Adani Power has seen significant de-rating in the last month, with its stock falling about 18 per cent. Its results for the quarter ended June, too, disappointed. The company reported a loss of about Rs 800 crore, of which Rs 210 crore was related to foreign exchange. After the results were announced, most analysts rated the stock as ‘sell’, owing to concern on high debt and interest costs, falling plant load factor (PLF), rising fuel costs and delay in a few projects.
"We believe the company continues to have the best execution capabilities in the private institutional placement programme space, but cost overruns at Mundra (15 per cent more than the original project cost) are likely to increase the cost of generation. We cut our FY14 earnings per share estimate 64 per cent, well below consensus," Sumit Kishore, who tracks the company at JP Morgan, stated in a report. Because of the uncertainties, analysts estimates vary sharply. For instance, for FY13, estimates for revenues range Rs 7,800-10,000 crore while for bottom line it ranges from a profit of Rs 220 crore to a loss of Rs 1,078 crore.
In terms of valuations, considering the recent fall, there may not be many downside risks to current levels. However, analysts are advising caution. At Rs 43, the stock is trading at about eight times its earnings and 1.3 times the book value, based on FY14 estimates. Until clarity emerges on these issues, the stock is likely to lag the broader markets.
| COST PRESSURES | |||
| in Rs crore | Q1’ FY13 | Q1’ FY12 | % YoY chg |
| Units produced (mln) | 5,079 | 3,193 | 59.1 |
| Units sold (mln) | 4,546 | 2,898 | 56.9 |
| Plant load factor (%) | 63 | 74 | 1,100 bps |
| Revenues | 1,463 | 819 | 78.7 |
| Fuel Cost per unit (Rs) | 2.8 | 1.04 | 168.3 |
| Ebitda | -121 | 410 | NA |
| Net profit | -793 | 177 | NA |
| Standalone financials Source: Company, Analyst reports | |||
Operational issues
In the recent past, the company has seen lower PLF (52-63 per cent in the last four quarters, compared with 70-90 per cent earlier), partly due to lack of transmission infrastructure, which hit evacuation of power. PLF was also hit by low demand for costly power, fuelled by expensive imported coal. Due to low supplies from its captive mines in Indonesia, the company had to purchase about 67 per cent of its coal requirement from the spot market.
The June quarter was no different. Higher coal costs and a depreciating rupee led to fuel cost of Rs 2.8 per unit in the quarter ended June, a rise of 168.3 per cent compared to the year-ago period and more than analysts’ estimates.
Resolving key issues is crucial to achieving stability. Recently, CRISIL had downgraded Adani Power's bank facilities, stating the company's performance was likely to remain under pressure, as it would have to continue relying on expensive imported coal over the near to medium term, while power was sold at fixed rates. The rating agency also stated the company would remain vulnerable to the depreciation in the rupee because of its large, un-hedged foreign currency debt of $2.5 billion (Rs 13,868 crore). The rupee's depreciation, along with delays in some projects, has resulted in an increase in project costs.
Analysts believe this may not immediately result in cash outflow, though it may raise leverage (net debt to equity was about four times in FY12) and increase interest costs. Therefore, they expect dilution, as the company might have to raise equity to keep its debt under control.
Outlook
Low availability of coal, coupled with policy woes, is likely to hit Adani Power's upcoming projects, which are already delayed. However, with Coal India expected to sign fuel supply agreements at 80 per cent supply levels and pooling of coal prices, the 1,980 Mw Tiroda and the 1,980 Mw Mundra-4 plants could get a boost, as these have coal linkages.
Nevertheless, analysts have lowered their earnings expectations. This shows the lower-than-expected capacity addition, higher fuel costs, an increase in interest costs and the fall in realisations due to low merchant rates.
