We maintain reduce on Adani Power (APL) with a target price of Rs 35. Our medium-/long-term earnings outlook for APL hinges on the final outcome of regulatory / legal events relating to PPAs and fuel sourcing. The ?compensatory tariffs? awarded by regulators could still be challenged in the appellate tribunal. On our FY14f earnings (not adjusted for the 20% equity dilution in Q1FY14) the stock trades at FY14f 1.4x P/B (1.8x P/B on Bloomberg consensus FY14 estimates).
The Maharashtra Electricity Regulatory Commission (MERC) directive to setup a committee to determine the quantum of a compensatory charge (if any), by evaluating several parameters of the ?disputed? PPA (including debt restructuring, APL securing alternative coal blocks / long-term coal linkage for full 1320MW capacity) is along similar lines as Central Electricity Regulator?s (CERC?s) decision in the case of APL?s Mundra PPAs.
Simultaneously, pegging the interim capacity charge (R0.989/kWh) below the bid capacity charge in the PPA (R1.44/kWh) by allowing only 50% of the RoE sought by APL is a potential indicator of lower than originally implied RoE being built into the compensatory charge.
Currently, our contribution from APL?s 1320MW PPA from Tiroda-I in FY14 builds in: a) project cost at R92.6 billion, b) supply at 75% utilization level at bid-tariffs (R2.55/kWh); c) Coal India supplies the minimum guaranteed domestic linkage coal, i.e., 65% of contracted quantity under the FSAs, balance coal requirement to be imported; d) landed cost of coal (blended) at ~R2,550 per tonne.
