Adani Power: Risk-reward remains unfavourable

Despite recent buys, concern on power rates, demand continues

Even as uncertainties and concern on the power sector continue, Adani Power has been moving fast to consolidate and add to its generation capacity. On Monday, the company announced acquisition of a 600-Mw operational coal-based power plant of Avantha Power. This followed its acquisition of a 1,200-Mw Udupi power plant for Rs 6,000 crore from Lanco a few months ago. And, has executed a binding term sheet for the acquisition of 100 per cent shares of Korba West Power Company Ltd. The acquisition, which includes another 600-Mw plant under construction, comes at a cost of Rs 4,200 crore (enterprise value) and will raise Adani’s total capacity to 11,040 Mw. Valuations for the latest deal look reasonable, given the benchmark range of about Rs 4 crore per Mw.

While these moves will push Adani towards its capacity target of 20,000 Mw by 2020, what raises concern is that the acquisitions come at a time when uncertainty on rates continues and the demand environment remains weak. These issues are also putting pressure on realisations and plant load factor for the sector. Coal availability issues remain.

In the September quarter, fuel costs were higher than expected for Adani Power. This, along with higher interest costs, led to a loss of Rs 799 crore (against a Rs 1,072-crore loss in the year-ago period), despite factoring in the compensatory rates from various regulators to the tune of Rs 489 crore. While the company benefited from these, analysts at Emkay Global feel these projects are likely to make losses. They maintain the stock remains the most expensive private power utility, with a valuation of 3.3 times the FY15 estimated book value. Analysts at J M Financial, too, said their optimistic estimate of 17 per cent return on equity in FY17 (including the rate rise benefit) factored in current valuations (2.7 times the FY15 estimated book).

The balance sheet, too, remains highly leveraged, given debt of about Rs 42,000 crore (debt-equity ratio of 7.8) in September-end. Though there are talks of fund-raising, the company hasn't spelt out the details of how it will fund the acquisitions.

Following Monday’s deal, the stock closed at Rs 46.55, up 2.7 per cent.

Benefits in the near term remain few. Though consolidation is the only way forward for incumbents in the sector to grow fast, lack of clarity on various issues is a key overhang. As of now, the risk-reward seems unfavourable.