Facing a fuel crunch

Last week, Adani Power announced it was putting off its 6,500-Mw expansion plan, on short coal supply. The stock, which has dropped 50 per cent in the past year, touched a 52-week low of Rs 59.4, but has now recovered subsequently. But, the outlook will remain cautious till the fuel issue is resolved.

Equirus analyst Devam Modisays says in his Q2 analysis report, “Though the company enjoys static advantages of picture perfect execution skills and an integrated business model, it is facing coal procurement challenges in the form of unfavourable Indonesian regulations, rupee depreciation and domestic coal scarcity.”

Projects critical for growth
The expansion plan put on hold was being carried out at three locations — one in Madhya Pradesh and two in Gujarat — at about Rs 30,000 crore. These plants were in the development stage and are critical for growth after FY14.

The company has achieved financial closure, acquired the land and obtained most mandatory clearances, at a cost of Rs 500 crore. The total coal requirement for these projects is estimated at 25 million tonne-a-year, something the company hasn’t been able to source.

High fuel risk
Adani’s operational capacity of 3,300- Mw at Mundra (Gujarat), where it sources 70 per cent of its coal requirements from its parent Adani Enterprises’ Bunyu coal mine in Indonesia, will rise to 4,620 Mw shortly. Since Bunyu can meet requirements up to 3,000 Mw only, the company will have to depend on other foreign sources. It has bought stakes in two Australian coal mines, Galilee Coal and Abbot Point Coal Terminal) and domestic coal linkages.

While imported coal is costly and prone to regulatory and exchange rate risk, many new domestic coal linkages come with a clause that guarantees only 50 per cent of the requirement. Besides, Coal India’s production is falling short of demand and the PSU keeps revising its targets downwards.

Says Vijaykumar Bupathy, analyst, Spark Capital, “The fuel supply risk is high for the company and margins are likely to fall, as it will have to resort to e-auctioned coal or other imports at market prices.”

Clear short-term visibility
Though the projects under development are suffering, those under construction are progressing according to schedule. The company’s total capacity is set to reach 6,000 Mw after its Tiroda Phase-I and -II plants (660 Mw each) in Maharashtra (of the total target of 3,300 Mw) get operational by the end of this year. By FY13, the company is targeting a capacity of 10,000 Mw.

FUEL RISK
Rs crore	FY11	% chg	FY12E	% chg	FY13E	% chg
Net sales	2,135.0	390.8	5,251.6	146.0	11,004.8	109.6
Operating profit	1,220.0	400.0	2,946.3	141.5	5,416.0	83.8
Net profit	513.0	201.8	1,242.6	142.2	1,810.2	45.7
EPS (Rs)	2.4		5.7		8.3
E: Estimates  Source: Company, Analyst reports

Outlook and valuation
The company has certain advantages. First, it operates in the western region, where the power deficit is higher than elsewhere in the country. Second, its proportion of merchant sales is increasing (it rose from 10 per cent in earlier quarters to 36 per cent in Q2 FY12), along with higher rates. However, at the bottom line level, these advantages will be negated by higher fuel, interest and depreciation costs. But, at Rs 65, the valuation of 1.6 times the FY13 estimated book value seems to factor in the concerns.

The news about the company being shortlisted to develop four projects abroad worth Rs 19,000 crore with a total capacity of 3,792 Mw and its plans to invest an additional Rs 3,000 crore in solar power are long-term positives. HSBC has initiated coverage on Adani with an ‘overweight’ rating and a target price of Rs 85, as it feels the company has a strong track record of timely project completions, is well placed to mitigate fuel supply risk and is best positioned to grow among peers.