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ADANI POWER
Awaits clarity on apex courts ruling
e
India Equity Research| Power
EDELWEISS 4D RATINGS
Adani Powers (APL) Q3FY17 net loss of INR3.23bn exceeded our and
Streets expectations, resulting in the stock plummeting 10%. Key reason Absolute Rating HOLD
Rating Relative to Sector Underperform
for the miss was lower volume off take and non-availability of domestic
Risk Rating Relative to Sector High
coal. As in the previous quarter, APL booked compensatory tariff (CT) of
Sector Relative to Market Overweight
INR4.8bn which was lower than previous quarters. Going forward, while
operational performance could recover key upside hinges on ratification of
CERCs CT order by the Supreme Court (SC). We maintain HOLD with a MARKET DATA (R: ADAN.BO, B: ADANI IN)
SoTP-based target price of INR28. CMP : INR 34
Target Price : INR 28
Subdued operating performance, higher interest costs drag PAT 52-week range (INR) : 39 / 22
Share in issue (mn) : 3,474.2
Revenue declined 6% YoY to INR58bn, despite plants (cumulative 10.5GW capacity)
M cap (INR bn/USD mn) : 119 / 1,750
declaring higher availability of 94% (93% in Q3FY16) due to shortage of domestic coal,
Avg. Daily Vol.BSE/NSE(000) : 8,951.0
lower merchant prices and back down by customers at Kawai and Mundra plants
(which led to 800bps YoY fall in PLFs to 69% in Q3FY17). Total volumes stood at 14.9bn
SHARE HOLDING PATTERN (%)
units versus 16.6bn units in Q3FY16. EBITDA fell 18% YoY to INR16.5bn fuel cost shot
Current Q2FY17 Q1FY17
up by 9% on higher procurement of domestic coal from e-auction platform. This
Promoters * 64.9 64.0 63.1
coupled with ~10% increase in Interest costs (due to higher working capital and MTM
MF's, FI's & BKs 9.8 10.4 11.1
losses), led to a net loss of INR3.23bn.
FII's 17.3 17.0 17.7
Others 8.0 8.6 8.1
Stock drawing investors fancy * Promoters pledged shares : NIL
In past 1 month, the APL stock has been drawing investors fancy and zoomed 25% (% of share in issue)
following the CERCs CT order wherein for the first time it has recognized the Force
Majeure clause. In its con-call, management stated they do not expect CERCs CT order PRICE PERFORMANCE (%)
to be significantly lower than its internal expectations as it has been only recognising EW Power
Stock Nifty
Index
CT for 2 out of 3 PPAs (GUVNL 2 and Haryana PPA) in Mundra and hasnt recognised
CT for GUVNL 1. 1 month 13.2 3.3 6.7
3 months 24.2 (4.0) 4.4
Outlook and valuations: Seeks clarity on CT; maintain HOLD 12 months 29.6 14.2 20.6
APLs power plants and its subsidiary registered improved plant availability of 94% versus
93% YoY. In the first 9 months, plant availability was 91% versus 90% in the corresponding
quarter of previous year.
Aggregate PLF was 69% for the quarter, which was lower both YoY and QoQ.
Better PLF at Tirora and Udupi was offset by lower PLF at Mundra and Kawai. Lower PLF at
Kawai was due to shortage of domestic coal, lower merchant prices and back down by
customers.
Plant-wise PLF for the quarter: Mundra 71%; Tirora 69%; Kawai 44% and Udupi 88%.
APL sold 14.9BUs versus 16.6BUs YoY. Number of units sold YTD17 stood at 43.9BUs versus
47.6BUs YoY.
Number of units sold during the quarter plant-wise: Mundra 6,603MUs, Tiroda 4,861MUs,
Kawai 1,233MUs and Udupi 2,196MUs.
Composite merchant and medium merchant rates stood at INR3.41/kwh (versus 3.46/kwh
YoY) with merchant and medium term volume at 964MU (versus 1,383MUs YoY).
YTD17 sales realisation stood at INR3.58/kwh and fuel cost was INR2.34/kwh.
CT recognised stood at INR4.80bn versus INR5.18bn YoY out of which Mundra was
INR3.44bn, Tiroda INR0.42bn and Kawai INR0.94bn.
On quarterly basis, higher interest cost was due to higher utilisation of working capital and
impact of mark to market.
Management mentioned that at Tiroda fuel cost was lower due to large stock of domestic
coal and therefore CT was lower.
Management mentioned the company has not recognised CT for 1 PPA (GUVNL from its
COD till March 31, 2015) out of the 3 PPAs (1 GUVNL and 1 Haryana PPA) in the case of
Adani Power Mundra Limited.
Coal quantity consumed at various plants: APML 3.14MTs (largely domestic), Kawai 0.66
(0.4MT domestic), Mundra 3.64MTs (all imported), Udupi 1MT (all imported) totaling to
8.5MTs.
Debt, as of December16 Long term INR420bn and working capital loan INR60bn (out of
which 80% is non-fund based).
As % of net revenues
Direct costs 60.3 61.4 56.3 58.3 64.1 63.0
Employee cost 1.8 1.7 1.9 1.9 1.4 1.5
Other operating expenses 6.4 5.7 7.4 6.9 6.4 6.6
EBITDA 31.5 31.2 34.5 33.0 28.0 29.0
Reported net profit (2.0) (7.1) (0.6) (1.3) (1.1) 1.8
Tax rate 2.7 3.2 66.4 31.0 - -
Change in Estimates
FY17E FY18E
New Old % change New Old % change Comments
Net Revenue 238,005 241,788 (1.6) 242,566 242,258 0.1
EBITDA 66,699 69,340 (3.8) 70,225 71,692 (2.0)
EBITDA Margin 28.0 28.7 29.0 29.6
Adjusted Profit (2,521) (240) 950.1 4,338 5,974 (27.4)
After Tax
Net Profit Margin (1.1) (0.1) 1.8 2.5
Capex - - 0.0 - - 0.0
Company Description
APL commercialised its first unit of 330 MW at Mundra, Gujarat, in 2009 and scaled up plans
to build Indias largest and one of the worlds 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 worlds 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 ~7.2 GW (at Mundra, Gujarat and Tiroda,
Maharashtra) and another 1.9 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. APLs
entire capacity (9.24 GW) is coal based with a blend of imported (AEL) and domestic (CIL)
coal procured through linkages. Though linkages are in place (except 2.6 GW Tiroda
ext/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 80% of CILs commitment for Mundra IV i.e. 3x660
and Tiroda I i.e. 3x660 to be met based on draft revised FSAs circulated by CIL) 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.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY15 FY16 FY17E FY18E Year to March FY15 FY16 FY17E FY18E
Macro Net revenue 195,449 252,316 239,374 242,567
GDP(Y-o-Y %) 7.2 7.4 7.9 8.3 Cost of Operations 119,043 149,159 156,661 152,814
Inflation (Avg) 5.9 4.8 5.0 5.2 Other operating expenses 14,369 14,350 15,314 15,999
Repo rate (exit rate) 7.5 6.8 6.0 6.0 Employee costs 3,280 3,278 3,408 3,529
USD/INR (Avg) 61.1 65.0 67.5 67.0 Total operating expenses 136,692 166,786 175,384 172,342
Sector EBITDA 58,757 85,529 63,990 70,225
Merchant prices(INR/kWh) 4.0 4.0 4.0 4.0 Depreciation 20,606 23,362 24,812 24,812
NewCastle FoB(USD/t) 69 59 59 59 EBIT 38,151 62,168 39,177 45,412
Company Add: Other income 2,465 2,018 1,325 752
Closing capacity (MW) 9,240.0 10,480.0 10,480.0 10,480.0 Less: Interest Expense 52,030 59,642 46,513 42,463
Average PLF (%) 80.0 80.0 80.0 80.0 Add: Exceptional items 3,258 - - -
Gross generation (MUs) 54,667 69,390 70,722 73,323 Profit Before Tax (8,156) 4,544 (6,010) 3,702
Aux consmuption (%) 7.3 6.9 8.0 7.9 Less: Provision for Tax - (341) - -
Net Gen./Sold (mn kwh) 50,692 64,600 65,097 67,504 Reported Profit (8,156) 4,885 (6,010) 3,702
Avg.Realisation(INR/kwh) 3.9 3.2 3.7 3.6 Exceptional Items 15,645 - - -
Avg. Energycost(INR/kwh) 2.3 2.3 2.4 2.3 Adjusted Profit (23,801) 4,885 (6,010) 3,702
Avg. O&M/unit (INR/kwh) 0.35 0.27 0.28 0.28 Shares o /s (mn) 2,872 3,334 3,417 3,417
Avg. Dep/unit (INR/kwh) 0.41 0.36 0.38 0.37 Adjusted Basic EPS (8.3) 1.5 (1.8) 1.1
Avg. Int/unit (INR/kwh) 1.03 0.92 0.71 0.63 Diluted shares o/s (mn) 2,872 3,334 3,417 3,417
Net borrowings (INR mn) 435,284 521,829 474,405 443,073 Adjusted Diluted EPS (8.3) 1.5 (1.8) 1.1
Capex (INR mn) (34,275) 63,000 - - Adjusted Cash EPS (1.1) 8.5 5.5 8.3
Debtor days 47 94 125 100
Inventory days 45 40 40 40 Common size metrics
Payable days 145 147 150 150 Year to March FY15 FY16 FY17E FY18E
Operating expenses 69.9 66.1 73.3 71.0
Depreciation 10.5 9.3 10.4 10.2
Interest Expense 26.6 23.6 19.4 17.5
EBITDA margins 30.1 33.9 26.7 29.0
Net Profit margins (12.2) 1.9 (2.5) 1.5
Additional Data
Directors Data
Mr. Gautam S. Adani Chairman, Promoter Non Executive Mr. Rajesh S. Adani Managing Director, Promoter Executive
Mr. Raminder Singh Gujral Non Executive (Independent) Mr. Vneet S Jaain Executive Director
Mr. C. P. Jain Non Executive (Independent) Ms. Nandita Vohra Non Executive (Independent)
Holding Top 10
Perc. Holding Perc. Holding
Opal Investment Mauritius 6.14 Emerging India Focus Funds 3.25
Elara India Opportunities Fund 2.91 Albula Investment Fund Ltd 2.29
Ventura Power Investments 2.24 Life Insurance Corp Of India 1.97
Cresta Fund Ltd 1.78 Dimensional Fund Advisors Lp 0.92
Vanguard Group 0.72 Kotak Mahindra 0.23
*as per last available data
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
11 Jan 2017 Universal Trade and Investments Ltd. Buy 3816962.00
11 Jan 2017 Afro Asia Trade and Investments Ltd. Buy 5067274.00
11 Jan 2017 Worldwide Emerging Market Holding Ltd. Buy 5067274.00
15 Nov 2016 Worldwide Emerging Market Holding Ltd. Buy 9702802.00
15 Nov 2016 Afro Asia Trade and Investments Ltd. Buy 9702802.00
*in last one year
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Sector return is market cap weighted average return for the coverage universe
within the sector
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Manoj Bahety
Deputy Head Research
manoj.bahety@edelweissfin.com
Recent Research
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* -1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594
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297 36
149 32
(INR)
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Adani Power
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