
9,240
20.01
Remarks
Agreement with AEL to supply 4.60mtpa for 15 years CIF cost at US$36/ton for five years from CoD of last unit. Escalation of 10% in every block of five years. Received linkages from Mahanadi Coal Fields in Jan 2010 for 30% of capacity (396MW) Agreement with AEL for supply of 4.04mtpa for 15 years. CIF cost at US$36/ton for five years from CoD of last unit. Escalation of 10% in every block of five years. Received linkages from Mahanadi Coal Fields in Jan 2010 for 30% of capacity (396MW) Linkages from Mahanadi Coalfields for supply of ~6.4mtpa of Grade F coal. Domestic coal will cater to 70% of requirements. Balance 30% to be supplied by AEL on similar contract terms (as per Phase 1 and 2) Obtained linkages of 1,180MW from South Eastern Coalfields and Western Coalfields. In Jan 2010, received tapering linkages for 660MW. Linkages to be obtained from SECL mine for Grade F coal. Applied for coal linkages.
Source: Company/MOSL
PPA signed for 7.1GW
PPA structure for Tiroda Expansion and Kawai has fuel/freight escalation, while lower availability can lead to under-recoveries of capacity charges For Mundra (4.6MW), the PPA structure has a fixed energy charge; any fuel cost increase will impact profitability
11 April 2011
Projects
Capacity Capacity (MW) (MW) Contracted Balance
Mundra Phase 1 & 2
1,320
1,000
205
Mundra Phase 3
1,320
1,000
205
Mundra Phase 4
1,980
1,424
351
Tiroda Power Project
1,980
1,320
512
Rajasthan (Kawai)
1,320
1,200
21
Tiroda Expansion
1,320
1,200
21
Remarks 1,000MW at a tariff of Rs2.81/unit going up to Rs3.42/unit in the 25th year 1,000MW at tariff of Rs2.35/unit, plus incentives linked to availability 1,424MW of power from MPP-IV to Uttar Haryana Bijli Vikas Nigam (UHBVNL) and Dakshin Haryana Bijli Vikas Nigam (UHBVNL) for 712MW each at a levelized tariff of Rs2.94/unit 1,320MW tied up with MSEDCL, effective from CoD of third unit. Tariff is estimated at Rs2.55/ unit, going up to Rs3.47/unit in the 25th year 1,200MW tied up with Rajasthan state utilities distributor at a levelized tariff of Rs3.24/ unit. 1,200MW to MSEDCL at tariff of Rs3.28/unit Source: Company/MOSL
11
Adani Power
Merchant contribution to profitability sizable, exposes to near term earnings volatility Merchant profitability will be the key near-term earnings driver, contributing 84% to the profits in FY12 and 68% in FY13. We expect capacity commissioning of 4.6GW over the next 18-20 months. The trigger point for PPAs for a large part of these capacities is in phases from mid-FY13, leading to increased merchant sales in the interim at 12.9BUs in FY12 and 19.7BUs in FY13 - up from 991MUs in FY11. The key risks are delays in terms of project commissioning (as merchant sales have a limited window of opportunity), volatility in merchant prices and fuel availability/pricing. Shortfall in terms of domestic linkage availability would necessitate use of e-auction/imported coal, increasing earnings volatility.
Merchant earnings to contribute a meaningful part of profitability in FY12 and FY13 (Rs b)… Contribution from Merchant Pow er (%)
84
43
21
36
FY10
3
2
7
12
21
25
31
43
35
68
12
68
1
During FY12 and FY13, the contribution of merchant earnings would be higher, as PPAs for Mundra Phase-IV and Tiroda are triggered in phases from mid-FY13; APL would enjoy merchant sales in the interim
Consolidated PAT
28
Merchant Profit
FY11E
FY12E
FY13E
FY14E
FY15E
…driven by capacity ramp-up in the interim and merchant sales (BUs) 2,640MW Mundra 1,980MW Tiroda Exp
1,980MW Mundra 1,320MW Kaw ai
1,980MW Tiroda
19.7
During FY12 and FY13, we expect APL to commission 4.6GW of incremental capacity
12.9
0.4
1.0
FY10
FY11E
FY12E
FY13E
9.7
10.2
FY14E
FY15E
Source: Company/MOSL
11 April 2011
12
Adani Power
CEA estimates 4GW capacity commissioning by FY12 (including 2.64GW on best effort basis) v/s our estimate of 4.6GW
Delays in terms of capacity commissioning is a key risk to merchant profitability; our assumptions reflect management's guidance, higher capex spending on projects, etc
Projects
Cap (MW)
CoD
FY10
FY11E
FY12E
FY13E
- Mundra Phase 1 660 2009-10 660 - Mundra Phase 2 660 2009-11 660 - Mundra Phase 3 1,320 2011-12 1,320 - Mundra Phase 4 1,980 2012-13 660 1,320 - Maharashtra (Tiroda) 1,980 2012-13 660 1,320 Total (As per CEA) 6,600 660 660 2,640 2,640 Capacity (As per CEA) 660 1,320 3,960 6,600 Capacity (As per MOSL) 660 1,980 4,620 6,600 Source: Company / MOSL; shaded projects indicate capacities on best effort basis assumed by CEA
…Execution delays has led to loss of merchant opportunity for Mundra phase 1 & 2 (MW) Merchant capacity estimates earlier Merchant capacity actual 446
Merchant capacity for APL would have been higher given earlier commissioning time frames
287 126
43
FY10
FY11E
FY10
Trend in short-term prices and bilateral rates Bi-lateral prices
UI prices
FY11E
ST realization for APL (Rs/unit)
Exchange price
6.35 5.56
12.0
4.42
9.0
3.9 4.0 4.0
6.0
0.0
Jan-11
3.0 Oct-08 7.8 8.0 7.9 Jan-09 7.2 6.6 7.4 Apr-09 7.2 6.8 4.8 Jul-09 4.8 4.6 4.7 Oct-09 5.1 5.3 5.0 Jan-10 5.3 5.1 4.9 Apr-10 5.7 6.2 5.6 Jul-10 5.0 4.9 4.7 Oct-10 4.0
ST realization for APL has been higher than average rates, which could be attributable to 100% of operations in the western region
1QFY11 2QFY11 3QFY11
Sensitivity of earnings to changes in merchant tariffs (Rs b) Current
Rs0.5/unit decline in realization
Dow ngrade (%) 34.5
-6.1%
A Rs0.5/unit decline in realization results in ~20% downgrade in APL's FY12/13E net profit
28.2
28.0 22.8
6.8
-19.0% 6.4
FY11E
FY12E
-18.8%
FY13E Source: Company/MOSL
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Adani Power
Multi-fold earnings growth; initiate coverage with Neutral APL's net profit is expected to increase from Rs1.7b in FY10 to Rs30b in FY13E given increased operational capacity from 990MW as at March 2010 to 6.6GW by FY13E. Consolidated DER in FY11/12 is high at 3.3x; funding is comfortable as 82% of the capex on 6.6GW to be commissioned by FY13 has been incurred. Fuel availability is a risk for Tiroda (3.3GW) and Kawai (1.3GW) given constraints in coal linkages. We have valued APL on SOTP methodology for 9.2GW of projects portfolio and arrive at a valuation of Rs113/sh, including Rs9/sh towards growth option for additional 7GW of projects in initial pipeline stages. We initiate coverage with a Neutral rating.
Multi-fold earnings growth (net profit, Rs b) driven by capacity addition (GW) Mundra Phase 1 & 2 Mundra Phase 4 Rajasthan (Kaw ai) Other income
30.2
Increase in operating capacity from 990MW currently to 6.6GW by FY13, and higher contribution from merchant power would drive profitability
48
24.7
Mundra Phase 3 Maharashtra (Tiroda) Maharashtra Expn (Tiroda)
34 20
7.2 6
1.7 -8
FY10
FY10
FY11E FY12E FY13E
FY11E
FY12E
FY13E
FY14E
FY15E
Source: Company/MOSL
Trend in levelized profitability for projects (Equity IRR @ 20-40%)
APL's net profit margin ranges from Rs0.20-0.70/ unit. Key risks are: increased fuel costs, fuel availability and lower merchant realizations
Project
Realization (Rs/unit)
Mundra Phase 1&2 Mundra Phase 3 Mundra Phase 4 Maharashtra (Tiroda)
Cost (Rs/unit) Fixed Variable
2.99 2.99 3.32 3.19
0.83 0.83 1.00 1.20
PAT Equity IRR (Rs/unit) (%)
1.40 1.40 1.62 1.74
0.77 40.5 0.77 40.5 0.70 26.8 0.25 20.4 Source: Company/MOSL
Return ratios suppressed due to CWIP (Rs b); to improve going forward CWIP (Rs b) As % of CE
73.8
RoE (%)
RoCE (%) 33.3
31.2
43.3 25.3
15.6
154.9
102.4
11.9 202.3
Superior RoE going forward would be a function of aggressive DER of 80:20 for all its projects
77.6
127.7
In FY10, APL's reported RoE was 3.1% and RoCE was 1.5%. Lower return ratios were due to higher CWIP, given 6GW of projects under construction.
FY10
FY11E
FY12E
FY13E
12.9
2.9 1.5 FY10
5.1 FY11E
FY12E
FY13E
Source: Company/MOSL
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Adani Power
APL: SOTP valuation
We have valued APL on SOTP methodology for 9.2GW of project portfolio and arrive at a valuation of Rs113/share, including growth option for additional 7GW of projects in initial pipeline stages
11 April 2011
Value (Rs m)
Value (Rs/sh)
% to NPV
Projects under construction and Operation - Mundra Power project (Phase 1-3) 108,945 - Maharashtra Power project 35,008 - Mundra Project (Phase 4) 62,729 Cash / Investments / Advances 2,018 Projects under development * 17,198 Investment in Shipping Business 2,893 Growth Option 20,492
50 16 29 1 8 1 9
44 14 25 1 7 1 8
Rationale
DCF DCF DCF FY11E book value BV of Investment 7.2GW of projects under development
Total 246,389 # 113 100 * includes Tiroda expansion and Kawai project; # We have not considered possible upside from CER credits Source: MOSL
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Adani Power
Annexure 1: APL's project portfolio Project portfolio enhanced to 16.5GW v/s 6.6GW earlier; operational capacity of 1,980MW
Kaw ai 1,320MW Mundra Phase I &II 1,320MW Mundra Phase III 660MW Mundra Phase III 660MW Mundra Phase IV 1,980MW Bhadreshw ar 3,300MW
Chhindw ara 1,320MW Dahej 2,640MW Tiroda 1,980MW Tiroda Exp 1,320MW
Operational Projects (1,980MW) Under Construction (7,260MW) Under development (7,260MW)
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Adani Power
Financials and valuation Income Statement
(Rs Million)
Y/E March Net Sales Change (%)
2010 4,349 -
2011E 21,190 387.3
2012E 76,476 260.9
2013E 132,999 73.9
Operating Expenses EBITDA % of Net Sales Depreciation Interest Other Income PBT Tax Rate (%) PAT before Min. Int. Minority Interest Reported PAT Change (%) Adjusted PAT Change (%)
1,910 2,438 56.1 353 377 319 2,027 327 16.1 1,700 -1 1,701 1,701 -
8,671 12,519 59.1 1,581 2,249 282 8,971 1,767 19.7 7,204 0 7,204 323.5 7,204 323.5
30,055 46,421 60.7 5,813 9,616 75 31,068 6,430 20.7 24,638 -33 24,671 242.5 24,671 242.5
60,594 72,405 54.4 12,996 20,228 82 39,263 8,363 21.3 30,901 679 30,222 22.5 30,222 22.5
Balance Sheet
(Rs Million)
Y/E March Share Capital Reserves Net Worth Minority Interest Loans Capital Employed
2010 21,800 35,980 57,780 1,023 105,705 164,509
2011E 21,800 41,968 63,769 1,023 209,200 273,992
2012E 21,800 62,476 84,276 990 272,073 357,340
2013E 21,800 87,598 109,398 1,669 293,468 404,536
Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital Work in Progress Inventory
28,549 678 27,871 127,691 95
83,228 2,410 80,818 202,259 202
209,710 8,223 201,486 154,893 700
306,583 21,220 285,364 102,395 1,417
2,563 9,406 11,654
4,354 1,000 1,018
3,143 1,000 1,963
5,466 1,000 13,740
14,617 35 9,066 164,628
15,660 0 -9,085 273,992
5,846 0 960 357,340
4,846 0 16,777 404,536
Debtors Loans and Advances Cash Current Liabilities Provisions Net Curr. Assets Application of Funds E: MOSL Estimates
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Adani Power
Financials and valuation Ratios Y/E March Basic (Rs) Adjusted EPS
2010
2011E
2012E
2013E
0.8
3.3
11.3
13.9
-2,985.0 0.9 26.5 0.1 15.0
323.5 4.0 29.3 0.5 15.0
242.5 14.0 38.7 1.7 15.0
22.5 19.8 50.2 2.1 15.0
150.5 124.6 143.6 80.5 4.4 0.1
35.5 29.1 37.1 21.9 4.0 0.4
10.4 8.4 11.3 6.9 3.0 1.4
8.5 5.9 7.4 4.0 2.3 1.8
Profitability Ratios (%) RoE RoCE
2.9 1.5
11.9 5.1
33.3 12.9
31.2 15.6
Leverage Ratio Debt/Equity (x)
1.8
3.3
3.2
2.7
Growth (%) Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%)
Cash Flow Statement Y/E March PBT before Extraordinary Items Add : Depreciation Interest Less : Direct Taxes Paid (Inc)/Dec in WC CF from Operations
(Rs Million) 2010 2,027 353 377 -327 1,097 3,527
2011E 8,971 1,581 2,249 -1,767 7,516 18,550
2012E 31,068 5,813 9,616 -6,430 -9,100 30,966
2013E 39,263 12,996 20,228 -8,363 -4,040 60,085
(Inc)/Dec in FA CF from Investments
-86,879 -86,879
-129,248 -129,248
-79,116 -79,116
-44,375 -44,375
(Inc)/Dec in Networth (Inc)/Dec in Debt Less : Interest Paid Dividend Paid CF from Fin. Activity
-33,479 -55,808 -377 510 89,420
0 -103,495 -2,249 -1,660 99,586
0 -62,874 -9,616 -4,163 49,095
0 -21,395 -20,228 -5,100 -3,933
Inc/Dec of Cash Add: Beginning Balance Closing Balance
6,068 5,585 11,654
-11,111 11,654 543
946 1,018 1,963
11,776 1,963 13,740
E: MOSL Estimates
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Adani Power
For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail:
[email protected]
Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021 This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Group/Directors ownership of the stock 3. Broking relationship with company covered 4. Investment Banking relationship with company covered
Adani Power No No No No
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