Adani Power - Key Issues Persist; Downgrade to "SELL" - Karvy

We believe that Adani Power (APL) continue to have the best execution capabilities in the private power utilities but due to INR depreciation and lower output from Bunyu mines has increased cost of generation.

Execution on Track amid Fuel Concerns: As APL's project execution has been on track, we expect the full commissioning of 9.2GW capacity by FY15E. Earlier, the Company obtained domestic linkage for its Mundra Projects (30% of requirements) & Tiroda Project, which has cancelled by the Coal Ministry.

Reliance on Spot Coal Imports: APL has been relying on spot imports, as coal output from the parent's captive Bunyu mines has been disappointing. APL has long term PPAs for Mundra is a zero pass-through for fuel costs, which have taken hit on profitability.

Least Impact of FSA: Though CIL has signed FSA with APL for Mundra-IV (1,980MW) to meet the partial requirements, but APL's other units depend on spot buying due to lower generation from Bunyu mines. Though 28% fall in global spot coal prices over last 12-15 months is positive, but it is negated by 20% depreciation in INR against the Greenback.

Disappointing Quarter Continues: APL has incurred Rs. 2.29 bn loss in Q2FY13, as against Rs. 7.93 bn in Q1FY13, while the fuel cost rose to Rs. 2.62 in Q2FY13 from Rs. 1.48 in Q2FY12 and 3.13 per kwh in Q1FY13 due to higher coal purchase from the spot markets and lower PLF. We believe this will continue going forward unless the output from Bunyu mines rises meaningfully or tariffs relief related to fixed PPA get revised upwards which is under CERC - both are likely to be time consuming.

Key Upside Risks:

- PPA renegotiation especially for Mundra-III (1,320MW out of which 1,000MW long-term PPA at Rs. 2.35/kWh with GUVNL), and

- Increased availability of domestic coal for Tiroda projects.

Outlook & Valuation

At the CMP, the stock is trading at 2.1x FY14E P/B, 13x P/E with a 16.4% RoE in FY14. We downgrade our recommendation on APL to "SELL" from "HOLD" as we believe that the stock is expensive, given high risks to its earnings. Adani Power has outperformed power index by 29% over the six months which has already factored the near term positives on the back of FSA from CIL & fall in International coal. We have arrived at fair value of Rs. 60 per share based on our DCF valuations for individual projects.

Source : Equity Bulls

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