Adani Power IPO To Hit Market On July 28: Nirmal Bang
Adani Power Ltd. (APL) is a power project development company, which is developing, and will operate and maintain, power projects in India. The company has four thermal power projects under various stages of development, with a combined installed capacity of 6,600 MW. In addition, the company is also planning to develop two power projects with a combined installed capacity of 3,300 MW. APL intends to sell the power generated from these projects under a combination of long?term power purchase agreements to industrial and state?owned consumers and on merchant basis.
APL is a part of the Adani Group, a leading business group in India. Adani Group has a presence in high growth sector like Power, Infrastructure, Global Trading, Logistics and Energy etc. APL at present has four power projects under development:
Mundra Phase I and II Power Project: This project will have four sub?critical generation units of 330 MW each, with combined capacity of 1,320 MW. The first 330 MW unit of Mundra Phase I and II Power Project have commissioned in July 2009, and that the power project will be fully commissioned by February 2010.
Mundra Phase III Power Project: This project will have two super?critical generation units of 660 MW each, with combined capacity of 1,320 MW. The first 660 MW unit of Mundra Phase III Power Project will be commissioned by January 2011, and that the power project will be fully commissioned by June 2011.
Mundra Phase IV Power Project: This project will have three super?critical generation units of 660 MW each, with combined capacity of 1,980 MW. The first 660 MW unit of Mundra Phase IV Power Project will be commissioned by August 2011, and that the power project will be fully commissioned by April 2012.
Tiroda Power Project: This project will have three super?critical generation units of 660 MW each, with combined capacity of 1,980 MW. The first 660 MW unit of Tiroda Power Project will be commissioned by July 2011, and that the power project will be fully commissioned by April 2012.
In addition to this the company is also planning to develop two thermal power projects at Dahej and Kawai with a combined installed capacity of 3,300 MW.
Objects of the Issue:
To part finance the construction and development of Mundra Phase IV power project for 1980 MW.
Funding equity contribution in our subsidiary Adani Power Maharashtra Ltd. To part finance the construction and development cost of power project for 1980 MW at Tiroda, Maharashtra.
Demand supply mismatch of power to continue over long period : India is amongst the fastest growing economics globally and has grown at an average rate of 8.5% per annum during the last five years. The Indian power sector has historically been characterized by energy shortages which have been increasing over the years. In the period from April 2009 to May 2009, peak energy deficit was estimated to be at 12.3% and normative energy deficit was estimated to be 8.9%. In addition to this due to inadequate supply and distribution infrastructure the per capita consumption of energy in India is extremely low in comparison to most other parts of the world. In the implementation of the last three five year plans, covering fiscal years 1992 to 2006, less than 50% of the targeted additional energy capacity was added.
Mix of long term contract and merchant power sales will drive the profitability: APL is planning to sell electricity pursuant to a mix of off?take arrangements, including long?term power purchase agreements and merchant sales. The company intends to sell power to both state?run utility companies and industrial consumers pursuant to secured long?term off?take arrangements. It also intends to sell power on merchant basis. The company has entered into long?term PPAs for a total of 4,744 MW of power.
As such balance can be sold as merchant power in open market. The realization in long term agreement are based on return on equity of 16% with which unit selling price of power is around Rs.2.5 to Rs.3.5. On the other hand the current merchant power sales rates are around Rs.5.5 to Rs.6.5 per unit but carry a risk on account of off take of power. We believes that the combination of long?term and merchant arrangements will provide optimal returns to company.
Well Set for Implementation: APL is planning to set up four thermal based power plants of capacity 6600 MW by Apr?2012. The EPC and BTG contracts for all the plants are well in place along with the fuel linkages. The company has also entered into PPA agreement for a total of 4744 MW. For Mundra Phase I the 1st unit becomes operational in Jul?2009. By the end of FY 10 Mundra Phase I & II will become operational with a total power generation capacity of 1320 MW.
Delay in Execution of project: Power projects have long gestation periods due to the process involved in commissioning power projects. The schedule completion targets for power projects are estimates and are subject to delays as a results of, contractor performance shortfalls, unforeseen engineering problems, dispute with workers, availability of financing, unanticipated cost increase or change in scope and inability in obtaining certain property rights, fuel supply and government approvals, any of which could give rise to cost overruns or the termination of a power projects development. The timely execution of the projects is very important for generating any kind of revenue.
Difficulty in procuring fuel: Of the 6 power projects plans rolled out by APL all are coal based. The company has been allotted a few coal blocks by the GOI and has procured coal blocks in Indonesia also. The company may have to look at other options if it fails to procure fuel for firing up its power plants.
BTG from China: The BTG and EPC contracts of the four power plants have been awarded to various Chinese companies by APL. Poor performance of the Chinese equipments or any delay in the delivery of the equipments from the supplier can adversely affect the execution and implementation of the power plants.
Forex Risk: The Company has entered into certain EPC contracts for various project developments, the payments under these contracts are denominated in foreign currencies and secured by a letter of credit. In addition coal supply agreement with AEL is denominated in US dollars. Accordingly, any depreciation of the rupee against these currencies will significantly increase the rupee cost to company of servicing and repaying foreign currency payables.
Valuation & Recommendation:
We believe that Reliance Power is the best comparable company as both the companies are implementing large power plants and do not have any existing operational revenue generation. We tried to compare both the company on the basis of Enterprise Value(EV) per MW On EV/ MW APL is cheaper than Reliance Power.
Apart from this APL has advantage of faster power plant coming in operation which will translate into higher profitability and higher net worth to support future expansion.