We maintain our overweight rating on Adani Power with a price target of Rs 141, which implies 15% upside from current levels. We continue to view Adani Power as one of the best ways to play the growth in the Indian power sector. The stock has outperformed the Sensex by 9% year till date. However, valuations look attractive as its shares trade at 8.3xFY12 P/E and 9x EV/Ebitda on our estimates.
Adani Power reported Q3 revenue of Rs 500 crore (up 115% YoY), Ebitda of Rs 270 crore (up 115% YoY) and profits of Rs 110 crore (up 51% YoY). Reported profit was 30% lower than our estimate due to a Rs 15.5-crore provision created for customs duty. Average realisation during Q3 was Rs 2.93/unit, while the merchant realisation was Rs 3.9/unit. It is important to note that this provision does not impact cash flows. Adjusting for these, reported profit would have been about Rs 150 crore, and therefore, in line with our estimate. In our view, quarterly results are less relevant given that operations are still significantly small.
We lower our FY11 EPS estimate by 23% due to lower merchant assumption of Rs 4.8/unit (from Rs 5/unit prior). To factor in actual commercial date of operation for unit 4 of Mundra I and II and for unit 1 of Mundra III, we lower our FY12e EPS by 19% primarily to build in a lower merchant realistion of Rs 4.4/unit versus Rs 5/unit earlier.
We expect the share price to react positively to the commissioning of plants under construction, new project announcements, and further domestic fuel supply agreements. However, project delays could hurt cash flows.