Adani Power IPO - Analysis - Review

Pricing in next few years' growth

Wants to factor in the perfect execution of its plans to commission 6600MW in various phases by April 2012

Adani Power (APL), part of Adani Group and subsidiary of Adani Enterprises (AEL), is into power generation. The company is setting up power generation project both on its own and through special-purpose-vehicle (SPV) subsidiaries. Currently, it is gradually building two power generation projects with an aggregate capacity of 6,600 MW at an estimated cost of Rs 28369 crore at Mundra in Gujarat and Tiroda in Maharasthra. Post issue, the stake of AEL will be 70.25% compared with pre-issue holding of 81.53%.

The 4,620-MW Mundra Power Project (MPP) is to come up in four phases. It will be shown in the books of APL. However, the 1,980-MW Tiroda Power Project (TPP) is to be constructed by Adani Power Maharashtra (APML), a SPV and subsidiary of the company. Both the projects are to be fully completed by April 2012. The first and second unit of MPP involves setting up of four units of 330 MW each. The first 330-MW unit of phase I was recently synchronized with the grid. The remaining three units are expected to start operations shortly as phases I and II are scheduled to be fully commissioned by February 2010. Though the first two phases of MPP comprise smaller units with sub-critical parameters, phases III and IV are planned as supercritical units. While the 2X 660-MW phase III is to be fully completed by June 2011, the 3X660-MW phase IV is to be fully completed by April 2012. Earlier planned as a sector-specific special economic zone(SEZ), the MPP was later combined with the two-multi product SEZs developed by group company Mundra Port & SEZ (MPSEZL). The company has been notified as co-developer for the combined SEZ at Mundra, with MPSEZL as the developer.

The first phase of the TPP envisages setting up of two units of 660 MW each. The third 660-MW unit is being set up in the second phase. The Tiroda Power Project is to be fully completed by April 2012.

APL is to source its coal requirement for the MPP from group company AEL, one of the largest traders of coal in India. PT Adani Global, a wholly owned subsidiary of AEL, has entered into agreements to exclusively mine coal in Bunyu Island, Indonesia. For MPP, AEL proposes to procure coal from these mines in Indonesia. Under the coal supply agreement, AEL will supply 4.60 million tonnes of the requirement of 3.68 million tonnes for MPP's phase I and II, 4.04 million tones of the requirement of 4.06 million tonnes for MPP's phase III and 6.50 million tonnes of the requirement of 5.81 million tonnes for MPP's phase IV, with an average Gross Calofic Value (GCV) of 5,200 kilo calories per kg per annum for 15 years from the date of commencement of operation of the power project at USD 36 per tonne Cost, Insurance & Freight (cif) Mundra. In addition, the company received a letter from Mahanadi Coalfields (MCL) on 25 June 2009, provisionally agreeing to supply approximately 6.4 million tones of grade F coal to MPP's phase IV. However, as the TPP is not a coastal project, it is to be fired on domestic coal. The ministry of coal has allotted two coal blocks to the company so as to meet coal requirement of up to 1,000 MW of power generation. For the balance requirement, the SPV for TPP (i.e., APML) received letters from South Eastern Coalfields and Western Coalfields on 6 June 2009 and 1 June 2009 to provisionally supply approximately 2.5 million tonnes of grade F coal and 2.2 million tonnes of grade E coal for the Tiroda Power Project, respectively. The coal quantity to be supplied is conditional on APL achieving certain milestones over the next 24 months and signing of fuel supply agreements.

APL is to sell electricity from the proposed projects under a combination of long-term power purchase agreements (PPAs) and on merchant basis. The company has signed two long-term PPAs with Gujarat Urja Vikas Nigam (GUVNL), with the first being for the supply of 1,000 MW of power produced from the MPP's phase I and II, and the second for the supply of 1,000 MW of power produced from the MPP's phase III. Similarly, it has entered into two off-take agreements with Uttar Haryana Bijli Vitran Nigam and Dakshin Haryana Bijli Vitran Nigam for the sale of 1,424-MW power produced from MPP's phase IV. Another off-take arrangement is with Maharashtra State Electricity Distribution Company (MSEDCL) for supply of 1,320-MW power generated from the TPP. The surplus power in excess to off-take agreements will be sold on merchant basis and an agreement has been entered with AEL for selling up to 221 MW of surplus power from MPP's phase III on merchant basis. In addition, it may supply surplus power to various units within the MPSEZL.

APL is tapping the capital market to part finance the construction and development of the 1,980- MW MPP's phase IV to fund the equity requirement of subsidiary Adani Power Maharashtra that is setting up a 1,980-MW power plant at Tiroda, Maharashtra, and for general corporate purpose.

Strengths

Synchronized the first of the four units of MPP's (4X330 MW) phases I and II on 23 May 2009. The balance three units of MPP phases I and II are scheduled to be fully operational by February 2010.

Off-take risk mitigated as 72% of proposed generation capacity of its two power projects tied up under long term PPAs with state utilities. The balance surplus power is to be sold on merchant basis.

Proposes to sell about 1,856 MW, or 28%,of generation capacity under execution on merchant basis. After all the projects get commissioned, even at a plant load factor (PLF) of 85%, there will be a surplus of little over 850 MW. Given the current demand supply gap in the country, especially in the western region of the country, it is not difficult to sell this surplus at a higher price than the current PPAs. Agreement has been signed with AEL for selling up to 221 MW of surplus power from MPP's phase III on merchant basis. The balance might be sold to various units in MPSEZL.

Secured fuel linkage/ supply agreement for all phase of both MPP and TPP. Similarly, has made financial closure for all except TPP's phase II.

Being a co-developer of MPSEZL, entitled for tax benefits such as tax exemption under Section 80IA of the Income Tax Act, 1961, and complete exemption from minimum alternate tax (MAT) for MPP.

Except MPP phases I and II, all other units are based on supercritical technology and are eligible for clean development mechanism benefits. So far, has received host-country approval from the ministry of external affairs for MPP phase III and TPP's phase I.

Weaknesses

Core equipment of all power plants under execution is of Chinese origin, except MPP phase II, for which the core Boiler, Turbine and Generator (BTG) order has been placed with Kowa Company of Japan. Given the poor performance track record of Chinese power plant equipment in the country, the efficient and smooth operation of the power plant could be a cause for concern. If the power plant's availability falls below 75%, penalty has be paid under PPA. Also, power plants with Chinese equipment work better with imported coal compared to domestic coal. But the TPP is based on domestic coal. Hence, its operating and maintenance could turn out to be a cause for worry.

Lack of experience in executing large power projects is a major concern. While the fuel cost is a pass through, the fixed cost (captive cost) is not pass through in a competitive bid tariff system. Hence, unless capital cost is controlled and the project is executed well in time and within budget, profit will be impacted.

The New Indonesian Mineral and Coal Mining Law, approved by the Indonesian parliament in December 208 and signed by president on 12 January 2009, requires existing contracts to comply with the new mining law within one year with suitable modification even while allowing them to be valid until their expiry. The law is still at the drafting stage, awaiting presidential approval. Details are sketchy, and conditions such as specified percentage of coal mined should be set aside for domestic use could make the supply of coal for MPP uncertain. Though AEL could source from alternate sources, whether it will succeed in sourcing at US$ 36 per tonne is doubtful.

The TPP is yet to get the mega power project status and also environmental clearance.

Ability to sell surplus power, especially that generated by MPP's phases I and II, on merchant basis is subject to the right of first refusal by GUVNL, which has a firm off-take agreement for 1,000 MW of the total generation capacity of 1,320 MW of MPP's phases I and II. Under the firm off-take agreement, GUVNL has a right of first refusal on any additional or surplus capacity from the power project, provided the price for such power is equal to or less than the contracted price in the PPA with GUVNL. The right of first refusal will also not apply if (a) such surplus capacity is for own consumption or consumption by an Adani group company, or (b) the surplus capacity is contracted to be sold on a long-term basis to a government-controlled distribution licensee or to a government-controlled entity responsible for supplying bulk power to distribution licensees in Gujarat. This right of first refusal provided to GUVNL even prevents selling of surplus power to the units at MPSEZL so as to take advantage of better market price due to short-term demand-supply gap in the market.

Valuation

Currently, APL has no operational power plant except the modest 330-MW unit I of MPP's phase I, synchronized in May 2009. All others are either under execution or on the drawing board. This Unit I of MPP is expected to go on stream in July 2009, and the revenue generation is expected beyond July 2009. Given this background, the company has priced its offer in a price band of Rs 90 to Rs 100.

At the upper price band, APL will have a market capitalization of Rs 21800.35 crore compared with the current market capitalization of Rs 167053 and Rs 39475 crore of NTPC and Reliance Power (RPL). The market cap works out to Rs 3.30 crore per MW at the asking price of Rs 100. This is close to the level of NTPC, which commands a per MW valuation of Rs 3.35 crore with its proven track record in execution as well as operation of power plants. On the other hand, RPL, a player comparable with APL with all power plants under execution or on the drawing board, commands a valuation of Rs 1.23 crore per MW of project under execution. One should have experienced by now how market sensitive RPL, Tata Power and other power generation stocks with lofty plans are. In comparison, NTPC remains solid even in any big market gyrations. Till APL's plans are properly executed over the next few years, the stock will end up tracking the market and company-specific news