Adani Power: Acquisition strategy might pay off

Realisations and generation improve in Q1 but cost push continues due to higher coal prices

Adani Power’s acquisition strategy seems to be playing out well. Though its balance sheet is stretched, the Street believes the company has acquired assets that will help improve its return on equity, as these plants are not rate-constrained.

During the June quarter, consolidated income rose 13 per cent to Rs 5,914 crore. The firm has integrated Udipi Power Corporation during the quarter from April 21 and contributed Rs 569 crore to consolidated revenue. Though it posted Rs 418-crore loss during the quarter, its consolidated operating income was flat year-on-year (y-o-y) due to higher compensatory rates and impact of de-merger of the transmission business in the previous quarter.

The June quarter performance was largely in line with the Street's estimates. According to Reliance Securities, the loss was largely due to lower realisation and higher fuel costs. Though revenue was up 13 per cent y-o-y, operating margin was down 410 basis points to 26.9 per cent. Operating income was higher, thanks to higher realisations (up five per cent) and increased generation.

  Analysts believe integration of the 600-Mw Korba West Power Company, which Adani Power acquired from Avantha, would be beneficial as it has signed a power purchase agreement. Over the next 12 months, Adani could benefit from this.



With higher offtake of power, Adani would be able to recover its fixed costs as plant load factors would improve. The company has also managed to refinance the debt for a couple of its projects under the 5/25 scheme, which would help improve cash flows. Adani is also said to be looking at restructuring debt for other plants.

The compensatory rate  Adani has managed to get for its Tiroda and Rajasthan unit has helped the company clock Rs 4.1 per unit during the quarter, an improvement. Fuel costs increased 10 per cent to Rs 2.39 a unit, as coal supply continues to be an issue.



In the coming quarters, Udipi Power’s contribution will increase. Coal prices are unlikely to increase in the near term; so, benefits of imports will continue for Adani . The acquisition of Korba and subsequent signing of a power purchase agreement will be incrementally positive, as these rates will not regulated. Analysts are building in the compensatory rate into the company’s future earnings. In case, the judgment is not in favour of the company, it would be negative for the stock.