We maintain our ?reduce? rating on Adani Power with a 12-month price target of R35 as the proposed stake sale by the promoters would not have any implications on our earnings forecast for the entity. We use an FCFE-based (free-cash-flow-to-equity) methodology ? assuming 15% cost of equity ? to value Adani Power?s operational and feasible power-generation capacity.
In a filing with the BSE, Adani Power said that Adani Agro, which is an entity of the Promoter Group of Adani Power, proposes to sell 35.58 million shares of Adani Power (1.63% of the current outstanding shares of Adani Power) on October 8.
The shares would be sold on a separate trading window of the BSE. The floor price for the sale would be declared after the stockmarket closes on October 5. As the promoters? holding in Adani Power currently stands at 76.63%, of which Adani Agro holds 3.13%, the proposed stake sale would bring the promoters? holding to 75% ? in compliance with the Sebi requirement of a minimum 25% free float for listed entities.
Interestingly, promoter holding in Adani Power stood at 73.5% until May 23, 2012, when the merger of two entities (Adishree Tradelinks and Sanidhya Commodities) with Adani Power necessitated Adani Agro acquiring a 3.13% holding in Adani Power. Also, after the recently approved amalgamation of Growmore Trade & Investment (Mauritius) with Adani Power takes effect, promoter group’s holding in Adani Power post the proposed stake sale by Adani Agro would drop to 68.3%.
After the 33%-rise in the stock price over the past four weeks, Adani Power trades at 2.0x P/B, 8.2x EV/Ebitda and 15.6x P/E on our FY14f earnings (1.7x P/B, 9.3x EV/Ebitda and 13.0x P/E on consensus FY14f earnings), indicating valuations are expensive. Unless the 7% appreciation in the rupee against the dollar over the past four weeks sustains, our FY13f earnings for Adani Power would remain largely intact.
Nomura