Adani Enterprises

Investors with a two-three year horizon can consider fresh exposure to the stock of Adani Enterprises (AEL). The company has made a complete transition from low margin trading to becoming a holding company for the group's promising new forays into businesses such as power generation and ports.



At the current market price of Rs 619, the stock is trading at 16.6 times its estimated consolidated earnings for FY11. The market values of the company's stakes in Mundra Port and SEZ and Adani Power, which are 77.5 per cent and 73.5 per cent subsidiaries of AEL, alone work out to about Rs 596/share (factoring in a holding company discount of 20 per cent). Mundra Port has recently become a subsidiary of AEL.

Currently, AEL derives majority of its standalone income from coal trading, though it also has a presence in realty, agri-storage, gas distribution. It handled 28.8 million tonnes of coal in 2009-10. AEL's net profits (excluding MPSEZ's earnings) grew at 53.4 per cent compounded annually over the last three years while net sales grew by 37 per cent.

Prospects for the coal trading and mining businesses appear quite bright. Over the last one month, AEL has acquired mines in Australia's Galilee tenement with reserve of 7.8 billion tonnes and also obtained coal purchase rights for a minimum of 35 million tonnes/annum (MTPA), which may go up to 60 MTPA in Indonesia. In four years from now, AEL may mine as much as 160 MTPA from various mining assets. 160 MPTA of coal can support in excess of 35,000 MW of power capacity, opening up opportunities for the company to sell coal to upcoming power generators in India.

Most private projects are relying on imported coal for their power projects. In addition, the coal shortage for thermal power projects is expected to rise to 74 MTPA in 2011-12 and would go up to as high as 120 MPTA in 2012-13 once the projects slipped from eleventh plan to twelfth plan are also commissioned.

We expect both Adani Power and Mundra Port with huge growth potential in their respective sectors to contribute to substantial profit growth for AEL. AEL's arm — Adani Power with existing capacity of 990 MW is also set to add more than 9570 MW in phases until 2014. Similarly, Mundra Port is expected to double its capacity over the next three years with additional projects such as Hazira, Dahej and Murmugao, apart from overseas operations expected to be added on.

AEL has recently made investments of $455 million upfront for the Galilee tenements and $1.6 billion for Indonesian project. Further outgo towards a $2/ tonne royalty will be paid for 20 years once the coal mine in Australia gets fully operational. AEL has recently raised funds of Rs 5,500 crore through a QIP and rights issue. The debt-equity ratio (without accounting for rights and QIP issues) as on March 31, 2010 was 2.88.

via BL