>ADANI ENTERPRISES (IDFC SSKI)

HUNGARY FOR MORE!

Adani Enterprises (AEL) is redefining its business model and scale of operations. Moving away from low capex, lumpy and low-margin trading to capex heavy and high margin annuity businesses, AEL is emerging as an infrastructure conglomerate Rs421bn of revenues by FY12E). AEL plans to invest Rs300bn+ across sectors with 90% in power generation and coal mining by FY12. Commencement of power generation (total capacity of 6,600MW) and coal mining (75m tonnes at peak) imparts visibility of scale to what were ‘just potential opportunities’. While near-term risks pertain to execution and financial leverage, we derive comfort from AEL’s track record 8x revenue scale-up since FY02) and entrepreneurial vision. With current projects valued at Rs1,105-1,279 per share, and further upside likely as planned projects gain visibility as also from scale-up beyond the existing plans, we maintain Outperformer.

In quest of scale: AEL is transitioning from a Star Trading House (power, coal, agri, precious metals, scrap, etc) to an infrastructure conglomerate (power generation, coal mining, city gas distribution, oil & gas exploration, agri logistics, etc). A marked shift is underway from asset light businesses to asset creation, lumpy trading to annuity model and 5-6% margins to a 40%+ margin profile.

Power and coal businesses at the core: AEL is executing 6,600MW of power plants with 330MW capacity going on stream immediately and 1,320MW by FY10. In coal mining business, Indonesian mines with annual extract of 10m tonnes are operational and Indian mines (65m tonnes by FY16) would commission in FY11. Power generation and coal mining would account for 25% of revenues and 80% of EBITDA by FY12.

Execution the key; we see a winner: As AEL enters uncharted territories and creates scale
Rs421bn by FY12), execution will hold the key. However, timely commissioning of Mundra Port and power plants, position as India’s third largest power and largest coal trader, and promoters’ entrepreneurial acumen infuse confidence. Power would be the largest value creator with pre-money valuation of Rs204bn (Rs242bn post money). We value AEL’s existing projects at Rs1,105-1,279 per share (Rs688-862 for power and Rs221 for coal mining). Further upside could accrue as AEL capitalizes on the massive government thrust on infrastructure.

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