Stock Review: ADANI POWER

LOW plant load factor and lower realisation affected the December 2010 quarter earnings of Adani Power, underlining the general trend in the industry. The additional customs duty on sale of energy from SEZ to domestic tariff area added to its woes. Its December quarter net profit was down 13% compared with the September 2010 quarter in spite of 27% higher net sales. Most of its power generating capacity has come up in the last 12 months, hence it would be appropriate to compare the results on a quarter-on-quarter basis.

   In the December quarter, it added 330MW of power generating capacity, taking the total capacity to 1,320MW. The installed capacity has quadrupled from the year-ago period. But, net sales grew only 115%. Reduced capacity utilisation with plant load factor (PLF) at 85% in the December quarter and a drop in the average realised tariff to 2.9 per unit from 3.9 per unit last December were responsible for the sales growth lagging capacity growth.

   The government levied a customs duty of 0.1 per unit of power supplied from special economic zones to domestic tariff area in September 2010. This resulted in an additional cost of 15.5 crore during the quarter for the company for supplying power to Gujarat Urja Vikas Nigam.

   Future earnings will depend on timely commissioning of upcoming projects. The current valuation of 4.3 times book value factors in the earnings expected through pre-PPA merchant sales from its upcoming 3,300MW power generation capacity at higher rates. The current capacity is 1,320MW. The company has been very aggressive in capacity expansion and plans to add five more units of 660MW each — a total of 3300 MW by FY12 — at its Mundra and Tiroda projects. Any delay in project execution will lower the high valuations currently.

   Fuel availability is critical for the company. Its fuel cost fell to 36% of net sales in the December quarter, as against 42% in the year-ago period. However, this was mainly due to the continuing cheap coal supply from group company Adani Enterprises, which has coal mines in Indonesia and Australia. But for the upcoming projects, Adani Power is dependent on Coal India for fuel. With Coal India falling short of its production targets, it is likely that the company would need to source coal from open market at higher prices, which will affect its operating margins.

   The scrip is down 10% in the past month. In the coming quarters, it is critical for the company to commission its projects on time and ensure cost-effective fuel supplies.