Stock Review: Adani Power

The recent ruling by the state power regulator may have an adverse impact on income

The Gujarat Electricity Regulatory Commission (GERC) has ruled in favour of the state power distribution company, Gujarat Urja Vikas Nigam, and directed Adani Power to honour its power purchase agreement (PPA) to supply 1,000 Mw at `2.35 per unit for the next 25 years.

The PPA, signed in 2007, required Adani Power to arrange for the fuel, with no responsibility on the state distribution board for changes in the same. Hence, the unilateral cancellation will not hold. Now, Adani Power can either challenge this ruling or supply power at the decided rate and compromise on earnings.

According to analysts, Adani Power leveraged the cheap landed coal available from its parent, Adani Enterprises. The commitment was to supply coal with an average gross calorific value of 5,200 kcal/kg for the next 15 years at $36 a tonne. However, the coal received was of lower calorific value and had to be blended with the South African coal. Subsequently, the cost went up to $70 a tonne. This affected expenditure figures in the first quarter of the current financial year.

However, the merchant power rate of around `6.75 per unit was much higher than the `4.5 per unit estimated by industry watchers. This saved the day for Adani Power, despite a not-so-impressive plant load factor. With merchant power rates expected to remain soft over the next three years (barring intermittent spikes), the company will have to start looking at increasing volume, which it can as it has around 5.15 Gw projects under construction.

At the moment, there is a lot of optimism on the management's ability to execute projects at a fast clip using Chinese technology and labour. But, even this could come under a cloud. Analysts estimate that a 0.5 per cent decrease in rates drag earnings per share (EPS) by 10 per cent, while a 10 per cent rise in coal costs erodes EPS by 14 per cent. Given this, a5-10 per cent earnings downgrade is being reworked by analysts. They are also not ruling out its impact on Adani Enterprises, which owns 70 per cent in Adani Power.