>ADANI POWER (UBS)

■ Initiate coverage of Adani Power with a Buy rating
We are upbeat on the power generation growth story in India and believe the key positives for Adani Power are: 1) earnings could rise 5x from FY10 to FY12 with ROE a robust 25%+ in FY12E; 2) ROE versus P/BV appears attractive on a comparable basis (2.5x P/BV versus 25% ROE in FY11E); and 3) significant upside potential from merchant power (surplus power with producers, which is not tied in to any long-term PPAs) and new power plants/reinvestment.

■ Unparalleled execution capability; capacity expansion upside
We believe the company’s execution track record is unparalleled. Adani Power took only three years to commission its first power unit (330MW) and we expect the entire 6,600MW to be commissioned by end-FY13. It also has 3,300MW in an advanced stage of development and 5,280MW planned. This could provide significant upside to the share price in the medium to long term.

An emerging utility major

■ Core operating earnings to start in FY10
Based on rapid capacity additions we believe EPS growth will be significant, from Rs2.22 in FY10E to Rs11.24 in FY12E. In addition, the first few months of operation indicate that Adani Power’s 330MW unit has reached a 90%+ plant load factor. By FY15, we believe the company will become a major private sector power generation utility, despite being a late entrant to the sector.

■ Valuation: project-based DCF price target of Rs130
We derive our price target using a plant-by-plant DCF, assuming COE of 13.2%, a risk-free rate of 7.2% and beta of 1.2. Under development/planning capacity is the key upside potential and our valuation could rise 23% if we include these projects.

To read the full report: ADANI POWER