Equity Research INDIA

May 7, 2018
BSE Sensex: 35208
Adani Power REDUCE
ICICI Securities Limited Downgrade from Hold
is the author and SHAKTI to provide some respite; Mundra resolution
distributor of this report
remains critical Rs25
Reason for report: Q4FY18 result review and recommendation change
Power Adani Power’s adjusted Q4FY18 EBITDA of Rs923mn was down 93% YoY, missing
our estimate by 72%. The EBITDA underperformance was driven by: 1) lower than
expected adjusted realisations (Rs3.6/kWhr in Q4FY18 vs our estimate of
Target price Rs24 Rs3.9/kWhr) and higher than expected other expenditure. As a result, the
company’s adjusted net loss deteriorated from Rs9bn in Q4FY17 to Rs18.6bn in
Earnings revision
Q4FY18, missing our loss estimate of Rs16.5bn. During the quarter, Adani Power
(%) FY19E
Sales ↑ 1.6 booked one-time ‘change in law’ income worth Rs6.6bn on favourable order post
EBITDA ↓ 1.4 commissioning of FGD at Mundra and Compensatory Tariff (CT) / force majeure
EPS NM (FM) relief worth Rs2.5bn at its Tiroda and Kawai plants for losses incurred due to
shortage of domestic coal.
Target price revision  Mundra commercial shutdown strategic as penalties would be lower than
Rs24 from Rs27
losses: Adani Power’s management justified its decision to take a commercial
Shareholding pattern shutdown at Mundra as the penalty on non-supply of power, which could be imposed
Sep Dec Mar as per the PPA, will be lower than the losses which would be incurred on operating
‘17 ‘17 ‘18 Mundra at current international coal prices. In FY18, Gujarat imposed a penalty of
Promoters 69.5 71.6 73.1
Institutional
Rs970mn for not meeting the minimum power supply norms under the PPA.
investors 23.2 21.9 20.4  Company caught in a difficult spot on Korba West acquisition: Adani Power had
MFs and UTI 0.4 0.7 0.9
FIs/Banks 1.8 1.8 1.8 acquired Avantha Power’s Korba West 600MW power plant in Mar’15. However,
FIIs 14.5 19.4 17.7 before transfer of stake could take place, lenders of Avantha Power converted part of
Others 7.3 6.5 6.5
Source: NSE their debt into equity, taking over 51% controlling stake of the plant. Adani Power
was offered 49% stake and operational control of the power plant, which the
Price chart company accepted. However, with increased possibility of Korba West power plant
50 going to NCLT for resolution, Adani Power as part owner would not have been
45 eligible to participate in the bidding process. Hence, it will take over the stake in the
40 asset only after resolution is completed.
35  Jharkhand project update: Company’s 1,600MW Godda thermal project (for supply
(Rs)

30
25
of power to Bangladesh) has received all necessary clearances and land acquisition
20 is currently underway. The USD-denominated Rs134.5bn project, which will involve
15 construction of an isolated power transmission system from Godda to Bangladesh,
10 will be based on imported coal.
Nov-15

Nov-16

Nov-17
May-16

May-18
May-15

May-17

 Downgrade to REDUCE with a revised SoTP-based target price of Rs24/share

given the following concerns: i) Mundra PPAs have become unviable post Supreme
Court’s adverse ruling, ii) the company’s balance sheet is stretched post CT write-off,
and iii) APL’s aggressive inorganic expansion plans. Risks of INR depreciation, lower
merchant utilisation, and increasing coal prices could impact financials. However,
resolution or demerger of Mundra could be a potential rerating catalyst.
Market Cap Rs97bn/US$1.4bn Year to Mar Consol FY17 FY18 FY19E FY20E
Reuters/Bloomberg ADAN.BO/ADANI IN Revenue (Rs mn) 227,838 206,110 245,921 265,715
Shares Outstanding (mn) 3,856.9 Net Income (Rs mn) (20,974) (21,194) (13,021) (6,101)
52-week Range (Rs) 47/24 DEPS (Rs) (5.4) (5.5) (3.2) (1.4)
Free Float (%) 26.9 % Chg YoY (471.2) 1.0 (41.6) (55.3)
Research Analysts: FII (%) 17.7 P/E (x) (4.6) (4.6) (7.8) (17.5)
Daily Volume (US$/'000) 8,363 P/BV (Rs) 3.2 10.9 71.5 115.7
Rahul Modi
rahul.modi@icicisecurities.com Absolute Return 3m (%) (21.4) EV/E (x) 10.3 10.8 9.1 8.2
+91 22 6637 7373 Absolute Return 12m (%) (16.0) Dividend Yield (%) - - - -
Apoorva Bahadur Sensex Return 3m (%) 3.4 RoCE (%) 5.9 5.7 7.5 8.8
apoorva.bahadur@icicisecurities.com
+91 22 6637 7419 Sensex Return 12m (%) 19.4 RoE (%) (40.4) (109.1) (253.6) (519.7)

Please refer to important disclosures at the end of this report

Adani Power, May 7, 2018 ICICI Securities
Table 1: Q4FY18 result review (consolidated)
(Rs mn, year ending March 31)
Q4FY18 Q4FY17 % YoY Q3FY18 % QoQ I-Sec est.
# of units generated 8,460 16,892 (49.9%) 13,306 (36.4%) 8,460
# of units sold 7,900 16,310 (51.6%) 12,630 (37.5%) 7,868
Auxiliary consumption 6.6% 3.4% 5.1% 7.0%
Revenue 40,642 63,522 (36.0%) 48,445 (16.1%) 30,534
Per Unit sold 5.14 3.89 32.1% 3.84 34.1% 3.88

Fuel Cost (including forex) 21,395 43,632 (51.0%) 34,704 (38.3%) 22,725
Cost per unit generated 2.53 2.58 (2.1%) 2.61 (3.0%) 2.69
Cost per unit sold 2.71 2.68 1.2% 2.75 (1.4%) 2.89

O&M 5,411 5,172 4.6% 4,251 27.3% 4,568

Cost per unit generated 0.64 0.31 108.9% 0.32 100.2% 0.54
Cost per unit sold 0.68 0.32 116.0% 0.34 103.5% 0.58
Staff cost 824 954 (13.6%) 993 (17.0%) 950
Other expenditure 4,587 4,218 8.8% 3,259 40.8% 3,618

EBITDA 13,023 13,216 (1.5%) 8,740 49.0% 3,241

Per unit sold 1.65 0.81 103.4% 0.69 138.2% 0.41

Depreciation 6,814 8,685 (21.5%) 6,730 1.3% 6,786

Other Income 970 2,342 (58.6%) 719 35.0% 1,200
EBIT 7,179 6,873 4.5% 2,729 163.0% (2,345)
Interest 13,632 15,864 (14.1%) 14,112 (3.4%) 14,112
Exceptional - 40,767 NM - NM -
PBT (6,453) (49,758) NM (11,382) NM (16,457)
Tax 33 (152) NM (38) NM -
PAT (6,486) (49,605) NM (11,345) NM (16,457)
Per unit sold (0.82) (3.04) NM) (0.90) NM (2.09)
Source: Company data, I-Sec research

Chart 1: Average realisations (ex-compensatory tariff) benefitted from one-time

gains
5.50
5.00
4.50
4.00
(Rs/Kwhr sold)

3.50
3.00
2.50
2.00
1.50
1.00
Q4FY17
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17

Q1FY18
Q2FY18
Q3FY18
Q4FY18

Source: Company data, I-Sec research

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Adani Power, May 7, 2018 ICICI Securities
Chart 2: Fuel cost per unit remains elevated in Q4FY18 due to high international
coal prices and low availability of domestic coal

2.9

2.6

(Rs/kwhr generated)
2.3

2.0

1.7

1.4

1.1

0.8

Q3FY17
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17

Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Source: Company data, I-Sec research

Chart 3: PLFs impacted by commercial shutdown in Mundra

100

90

80

70
(PLF %)

60

50

40

30
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Source: Company data, I-Sec research

3
Adani Power, May 7, 2018 ICICI Securities

Q4FY18 earnings call takeaways

 Company reported overall plant availability at 93% in Q4FY18 (O&M availability,
billed availability at 62% for Mundra).
 PLF stood at 37% in Q4FY18 vs 73% in Q4FY17.
 Lower billed availability and PLF was due to delay in signing FSAs under SHAKTI,
forced outage in Udupi and commercial shutdown in Mundra. Management stated
that penalties from commercially backing down Mundra are lower than losses
incurred from operating the plant at current international coal prices
 As per the management, international coal prices have remained elevated due to
higher Chinese coal import demand, resulting in higher under-recovery at Mundra.
 Kawai had signed FSA under SHAKTI for 4.12mtpa coal, which it started receiving
since Feb’18. Cost of coal allotted under SHAKTI is Rs2.2/kWhr (on generation
basis).
 Tiroda has also signed FSA for 5.85mtpa coal under SHAKTI and supply began
from Apr’18. Cost of such coal, on generation basis, is Rs1.8-1.85/kWhr.
 Q4FY18 PLFs
o Mundra – 23%
o Tiroda – 56%
o Kawai – 14%
o Udupi – 67%
 Net units sold in Q4FY18
o Mundra – 2,061MUs
o Tiroda – 3,832MUs
o Kawai – 385MUs
o Udupi – 1,626MUs
 Aggregate auxiliary consumption – 6.13%
 PPA sales realisation in Q4FY18 – Rs3.6/kWhr (ex-compensation)
 Merchant realisation and volumes in Q4FY18 – Rs4.15/kWhr and 322MUs
respectively
 Q4FY18 average fuel cost – Rs2.72/kWhr
 Compensatory tariff (CT) recognised in Q4FY18 was Rs2.5bn and Rs9.3bn in
FY18
o Tiroda – Rs2bn in Q4FY18; Rs3.68bn in FY18
o Kawai – Rs510mn in Q4FY18; Rs5.65bn in FY18
o No CT recognised for Mundra in FY18
 Finance charges were lower YoY in Q4FY18 due to favorable forex.

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Adani Power, May 7, 2018 ICICI Securities
 External debt (ex-ICDs) stood at Rs437.71bn in FY18 vs Rs481.48bn at end-
FY17.
o Mundra – Rs189.13bn
o Tiroda – Rs131.73bn
o Kawai – Rs67.50bn
o Udupi - Rs45.94bn
 Debt:
o Term loan – Rs270bn
o NCDs – Rs40bn
o ECB – Rs64bn
o Working capital debt of Rs64bn
o Total debt of Rs530bn (incl. Rs90bn worth of ICDs in FY18 vs. Rs60bn in
FY17)
 Debt reduction YoY was due to normal repayments and lower working capital.
 Korba West MT PPA opportunity – company continues to evaluate opportunities,
but acquisition has not been completed yet, as banks converted debt to equity
before transfer of promoter’s stake to Adani Power.
 Jharkhand project update – PPA has been signed and all clearances are available.
Land for main project has been acquired and it will have a dedicated transmission
line (isolated from main grid). Management clarified that the project will use only
imported coal.
 Compensation on shortage of domestic coal and for Lohara coal block de-
allocation worth Rs3bn and Rs1bn respectively, was received in FY18
 Revenue break-up:
o Mundra – Rs97.48bn in FY18 and Rs19bn in Q4FY18
o Tiroda – Rs70bn in FY18 and Rs14.5bn in Q4FY18
o Kawai – Rs26.5bn in FY18 and Rs1.6bn in Q4FY18
o Udupi – Rs29bn in FY18 and Rs8.6bn in Q4FY18
 EBITDA break-up:
o Mundra – Rs16.8bn in FY18 and Rs6.3bn in Q4FY18
o Tiroda – Rs27bn in FY18 and Rs5.2bn in Q4FY18
o Kawai – Rs7.5bn in FY18 and loss of Rs800mn in Q4FY18
o Udupi – Rs9bn in FY18 and Rs2.6bn in Q4FY18
 Fuel cost/kWhr in Q4FY18
o Mundra – Rs2.82/kWhr
o Tiroda – Rs 2.08/kWhr
o Kawai – Rs 3.17/kWhr
o Udupi – Rs 3.1/kWhr

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Adani Power, May 7, 2018 ICICI Securities
 Change in law income booked in Q4FY18 worth Rs6.6bn on favourable order due
to FGD installation at Mundra (additional Rs2bn booked for domestic coal
shortage for FY18).
 Post SHAKTI, 80-85% coal used will be domestic (for 83% normative PLF) at
Tiroda and 100% at Kawai.
 Rs970mn penalty was imposed on Mundra by Gujarat, Rs530mn was imposed on
Tiroda by Maharashtra, and Rs850mn on Kawai by Rajasthan in FY18 due to
commercial shutdowns.
 Debt repayment due in FY19 – Rs28bn.
 Mundra plant is designed to use imported coal and the management is not looking
at using domestic coal there.

Change in earnings estimate

We adjust our FY19E earnings as we factor FY18 reported financials and introduce
FY20E estimates.

Table 2: Earnings estimate revisions

(Rs mn)
FY19E FY20E
Previous Revised % chg Introduced
Sales 242,026 245,921 1.6 265,715
EBITDA 67,637 66,681 (1.4) 73,825
EPS (Rs) (2.1) (3.2) NM (1.4)
Source: Company data, I-Sec research

Table 3: APL – SoTP valuations

Capacity Cost of Value Stake Current Previous
Project (MW) CoD equity (%) (Rs mn) (%) Value/share (Rs) Value/share (Rs)
Mundra 4,620 FY11-FY13 12.5 13,276 100 3.4 1.7
Tiroda 3,300 FY13-14 12.5 86,624 100 22.5 18.5
Kawai 1,320 FY14 12.5 34,375 100 8.9 7.9
Udupi 1,200 FY16* 12.5 10,818 100 2.8 3.5
Cash end-FY18 2.2 2.2
Unallocated debt (28.4) (22.9)
Bailout compensation till FY18 12.1
Total value 24 27
Source: I-Sec research

Valuation methodology and risks

We downgrade Adani Power to REDUCE from Hold with a revised SoTP-based target
price of Rs24/share (Rs27/share previously).

The upside risks to our call are: i) resolution or offloading of stake in Mundra, ii) further
equity dilution at attractive prices boosting financials, iii) higher merchant realisations,
and iv) lower than expected fuel costs.

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Adani Power, May 7, 2018 ICICI Securities

Financial summary (consolidated)

Table 4: Profit & loss statement
(Rs mn, year ending March 31)
FY14 FY15 FY16 FY17 FY18P FY19E FY20E
Operating Income (Sales) 157,540 187,962 252,316 227,838 206,110 245,921 265,715
Operating Expenses 110,955 136,644 166,786 168,122 149,198 179,240 191,890
EBITDA 46,585 51,318 85,529 59,717 56,912 66,681 73,825
% margins 29.6% 27.3% 33.9% 26.2% 27.6% 27.1% 27.8%
Depreciation & Amortisation 22,185 18,182 23,362 26,724 26,987 26,756 26,756
Gross Interest 40,100 48,635 59,642 59,017 55,702 56,933 57,290
Other Income 2,003 2,690 2,018 4,190 4,824 3,987 4,120
Recurring PBT (13,696) (12,809) 4,544 (21,835) (20,953) (13,021) (6,101)
Add: Extraordinaries - 4,653 - (40,767) - - -
Less: Taxes (10,790) - (341) (861) (52) - -
Less: Minority Interest - - - - 292 - -
Net Income (Reported) (2,906) (8,156) 4,885 (61,741) (21,194) (13,021) (6,101)
Recurring Net Income (2,906) (12,809) 4,885 (20,974) (21,194) (13,021) (6,101)
Source: Company data, I-Sec research

Table 5: Balance sheet

(Rs mn, year ending March 31)
FY14 FY15 FY16 FY17 FY18P FY19E FY20E
Assets
Total Current Assets 83,780 127,905 188,611 168,312 172,663 203,290 211,175
of which cash & cash eqv. 15,261 8,563 8,687 6,042 8,566 11,369 14,384
Total Current Liabilities & Provisions 80,453 80,076 94,155 99,184 101,769 131,184 144,303
Net Current Assets 3,327 47,828 94,456 69,128 70,894 72,105 66,872
Investments 1,153 3,573 1 1,643 0 0 0
of which
Other Marketable 1,153 3,573 1 1,643 0 0 0
Net Fixed Assets 502,456 453,265 505,064 545,155 522,570 511,762 514,407
of which
Capital Work-in-Progress 38,811 2,468 2,468 1,246 1,199 14,647 41,547
Total Assets 506,936 504,666 599,521 615,927 593,464 583,868 581,279

Liabilities
Borrowings 441,502 447,420 523,904 524,844 523,740 521,564 519,476
Deferred Tax Liability - - 1,851 61,087 60,879 60,879 60,879
Equity Share Capital 28,719 28,719 33,339 38,569 38,569 40,569 42,569
Face Value per share (Rs) 10 10 10 10 10 10 10
Reserves & Surplus* 36,715 28,527 40,426 (8,574) (29,724) (39,145) (41,646)
Net Worth 65,434 57,246 73,765 29,996 8,845 1,424 924
Total Liabilities 506,936 504,666 599,521 615,927 593,464 583,868 581,279
Source: Company data, I-Sec research

Table 6: Quarterly trend

(Rs mn, year ending March 31)
Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18
Total Revenues 55,773 57,643 58,035 63,522 55,902 55,672 48,445 40,642
EBITDA 19,151 18,093 16,392 13,216 15,603 14,610 8,740 13,023
Margin (%) 34.3 34.3 28.4 20.8 27.9 26.2 18.0 32.0
Other income 419 1,056 691 2,342 579 2,556 719 970
Add: Extraordinaries - - - (40,767) - - - -
Net profit (312) (1,134) (3,236) (49,605) (4,539) (3,470) (11,345) (6,486)
Source: Company data, I-Sec research

7
Adani Power, May 7, 2018 ICICI Securities
Table 7: Cashflow statement
(Rs mn, year ending March 31)
FY14 FY15 FY16 FY17 FY18P FY19E FY20E
Operating Cashflow 17,275 2,683 26,229 1,560 970 9,748 16,535
Working Capital Changes (24,554) (51,200) (46,503) 22,683 758 1,591 8,248
Capital Commitments (35,492) 31,010 (75,161) (66,815) (4,402) (15,948) (29,400)
Free Cashflow (42,771) (17,507) (95,435) (42,572) (2,674) (4,609) (4,617)
Cashflow from Investing Activities 1,074 270 5,590 2,547 6,467 3,987 4,120
Issue of Share Capital 25,422 - 11,634 17,170 - 5,600 5,600
Buyback of shares - - - - - - -
Inc (Dec) in Borrowings 23,548 5,917 76,485 939 (1,104) (2,175) (2,088)
Dividend paid - - - - - - -
Extraordinary Items - 4,653 - (40,767) - - -
Chg. in Cash & Bank balances (3,463) (6,698) 125 (2,645) 2,524 2,803 3,016
Source: Company data, I-Sec research

Table 8: Key ratios

(Year ending March 31)
FY14 FY15 FY16 FY17 FY18P FY19E FY20E
Per Share Data (in Rs.)
EPS(Basic Recurring) (1.0) (2.8) 1.5 (16.0) (5.5) (3.2) (1.4)
Diluted Recurring EPS (1.0) (4.5) 1.5 (5.4) (5.5) (3.2) (1.4)
Recurring Cash EPS 6.7 1.9 8.5 1.5 1.5 3.4 4.9
Dividend per share (DPS) - - - - - - -
Book Value per share (BV) 22.8 19.9 22.1 7.8 2.3 0.4 0.2

Growth Ratios (%)

Operating Income 132.6 19.3 34.2 (9.7) (9.5) 19.3 8.0
EBITDA 388.3 10.2 66.7 (30.2) (4.7) 17.2 10.7
Recurring Net Income (87.5) 340.8 (138.1) (529.4) 1.0 (38.6) (53.1)
Diluted Recurring EPS (89.6) 340.8 (132.8) (471.2) 1.0 (41.6) (55.3)
Diluted Recurring CEPS (255.9) (72.1) 352.9 (82.4) 0.8 125.4 43.3

Valuation Ratios (x)

P/E (24.8) (5.6) 17.1 (4.6) (4.6) (7.8) (17.5)
P/CEPS 3.7 13.4 3.0 16.8 16.7 7.4 5.2
P/BV 1.1 1.3 1.1 3.2 10.9 71.5 115.7
EV / EBITDA 11.2 10.4 7.2 10.3 10.8 9.1 8.2
EV / Operating Income 3.3 2.8 2.4 2.7 3.0 2.5 2.3
EV / Operating FCF (12.2) (30.6) (6.4) (14.5) (228.9) (131.7) (130.4)

Operating Ratios
Employee cost / Revenue 6.6 7.7 5.7 6.9 8.3 7.4 7.0
Op. expenses / Revenue 1.6 1.7 1.3 1.8 1.7 1.9 1.8
Other Income / PBT (%) (14.6) (21.0) 44.4 (19.2) (23.0) (30.6) (67.5)
Effective Tax Rate (%) 78.8 - (7.5) 3.9 0.2 - -
NWC / Total Assets (%) (2.4) 7.8 14.3 10.2 10.5 10.4 9.0
Inventory Turnover (days) 54.7 45.7 40.3 42.2 38.2 26.8 28.9
Receivables (days) 66.9 108.1 139.5 180.4 142.0 99.7 103.8
Payables (days) 35.0 98.4 128.7 145.7 182.8 170.2 165.1
D/E Ratio (x) 6.7 7.8 7.1 19.5 66.1 408.9 628.4

Profitability Ratios (%)

Rec. Net Income Margins (1.8) (6.7) 1.9 (9.0) (10.0) (5.2) (2.3)
RoCE 1.1 7.1 12.5 5.9 5.7 7.5 8.8
RoNW (5.4) (20.9) 7.5 (40.4) (109.1) (253.6) (519.7)
Dividend Payout - - - - - - -
Dividend Yield - - - - - - -
EBITDA Margins 29.6 27.3 33.9 26.2 27.6 27.1 27.8
Source: Company data, I-Sec research

8
 Adani Power, May 7, 2018 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

ANALYST CERTIFICATION
ANALYST CERTIFICATION
We /I, Rahul Modi, Masters in Finance;; Apoorva Bahadur, PGDM Research Analysts, authors and the names subscribed to this report, hereby certify that all of the
views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or
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associated persons of the ICICI Securities Inc.
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