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

India Strategy - Earnings

India Strategy - Earnings

Weekly Watch - July 25 2009

Weekly Watch - July 25 2009

SBI gets a nod for raising Rs170bn: report

State Bank of India (SBI) has reportedly been allowed to raise funds through public issue of fresh equity shares, thereby leading to dilution of the Government's stake to 51% from 59.4% at present. In the process, SBI can raise over Rs170bn at its present share price of Rs1,708. According to reports, SBI has approached the Finance Ministry to get its approval for raising funds to support its business growth. The public sector bank's capital adequacy ratio (CAR) stands at 12.97% under the Basel I norms. As SBI's deposits are likely to grow at over 20% in the current financial year, its CAR will fall to around 10%. However, as per the Finance Ministry's prudential norms, all the banks should maintain a CAR of 12%. SBI said it would like to maintain its CAR at 13%. To attain this target, it has to raise funds from the markets, added the reports

UK economy contracts more than expected in Q2

The UK economy shrank at more than twice the pace expected in the second quarter due to persistent weakness in crucial sectors such as construction, banking and business services. Gross Domestic Product (GDP) contracted 0.8% in the April-June quarter from the first quarter, the Office for National Statistics said. Economists had predicted a 0.3% drop, according to the median forecasts of economists. From a year earlier, the British economy shrank 5.6%, the most since records began in 1955. The pound dropped as much as 0.5% against the dollar after the report.

The figures underscore the possibility that the Bank of England could still move to expand its 125 billion pound (US$205bn) asset-purchase facility, economists said. Bank policy makers earlier this month deferred a decision on whether to expand the quantitative-easing program to the full 150 billion pounds authorized by the Treasury. Today’s report is the first among the Group of Seven (G7) nations for the second quarter. The International Monetary Fund (IMF) forecasts that the UK will contract 4.2% this year, compared with 4.8% in the euro area and 2.6% in the US.

Prime Minister Gordon Brown said that the G20 nations need to take steps to revive the world economy. "We are at a point where banks have been stabilized, but we don’t yet have a strategy for a return to growth," Brown said at the opening of a meeting in his office in London.

RCOM, Etisalat sign infra sharing pact

Etisalat DB and Reliance Communications (RCOM) announced a long term passive infrastructure sharing agreement which will accelerate Etisalat Telecom's forthcoming roll-out of telecom services in India. Under the terms of the agreements, Etisalat and its subsidiary would outsource their Telecom infrastructure requirements for the 15 telecom circles, encompassing end-to-end tower and transmission infrastructure to Reliance Infratel Ltd. and RCOM, respectively. RCOM would offer about ,000 towers to Etisalat for hosting latter's passive and other telecom infrastructure services. RCOM would deliver the first batch of towers in the next 60-90 days while the complete ramp up would occur over the next 18 months. In return, Reliance Infratel would receive steady state annual revenues to the tune of Rs10-12bn (ex-pass through charges) for a period of 10 years. Incremental revenue flow from the deal would occur only from Q4 FY11.

Sun Pharma arm faces class action suit in US suit

Shares of Sun Pharmaceutical slid on July 23 amid reports that a class action law suit has been filed in the US District Court against its arm Caraco Pharma. According to reports, US-based law firm Izard LLP has filed the case on behalf of some of Caraco's shareholders in a Michigan court on July 17 for allegedly not disclosing adequate information about US regulatory action that hurt its shares. Earlier on June 25, the US Food and Drug Administration (FDA) had seized all drug products manufactured by generic drug maker Caraco at its Michigan facilities in Detroit following repeated violations of the manufacturing standards. The USFDA started inspections at Caraco’s Michigan plant in May 2008 and issued Form 483, a special form that points out deviations during inspections from the standard US manufacturing practice. Caraco received a warning letter last November for not addressing the problems. In March, Caraco voluntarily recalled the entire batch of Digoxin tablets used to treat heart failure and abnormal heart rhythms due to size variability.

Mobile No. Portability only by year end only

The Government may now allow mobile number portability (MNP) by the end of the year 2009, Telecom Secretary Siddhartha Behura said at a summit organised by the industry body ASSOCHAM. The MNP was slated to come into effect in metros and large states on September 20, and the rest of the country by March 2010. The process for rolling out MNP in India has already started with telecom regulator TRAI inviting industry suggestions on MNP charges. These charges would decide the amount a customer would have to pay to a service provider while switching over to another operator. The Department of Telecommunications (DoT) has also awarded licences to two companies to implement the rollout of MNP. Once implemented, MNP would allow subscribers to retain their existing mobile number while changing the service provider. Commenting on the auction of third generation (3G) telecom services, Behura said that the issue of the reserve price for 3G spectrum auction would be decided when the Empowered Group of Ministers (EGoM) meets on July 31. The DoT and the Finance Ministry had earlier reached a consensus on the reserve price, but the matter was later referred to a ministerial panel headed by Finance Minister Pranab Mukherjee.

Govt imposes 3-year lock-in for new telcos

The Government imposed a three-year lock-in clause on stake sales by the promoters of telecom companies that were granted new Universal Access Service Licences (UASL) last year. The UASL holders will have a lock-in period of three years or till the fulfillment of rollout obligations, whichever is earlier, before promoters can sell their equity stake. The clause will be imposed on promoters with equity stake of 10% or more and whose net worth has been considered for determining the eligibility for grant of a UASL.

The Centre said this clause would not apply if telecom companies were to issue fresh share capital to investors and foreign telecom companies. Issue of additional equity shares by a UASL licensee through private placement or a public issue is permitted and is not subject to a lock-in. In case of fresh issuance within the lock-in period, declaration of dividend or special dividend shall not be permitted. The provision for lock-in period will not apply in pursuance with the enforcement of a pledge by lending financial institutions in the event of defaults committed by a UASL company.

The move will impact promoters of companies like Swan (Etisalat DB), Sistema Shyam, Datacom, STel, Loop and Unitech, which acquired Universal Access Service Licences in early 2008. But the lock-in will not impact the agreements already entered into by companies such as Swan, STel and Unitech. Swan had offloaded a 45% stake to UAE’s Etisalat for US$900mn, Unitech divested up to 67.25% in its telecom venture to Norway’s Telenor for US$1.1bn, while STel had sold a 49% stake to Bahrain’s Batelco for about US$225mn.

April-June net direct tax collections up 3.65% yoy

The net direct tax collections during the first quarter of the current fiscal year (up to June 2009) stood at Rs594bn, up from Rs574bn in the same period last fiscal, registering a growth of 3.65%. Growth in Corporate Taxes was 3.31% at Rs357.1bn as against Rs345.6bn, while Personal Income Tax (including FBT and STT) grew by 4.38% at Rs245.6bn as against Rs227.8bn in the year-ago period. Lower growth in net tax collection was mainly on account of higher tax refund outgo of Rs176bn, up 52% as against Rs115.7bn in the first quarter of last fiscal year.

Fringe Benefit Tax (FBT) shrunk by 7.56% to Rs10.3bn from Rs11.15bn in Q1 FY09 and the Securities Transaction Tax (STT) declined by 9.9% to Rs14.62bn from Rs16.23bn in the corresponding period last fiscal. Net tax collection during June 2009 as well as TDS growth, however, remained positive. Net collection during June 2009 stood at Rs353bn compared to net collection of Rs345.3bn during June 2008. Growth in Corporate TDS was 12.1% at Rs195.8bn as against Rs174.7bn last year and non-government PIT TDS growth was 12.4% at Rs.211.8bn compared to Rs188.4bn last year.

Inflation falls for sixth straight week

India's benchmark inflation, as measured by the wholesale price index (WPI), stood at -1.17% in the week ended July 11, as compared to -1.21% in the previous week, the Government said. Inflation was at 12.13% during the week ended July 12, 2008.

The Government also announced that it has revised inflation for the week ended May 16 to 1.65% from the preliminary forecast of 0.61% while the WPI for the same period stood revised at 234.6 as compared to 232.2. This is the fifth consecutive week in which provisional data was revised upwards by more than one percentage point.

The WPI for 'All Commodities' for the week ended 11th July rose by 0.1% to 236.7. The index for 'Primary Articles' group rose by 0.7% to 260.3 while the index for 'Food Articles' group rose by 0.9% to 255.9 and the index for ‘Non-Food Articles’ group rose by 0.3% to 238.4. The index for 'Fuel & Power' group rose by 0.1% to 338.4 while the index for 'Manufactured Products' group declined by 0.1% to 205.9.

The All-India Consumer Price Index (CPI) for Agricultural Labourers and Rural Labourers for June 2009 increased by 9 points each to stand at 484 points for both the series. The point to point rate of inflation based on the CPI-AL and CPI-RL increased from 10.21% in May 2009 for both the series to 11.52% and 11.26% respectively during June. Respective rates of inflation during June 2008 were 8.77% and 8.75%.

The wide divergence between different measures of inflation will complicate monetary policy. The Government is working on revamping the inflation series by incorporating more commodities in WPI and updating the base years of both CPI and WPI, which should be available soon. The biggest reason for the divergence is that food prices have a higher weighting in CPI as compared to WPI. Food price inflation is currently running at 9%.

Weekly stock Picks - July 25 2009

Buy LITL

Buy Neyveli Lignite

Buy Glenmark

Buy Moser Baer

Buy Tulip

Weekly Newsletter - July 25 2009

The budget blues seem to have been washed away thanks to the high tide on the Street. Positive comments from the government, broadly better results from India Inc., showers of blessings in terms of rain and encouraging core sector growth data have matched the mood of global markets moving up. FIIs too seem to be approaching the market positively for now.

Wild swings are expected next week, especially with the F&O expiry coming up. While earnings have brought glee in most cases, some RIL numbers seem to be on the lower side and could add to the volatility. Profit booking at higher levels remains on the cards. Stay tuned to the global cues and tread cautiously, as the current upsurge could meet some resistance sooner or later.

The RBI will announce its quarterly update on monetary policy on July 28th. The markets are divided on whether the central bank will tinker with policy rates or not. Even if it does, the revision is not likely to be a major one. What one needs to listen/read carefully is what the RBI chief has to say on the economy and any possible hints on future course of action, especially with inflation likely to spike towards the end of the year.

Key results to be announced next week: Titan, Areva T&D, Karnataka Bank, Dabur, Century Textiles, Chennai Petro, Cadila, BoB, RCF, EIH, NTPC, Ashok Leyland, BOI, Tata Motors, BPCL, GVK Power, Mundra Port, 3i Infotech, Grasim, Tata Tea, GMDC, REC, Neyveli Lignite, HUL, EKC, Cairn, Hero Honda, Aditya Birla Nuvo, PNB, Lupin, Godrej Ind, IGL, Sun Pharma, GSK Pharma, IVRCL, HPCL, Sesa Goa, Corp Bank, Jindal Steel, NMDC, IOB, RNRL, RPower, HDIL, Power Grid, IRB Infra, Cipla, Tata Steel, Sterlite, SCI, M&M, IOC, Nestle, UCO Bank, SAIL, Tata Chem, Voltas, Rel Infra, Moser Baer, JP Hydro, Tata Power, ABB, Nalco, Hindalco, Indian Hotels, Divis Lab, Videocon Ind, Rel Capital, RCom and GE Shipping.

SC to hear RIL-RNRL case on Sept 1

The Supreme Court said that the next hearing in the long-standing gas dispute between Reliance Industries (RIL) and Reliance Natural Resources (RNRL) would take place on September 1. The apex court said it would hear all the parties on the same day. The role of the Government and all the other third parties would be decided after the September 1 hearing. The apex court turned down RNRL's plea to reject the Government's petition, seeking to become an independent party in the Krishna Godavari gas dispute. A two-judge bench, headed by Chief Justice K.G. Balakrishnan heard arguments on gas allocation by RIL, RNRL, the Government and some independent power companies. The Supreme Court directed the matter to a three-judge bench, which will now hear the case on Sept. 1.

Earlier, Anil Ambani wrote a letter Prime Minister Dr. Manmohan Singh, alleging that the Petroleum Ministry is interfering in a commercial dispute over buying gas from RIL. The junior of the two estranged Ambani brothers accused the Petroleum Ministry of siding with Mukesh Ambani's RIL against his group company, RNRL. Ambani asked the Prime Minister to direct the Petroleum Ministry and the Directorate General of Hydrocarbons (DGH) to stop intervening in the dispute except to interpret the production-sharing contract, which determines the Government’s rights and entitlements from the gas produced at a field operated by RIL. He also assured the Government that the legal battle between RIL and RNRL over gas from the KG Basin would not hurt national interest.

The Government last week increased its involvement in the gas dispute between the two Ambani brothers by filing a special leave petition (SLP) in the Supreme Court, asking it to quash the MoU signed between the two estranged brothers in 2005. The sovereign right of the Government over gas and the production sharing contract between the Union of India and RIL, the contractor, will gain precedence over the private MoU in larger public interest, the Centre said. The MoU between the two brothers be treated illegal and declared null and void as it treated the gas as a personal and family property of the signatories, it added.

The MoU, as is now well known, requires RIL to supply gas to RNRL at US$2.34 per million British thermal unit (mmBtu). RNRL has laid claim to 28 million standard cubic metres a day (mmscmd) of gas from RIL at a price of US$2.34 per mmBtu for 17 years. RIL, on its part, has said that the agreement is not binding as it is only a contractor for the KG basin gas and has added that this price was rejected by the petroleum ministry which has fixed a higher price of US$4.2 mmBtu. The family agreement was upheld by the Bombay High Court on June 15. However, RIL made an appeal into the Supreme Court against that order. The Supreme Court will hear the matter on July 20.

Monsoon 15% above normal in week ended July 22: IMD

Rainfall from the southwest monsoon was 15% above normal in the week ended July 22, according to the Indian Meteorological Department (IMD). This is the second consecutive week of above-average rainfall after a fairly long delay in arrival this season. Total rainfall since the beginning of June was 19% below average, improving from a 27% deficit in the previous week, the IMD said. Seventeen IMD subdivisions received ‘excess or normal’ category, while an equal number got ‘deficient' rainfall. The remaining two — Haryana, Chandigarh and Delhi (deficit of 65%) and Bihar (64%) — recorded scanty rainfall. Higher rainfall filled up in main reservoirs to 23% of capacity in the past seven days, up from 14% a week ago.

But rainfall was scarce in Uttar Pradesh, and the weather office has forecast only scattered showers in the sugarcane-growing state. Widespread showers are forecast for Gujarat, Maharashtra and Madhya Pradesh, the nation's main cotton and oilseeds regions. Widespread rainfall activity is likely with heavy to very heavy rainfall at a few places over North Konkan during the next 24 hours and over Gujarat during the next 2-3 days, according to the latest IMD forecast. Subdued rainfall activity is likely over central and adjoining east and Peninsular India during the next 2-3 days.

Fairly widespread to widespread rainfall activity with isolated heavy falls is likely over northeastern states, the weather bureau said. Fairly widespread rainfall activity is likely over foot hills of Himalayas and parts of plains of northwest India, it added. Heavy to very heavy rainfall at isolated places over Andaman & Nicobar Islands during next 48 hours, the IMD said.