While the growth visibility is reasonably good, the offer leaves no meaningful gains for investors in the near-term.
Even as there are quite a few power generation companies listed on the bourses and some others are aiming a listing through the primary market route, Adani Power (APL), analysts believe, stands out on a few counts. For one, since majority of its power projects have tied-up their funding needs as well as have got the necessary clearances, it provides higher visibility. Secondly, given APL’s and Adani group’s integrated business model which spans from access to low-cost coal from captive mines to shipping, ports, power generation and finally to transmission adds to the confidence.
While the underlying risks of project execution (within stated time and costs) and operational parameters (given that all projects will use Chinese equipment) hover, the offer price isn’t cheap.
Higher visibility
Adani Power is a part of the Adani group, which already has two companies listed on the stock exchanges; Adani Enterprises and Mundra Port & Special Economic Zone (MPSEZL). Adani Power is in the power generation business, and has a project each under development in Mundra (Gujarat; four phases) and Tiroda (Maharashtra; two phases). For now, APL has just 330 mw of operational power generation capacity, which is a part of Mundra project’s Phase I & II and was commissioned in May 2009.
However, as the different projects go on stream in phases by April 2012, expect the company’s capacity to rise to 6,600 mw (see chart Project Pipeline). The good part is that the company has tied up for most of its debt requirements. While a part of the equity capital has been contributed by promoters, the proposed IPO is estimated to provide the balance contribution of about Rs 2,715-3,100 crore to part finance the Mundra Phase-IV (1,980 mw) and Tiroda power (1,980 mw) projects.
Clear advantages
A key positive, believe analysts, is that the long-term fuel linkages and power purchase agreements (sale of power) for the projects are in place. “The good thing is that the company has got everything in place for these projects like approvals, land, fuel, funds and other clearances, which boost confidence and visibility,” says Mehul Mukati, analyst, Emkay Share Broking. A notable advantage is APL’s access to cheap fuel supply. Its Tiroda project will be using coal produced domestically from the Lohara (Maharashtra) mine, with estimated coal reserves of 170 million tonnes.
The company's Mundra power projects (combined capacity of 4,620 mw) will however, source imported coal from Adani Enterprises, which has coal mining contracts in Indonesia. The landed cost of the Indonesian coal is relatively cheaper at $36 per tonne, which should help keep costs under check. Since APL is situated near the Mundra Port it would also gain on the logistics front.
| POWER STATS | ||||
| Project | Mundra 1-2 | Mundra-3 | Mundra-4 | Tiroda |
| Capacity (MW) | 1,320 | 1,320 | 1,980 | 1,980 |
| Project cost (Rs cr) | 4,350 | 5,796 | 8,960 | 9263.00 |
| PPA & Tariff | 1,000 mw with GUVNL, Tariff from Rs 2.81/ unit to Rs 3.42/ unit in 25th year. | 1,000 mw to GUVNL at Rs 2.35/ unit and 221 mw to Adani Enterprises at market rates | 1,424 mw to UHBVNL and DHBNNL at Rs 2.35-3.26/unit. 556 mw on merchant sales | 1,320 mw to MSEDCL at Rs 2.55-3.47/unit. 660 mw for merchant sales |
| Fuel | Imported coal | Imported coal | Imported coal | Domestic coal |
| Equipment status | BTG, BOP with Chinese company, SCMEC | EPC with Chinese company, SEPCO | EPCwith SEPCO | BTG, BOP with SCMEC |
| Comment | Acquired land, water and environment clearance | Acquired land, water and environment clearance | Acquired land, and environment clearance | Partly acquired the land environment clearance |
Put together, after accounting for cheaper imported coal, interest and depreciation, the company’s power generation cost is estimated at about Rs 1.85 per unit. This could provide good margins considering that APL has long-term power purchase agreements (70 per cent of total capacity) with different state utilities at an average sale price of Rs 2.75 per unit. This could also mean higher return on equity (RoE), a parameter that indicates efficiency of capital employed and future cash flow from the business. Typically, companies which consistently generate higher RoE tend to enjoy premium valuations.
Better returns
Analysts believe that Adani Power’s RoE could range 22-25 per cent, which is significantly higher as compared to 14-16 per cent earned under regulated tariffs. Among other reasons for high RoE estimates is that the company aims to utilise 30 per cent of its total capacity for merchant power sales, which currently trades at about Rs 6-8 per unit. While analysts believe these high rates are not sustainable, they expect it to range Rs 3-4 per unit going ahead (post 2011-12). This is primarily given that India is a power deficit country, wherein Gujarat and Maharashtra (where APL is setting up its power capacities) have historically faced peak power shortage of 15-25 per cent.
Conclusion
Even as the company enjoys some advantages and a better return profile, there are challenges as well. The company will be procuring all the power equipments for the planned capacities from Chinese manufacturers. As such, there is a difference of opinion among certain sections on whether the Chinese equipments are suitable to operate at high utilisation rates under Indian conditions. Besides, while the capital cost is estimated to be cheaper, the life-cycle cost may not be so.
With few power plants in the country, which use such equipments and that too with a short operating track-record, it may take a few years before things get crystal clear. Additionally, fluctuation in the rupee-dollar exchange rate will also have an impact on the landed cost of imported coal and thus, the cost of production and RoE of the projects. Regarding valuations, assuming that the projects get completed on time and within projected costs, analysts have estimated the net present value (NPV) of future cash flows from these projects between Rs 75 and Rs 85 per share.
Adding another Rs 12.50 to Rs 14 per share as a result of the cash raised through the proposed offer, the final value could be about Rs 88-100 per share, which is more or less equal to its IPO price band of Rs 90-100 per share. Thus, there aren’t any meaningful gains for investors in the near-term. Even as compared to peers, the IPO pricing is unattractive. However, the long-term upside could come in the form of power projects equivalent to 3,300 mw, which are currently under the planning stages and have not been factored by analysts while arriving at APL’s valuations. Overall, only those with a long-term perspective and an appetite for risk may look to invest in this IPO.
