>ADANI POWER (CLSA)

Adani Power is setting up 6,600MW power capacity which will make it one of the largest private sector players by FY13. It has 70% power tied up in Case 1 bids and the balance 30% will be sold on merchant basis. Additional merchant sales before the start of long term PPAs are contingent to timely commissioning of the projects. The fuel supply for its projects is a mix of Indonesian coal (sourced from AEL at US$36/t cif) and coal linkages from Coal India. The Budget proposal of imposing a duty on power imported from SEZs (has 70% capacity in Mundra SEZ) to DTA is a risk. Initiate with a U-PF and TP of Rs111/sh.

■ Strong capacity addition over next three years
Adani Power has 6,600MW capacity under development which is targeted to be full commissioned by FY13. This will make Adani one of the largest private sector players in power generation. 70% of this capacity is located in Mundra SEZ (Gujarat) while the balance 30% is in Tiroda, Maharashtra. The company has plans to add more capacity in Gujarat at Dahej (1,980MW) and in Rajasthan at Kawai (1,320MW) and expand its Tiroda project to 3,300MW.

■ High exposure to merchant power in initial years
~30% of its capacity is untied in any long term PPA which the company intends to sell on a merchant basis. Apart from that, the company has window to sell more power on a short term basis where its projects gets commissioned before the start of the PPA date. Thus the timely commissioning of its capacities is absolutely necessary to take advantage of this window when the merchant tariffs are also likely to be relatively higher.

■ Fuel supply to be a mix of Indonesian and linkage coal
The fuel supply for its projects is a mix of Indonesian coal (sourced from Adani Enterprises at US$36/t cif Mundra) and coal linkage from Coal India. The coal block allocation (Lohara) for part of its requirements for Tiroda project has been cancelled by the MoEF and the company has recently got a linkage (tapering) in lieu of that. We have assumed a coal linkage for the full requirements of Tiroda project in our numbers.

■ Project execution/merchant tariff – key to stock performance
Our DCF based target price for Adani Power is Rs111/sh. We believe the capacity ramp up/ risks associated with the coal supplies (mainly the pricing) from Indonesia/ merchant tariffs are going to be the key for the stock performance. We have given the company benefit of doubt regarding the budget proposal of imposing a duty on power imported from SEZs to DTA (domestic tariff area) however we have assumed a MAT rate for taxation for the company (similar to other mega power projects) even though the company’s assessment is that it will have zero tax liability for the initial 10 years under the SEZ Act. Initiate with an Underperform.

To read the full report: ADANI POWER