Stock Review: Adani Power

THE markets like predictability, especially when substantial capital expenditure is at stake. In times when projects of many independent power producers (IPPs) are stuck at different stages of execution, Adani Power is on a good wicket. The company is in an accelerated execution phase, with expected capacity of 4.6 Gw by the end of 201112, which will make it the largest private power producer in India. However, the company is unlikely to be hit by the usual hurdles faced by other IPPs over land and fuel linkages, as it plans to leverage strengths of its parent company, Adani Enterprises (AEL).

The Mundra project, which accounts for 4.6 Gw, is the most profitable project for Adani Power, claim analysts. The reason for this is that it has contracted fuel supplies from the parent company's captive mines in Indonesia at aCIF of $36 a tonne. This translates into a fuel cost of Rs 1-1.2 per unit. A shortfall in coal will be met by the parent company, which is India's largest coal importer/aggregator. Of the 16.5 Gw portfolio, projects of 10.6 Gw are being commissioned at Mundra and Dahej, where AEL has access to vast tracts of land thanks to its special economic zone development plans. The parent also has access to 8 billion tonnes of coal reserves in Australia and Indonesia.

What analysts like is the company's control over the logistics chain. Mundra Port will have a coal handling terminal with a capacity of 50 million tonnes and Dahej will have 15-20 million tonnes. No other power producer has these advantages. The company, according to analysts, is comfortably positioned to fund the pipeline of projects.

But the good news ends here. As far as fuel linkages are concerned, 6.8 Gw is based on domestic linkages, which exposes APL to availability risks in the interim. In recent times, coal production in India has been affected and power producers have had to run at lower plant load factors due to shortage of coal. Also coal prices have risen sharply in 2011, putting profitability of many power producers at risk.

Another risk comes from merchant contribution to profitability. The power purchase agreement (PPA) structure makes Adani Power vulnerable to fluctuating fuel costs and availability. A report by Motilal Oswal on the company explains: "Of the 9.2 Gw capacity, long-term PPAs have been contracted for 7.8 Gw and 1.4 Gw will be available on amerchant basis. Of the long-term PPAs, 4.7 Gw (3.4 Gw from Mundra and 1.3 Gw from Tiroda) have fixed energy charges. Thus, variations in fuel costs will have a direct impact on project profitability."