We maintain ?reduce? on Adani Power (APL) and assign a 12-month target price of R35 per share. The recent appeal made by the Haryana government in the Appellate Tribunal of Electricity (APTEL) is likely to a) protract the timeline for a final, binding decision on the issue of ?tariff relief? for Mundra, b) ensure that any compensatory tariff agreed upon, is not ?excessive?, and c) potentially prompt state distribution companies to challenge awards of a ?tariff relief? by electricity regulators in similar cases of other IPPs.
We use a FCFE-based methodology (assuming 15% cost of equity) to value APL’s operational and feasible power generation capacity. To capture the risk of a power project from conception to commissioning, we adjust the FCFE value of projects for ?milestone discounts? (risk weights assigned to the non-achievement of six key milestones we identify for various types of projects).
At the current market price, the stock trades at 1.6x P/B, 7.8x EV/Ebitda and 12.5x P/E on our FY14f EPS of R3.5 and Rof R27.3.
Our medium/longer-term earnings outlook for Adani Power continues to hinge on the final outcome of regulatory/legal events relating to PPAs and fuel sourcing. CERC?s ruling for awarding ?compensatory tariff? for APL’s Mundra PPAs was always at risk of being challenged by Gujarat and/or Haryana distribution companies. To this extent, Haryana?s move is not surprising.