Adani Power: A fair price

Even before the Adani Power issue was priced, several analysts had pointed out that the pre-placement price of Rs 111.50 per share, valuing the company at $5 billion post-issue, didn’t provide enough cushion for the potential risks. Despite the issue have been subscribed some 40 times, the stock actually dipped below the issue price of Rs 100 on Thursday.

Of course, the fact that the shares weren’t listed in the F&O segment would have made a difference to investors. Nevertheless, industry watchers believe there could be some execution risks relating either to the Chinese equipment or a time overrun. Given the background of the promoters, however, there are unlikely to be any problems related to coal. At the current price of Rs 204, NTPC trades at around 16 times estimated 2010-11 earnings and arguably, Adani should trade at a discount to NTPC, at a multiple of say 12 times forward.

For an estimated earnings per share of Rs 19, in 2014, the stock should then trade at around Rs 228 in 2013, which means that for 20 per cent return over four years, the stock should currently trade at around Rs 110. Since 6,600 Mw capacity will be commissioned only in 2012, investors are understandably cautious and closer to the commissioning, the discount between NTPC and Adani could narrow depending on how much capacity NTPC is able to add and what kind of merchant power tariffs Adani is able to command.