We maintain ?sell? on Adani Power with a target price of Rs 38 a share. However, higher availability of low-cost coal than factored in remains a risk to our investment thesis. Even as the compensatory tariff remains challenged at Appellate Tribunal for Electricity (APTEL), we would look out for improved capacity utilisation of the expanded capacity base.
We have revised our FY15 EPS estimate to a loss of Rs 3.2 a share (Rs 2.8 earlier) and our FY16e EPS loss increases to Rs 1.2 a share (v0.7 previously).
Our earnings revision is primarily driven by higher interest costs as seen during the quarter, even as we factor marginal improvement in underlying realisations and operating costs. Adani Power?s reported earnings included compensation towards under-recoveries (past and current) even as it stands disputed in the APTEL.
Despite the inclusion of the compensatory tariff, interest coverage remains low at 1.1x, with interest cost of Rs 3,600 crore in FY14. The inferior interest coverage reflects the large quantum of under-utilised capacities. APL needs to work aggressively to ramp up utilisation at newly commissioned capacities.
We note APL had average PLF of 69% in FY14. The company reported net sales of Rs 2,500 crore (45% y-o-y, 1% q-o-q), operating profits of Rs 550 crore (66% y-o-y, 1% q-o-q) and net profit of Rs 900 crore against our estimates of Rs 2,400 crore, Rs 550 crore and net losses of Rs 400 crore, respectively.
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