Delays in execution, lower merchant rates and concerns over fuel availability have been responsible for the decline in Adani Power stock over the last two-three months. This also saw analysts simultaneously cut their earnings estimates for the company by 20-30 per cent. The stock touched its lowest level (Rs 80.15 on the Bombay Stock Exchange) today since its initial public offering in August 2009, wherein investors were allotted shares at Rs 100 a share.
However, this correction has made valuations attractive for long-term investors. The stock currently trades at around 11 times earnings and two times book value, based on estimated FY13 numbers, reflecting most of the above concerns.
Notably, on the business front, things are improving. Adani recently got conditional clearance from the environment ministry for its 2,400-Mw plant coming at Dahej in Gujarat. While it commissioned a 600-Mw plant in June, another facility of the stream soon, leading to better revenue visibility.
| HIGH VOLTAGE | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Net sales | 2,135 | 6,663 | 12,692 |
| Net profit | 514 | 1,340 | 1,778 |
| EPS (Rs) | 2.4 | 6.1 | 8.2 |
| PE (x) | 33.8 | 13.3 | 9.9 |
| P/BV (x) | 2.8 | 2.3 | 2.0 |
| RoE (%) | 8.1 | 17.4 | 20.3 |
| E: Estimates Source: CLSA Research | |||
CAPACITY, FUEL CONCERNS PRICED IN
Adani is the largest private company in the segment, with operational generation capacity of 2,600 Mw. It is not the only power company witnessing delays in execution. Nevertheless, with the help of ongoing projects, it’s targeting a capacity of 4,600 Mw by FY12-end and 6,000 Mw by FY13.
Analysts are less worried about the execution part and believe the planned capacity addition is achievable, though there are worries in terms of fuel availability. They estimate the company will require 11-12 million tonnes of coal in FY12. Against this, it has a supply agreement for 7.4 mt of coal with group firm Adani Enterprises from the latter’s Indonesian mines. For the rest, it will have to depend on domestic supplies.
“Although we are comfortable with its Indonesian supplies, we remain skeptical about its domestic supplies. Hence, we build in 70 per cent linkage coal and the balance from e-auction and spot market,” said Hitul Gutka, analysts, PINC Research, in his report on the company.
MERCHANT RATES STABILISING
Analysts are also factoring in lower merchant power realisations and its impact on Adani Power’s return on equity (RoE or shareholder funds) — about half of Adani’s capacity (FY12) is merchant power. Estimates suggest the firm’s earnings are sensitive to merchant rates; for every 25 paise drop per unit in merchant rates, its FY13 estimated earnings could fall by 9.7-10 per cent.
They expect the company to sell 60-65 per cent of its power in the short-term market or on a merchant basis, as some of its long-term power purchase agreements will only start by FY12-end and mid-2013. Consequently, they have pared their earnings estimate for the company from Rs 14 a share for FY13 to Rs 7.5 now. Similarly, the RoE estimates have been cut from 32 per cent to around 20 per cent, which is decent. Merchant power rates have stabilised and any improvement from current levels should benefit the company.