Maintain ‘sell’ on Adani Power and price target of R45. The company is aggressively looking to grow inorganically. Adani Power is one of the most successful Indian power companies in project execution, with capacity growing from zero to 9,240 MW in about seven years. Now, the company is also trying to grow inorganically, with two acquisitions announced in last three months –1200 MW Udupi Plant of Lanco and 600 MW Korba plant of Avantha Power. This is interesting because the company has been reporting losses during the last several quarters and the debt-equity ratio is already very stretched.
As of September 30, Adani Power reported a net worth of R5,500 crore and loans of R46,000 crore. This is despite recognising R2,500 crore related to the compensatory tariff still under dispute with power buyers. The company is likely to pay R10,000 crore for these two acquisitions which will increase debt-equity ratio to 10x.
We think the company may needs to raise capital, and that this would be more likely to come from its owners as external equity funding looks unlikely. The issue related to compensatory tariff is an overhang and we continue to find the stock expensive versus fundamentals. Among independent power producers, NTPC remains the safer bet.