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India Equity Research | Power Result Update

ADANI ENTERPRISES

Coal fired

 Higher coal volume and stellar Mundra Port show boost earnings
May 12, 2011
Adani Enterprises’ (AEL) Q4FY11 consolidated earnings, at INR 9.28 bn,
surpassed our estimate (INR 5.2 bn) due to higher-than-expected coal volume
Reuters: ADEL.BO Bloomberg: ADE IN
traded during the quarter. The performance was further augmented by margin
improvement and higher profitability in Mundra Port. Tax writeback of ~INR 503
EDELWEISS 4D RATINGS
mn and interest income of ~INR 300 mn further catapulted earnings. HOLD
Absolute Rating

Rating Relative to Sector Underperformer


 Coal trading volumes surge
Medium
Risk Rating Relative to Sector
The company traded 12.05 MT (8 MT estimate) of coal during the quarter (33.5
Sector Relative to Market Equalweight
MT for FY11 including ~3 MT from its captive Bunyu mine in Indonesia) with
Note:
average realisation of USD 95/tonne and 9-10% EBITDA margin (7% estimate). Please refer last page of the report for rating explanation

This led to higher earnings. AEL estimates to trade 35 MT of coal in FY12E


(including ~5-6 MT from Bunyu).
MARKET DATA
CMP : INR 638
 Expansion projects likely to stretch balance sheet 52-week range (INR) : 786 / 505

AEL is anticipating capex of ~USD 7–8 bn (to be funded via QIP funds, internal Share in issue (mn) : 1,099.8
M cap (INR bn/USD mn) : 701 /15,584
accruals and debt) for developing the Galilee coal mine, which is expected to Avg. Daily Vol. BSE/NSE (‘000): 992.8
commence operations from FY16. The agreement with PT Bukit Asam will also
SHARE HOLDING PATTERN (%)
entitle the company to transport and ship up to 60 MTPA of coal with an
investment of USD 1.65 bn for port and rail infrastructure. While these benefits Promoters* : 78.3

MFs, FIs & Banks : 1.0


are some time away, the high debt funding of these projects is likely to stretch
the company’s balance sheet in the near term. FIIs : 15.8

Others : 4.9

 Subsidiaries, in full throttle, to maintain robust growth momentum * Promoters pledged shares
: 0.7
(% of share in issue)
During the year, AEL’s subsidiaries posted strong growth. For FY11, Mundra Port
PRICE PERFORMANCE (%)
handled 51.7 MT (up 28% Y-o-Y) cargo and is poised to touch the 100-MT mark
Stock Nifty EW Power
by FY13E. Adani Power, with current capacity of 1,980 MW, is on track to be a Index
6,600-MW company by FY13E with additional 2,640 MW already in advanced 1 month (3.4) (3.8) (4.1)
stage of development.
3 months 7.3 4.8 2.7

12 months 8.1 8.4 (9.4)


 Outlook and valuations: Domestic coal holds key; maintain ‘HOLD’
There has been no incremental positive development on domestic coal mine
concessions. We believe the recent de-allocation of 14 coal mines owned by
various other entities (including NTPC) is likely to result in headwinds for the
stock. Our SOTP value of INR 453/share factors in the trading business, port and
power assets, but excludes the coal mining (both in India and abroad) business.
We believe current valuation factors in domestic mining as well as further scale
up/pipeline projects in its power, port and mining businesses, details of which
are not yet in public domain. At CMP of INR 638, since the stock factors in most
upsides, we maintain ‘HOLD/Sector Underperformer’ recommendation/rating.
Financials (Consolidated)
Year to March Q4FY11 Q4FY10 Y-o-Y % Q3FY11 Q-o-Q % FY11 FY12E
Shankar.K
Revenue (INR mn) 91,116 78,257 16.4 56,426 61.5 264,055 303,658
+91 22 4040 7412
EBITDA (INR mn) 15,636 5,154 203.4 9,405 66.2 40,932 74,558
shankar.k@edelcap.com
Net profit (INR mn) 9,282 3,398 173.2 4,744 95.7 24,761 38,009
Diluted EPS (INR) 8.4 6.8 23.7 4.3 95.7 22.5 34.6 Santosh Hiredesai
Diluted P/E (x) 28.2 18.4 +91 22 6620 3027
EV/EBITDA (x) 22.8 13.6 santosh.hiredesai@edelcap.com
ROAE (%) 18.7 16.1

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Power

Financial snapshot (INR mn)


Year to March Q4FY11 Q4FY10 % Change Q3FY11 % Change FY11 FY12E FY13E
Net revenues 91,116 78,257 16.4 56,426 61.5 264,055 303,658 419,600
Raw material 72,399 69,524 4.1 42,064 72.1 208,166 208,473 288,543
Raw material consumed 72,004 67,753 6.3 43,267 66.4 208,166 208,473 288,543
Stock adjustment 394 1,771 (77.7) (1,203) (132.8) - - -
Employee expenses 1,190 338 251.7 905 31.5 3,867 5,684 7,399
Other expenses 1,892 3,241 (41.6) 4,052 (53.3) 11,090 14,943 21,190
Total expenditure 75,480 73,103 3.3 47,021 60.5 223,123 229,100 317,132
EBITDA 15,636 5,154 203.4 9,405 66.2 40,932 74,558 102,468
Other income 83 88 (5.2) 763 (89.1) 4,213 4,558 5,445
Depreciation 1,839 557 230.0 1,388 32.5 5,586 11,284 21,250
EBIT 13,880 4,685 196.3 8,781 58.1 39,559 67,831 86,663
Interest 1,210 748 61.7 2,285 (47.1) 6,338 14,284 26,584
Profit before tax 12,671 3,937 221.9 6,496 95.1 33,222 53,546 60,079
Provision for current tax 2,327 162 1,337.9 857 171.4 4,472 5,442 5,677
PAT 9,282 3,398 173.2 4,744 95.7 24,761 38,009 43,165
Equity capital (FV INR 1) 1,100 498 1,100 1,100 1,100 1,100
No. of shares (mn) 1,100 498 1,100 1,100 1,100 1,100
Adj. EPS (INR) 8.4 6.8 4.3 22.5 34.6 39.2

As % of net revenues
Raw material 79.5 88.8 74.5 78.8 68.7 68.8
Employee cost 1.3 0.4 1.6 1.5 1.9 1.8
Other expenditure 2.1 4.1 7.2 4.2 4.9 5.1
EBITDA 17.2 6.6 16.7 15.5 24.6 24.4
Reported net profit 10.2 4.3 8.4 9.4 12.5 10.3

Table 1: SOTP
Business Value Stake Value to AEL Value per Methodolgy
segment (INR mn) (%) (INR mn) share (INR)
Adani Power 209,545 70.5 147,729 134 NPV
MPSEZ 310,733 77.5 240,818 219 NPV
Real estate 11,008 100.0 11,008 10 NAV
Trading 58,960 100.0 58,960 54 6x FY13E PAT
Cash 40,000 40,000 36
SOTP 498,514 453
Source: Edelweiss research

2 Edelweiss Securities Limited


Adani Enterprises

 Company Description
The Adani Group, founded in 1988, is one of the fastest growing business houses in
India. It has its roots in its flagship company, Adani Enterprises (erstwhile Adani
Exports), which was established by Mr. Gautam S. Adani in 1988 as a partnership firm
with an initial capital of INR 0.5 mn. The company is currently involved in multiple
business lines including trading, power generation coal mining and real estates.

 Investment Theme
AEL has embarked on an ambitious business diversification and expansion plan. Its
business diversification, among various initiatives, includes entry into power generation,
infrastructure development, coal mining, and also developing and managing agro silos.
The company’s diversification plan is an initiative to enhance margins, profitability and
return on assets.

• The company is scaling up operations of and expanding its subsidiaries Adani Power
and Mundra Port with an intent to make them one of the leading players in their
respective sectors.

• The company is planning to leverage its success in India by pursuing port and
mining assets in Australia and Indonesia.

 Recently, AEL was awarded the Preferred Proponent status for development of
port in Dudgeon, Queensland, Australia.

 It entered into a tri-partite agreement to develop a port cum rail project


connecting a coal mine in Indonesia which will also entitle it to coal purchase
rights.

• These initiatives are part of vision 2020 wherein AEL will mine 200 mt of coal,
Mundra Port will handle 200 mt of cargo, and Adani Power will have a generation
capacity of 20 GW.

 Key Risks
• Execution challenge
The biggest challenge for AEL is the execution risk of its projects in the pipeline. As
of now, it has only the trading business to fall back. The growth is coming from
projects that are in the pipeline.

• Internal risk management


AEL’s core business of commodity trading is exposed to market risks in a completely
unregulated environment. Monitoring of such risks requires stringent internal risk
management systems that are technology savvy. AEL’s trading portfolio is not only
exposed to market swings in exchange rates and prices, but is also exposed to local
government tariff policies and changes in trade restrictions.

Edelweiss Securities Limited 3


Power

Financial Statements

Income statement (INR mn)


Year to March FY09 FY10 FY11 FY12E FY13E
Income from operations 262,583 258,899 264,055 303,658 419,600
Direct costs 241,958 229,636 208,166 208,473 288,543
Employee costs 1,145 1,205 3,867 5,684 7,399
Other Expenses 9,458 11,167 11,090 14,943 21,190
Total operating expenses 252,562 242,008 223,123 229,100 317,132
EBITDA 10,021 16,891 40,932 74,558 102,468
Depreciation & Amortization 822 1,515 5,586 11,284 21,250
EBIT 9,199 15,376 35,347 63,273 81,218
Other income 146 335 4,213 4,558 5,445
Interest expenses 3,486 5,079 6,338 14,284 26,584
Profit before tax 5,859 10,632 33,222 53,546 60,079
Provision for tax 785 945 4,472 5,442 5,677
Core profit 5,075 9,687 28,750 48,105 54,403
Extraordinary income/ (loss) (25) 43 (491) - -
Profit After Tax 5,050 9,730 28,259 48,105 54,403
Minority interest - 537 3,498 10,095 11,237
Profit after minority interest 5,050 9,193 24,761 38,009 43,165
Basic shares outstanding (mn) 493 498 1,100 1,100 1,100
Basic EPS (INR) 10.3 18.4 23.0 34.6 39.2
Diluted equity shares (mn) 493 498 1,100 1,100 1,100
Diluted EPS (INR) 10.3 18.4 23.0 34.6 39.2
CEPS (INR) 12.0 21.4 28.0 44.8 58.6
Face value 1 1 1 1 1
Dividend per share (INR) 1.0 0.7 1.0 0.3 0.4
Dividend payout (%) 9.9 4.7 5.2 1.0 0.9

Common size metrics - as % of net


Year to March FY09 FY10 FY11 FY12E FY13E
Operating expenses 96.2 93.5 84.5 75.4 75.6
Depreciation 0.3 0.6 2.1 3.7 5.1
Interest expenditure 1.3 2.0 2.4 4.7 6.3
EBITDA margins 3.8 6.5 15.5 24.6 24.4
Net profit margins 1.9 3.7 10.9 15.8 13.0

Growth ratios (%)


Year to March FY09 FY10 FY11 FY12E FY13E
Revenues 33.9 (1.4) 2.0 15.0 38.2
EBITDA 40.0 68.6 142.3 82.1 37.4
Net profit 35.1 90.9 196.8 67.3 13.1
EPS 35.1 78.5 25.0 50.5 13.6

4 Edelweiss Securities Limited


Adani Enterprises

Balance sheet (INR mn)


As on 31st March FY09 FY10 FY11E FY12E FY13E
Equity capital 247 498 1,100 1,100 1,100
Reserves & surplus 29,940 59,879 208,664 262,954 282,588
Shareholders’ funds 30,187 60,377 209,763 264,054 283,688
Minority interest (BS) 4,769 18,518 22,016 32,112 43,349
Secured loans 66,992 119,012 246,986 330,280 343,676
Unsecured loans 53,851 55,377 67,277 76,336 82,676
Borrowings 120,842 174,389 314,263 406,616 426,352
Deferred tax (net) 522 699 3,636 3,636 3,636
Deferred revenue - - 6,291 6,291 6,291
Others - - 98 98 98
Sources of funds 156,320 253,983 556,068 712,806 763,414
Gross block 21,305 49,603 237,112 409,351 462,649
Depreciation 2,121 3,831 22,209 33,493 54,744
Net block 19,185 45,773 214,903 375,858 407,905
Capital work in progress 69,520 133,366 184,055 171,866 151,768
Total fixed assets 88,704 179,139 398,958 547,724 559,674
Investments 4,647 6,990 9,209 9,209 9,209
Inventories 30,983 33,855 44,751 39,939 48,413
Sundry debtors 34,006 30,264 54,481 58,231 76,964
Cash and equivalents 25,832 29,188 72,579 82,775 113,586
Loans and advances 17,039 24,591 38,469 38,469 38,469
Other current assets 547 643 643 643 643
Total current assets 107,860 117,898 210,922 220,056 278,075
Sundry creditors and others 42,696 46,964 56,690 61,945 81,263
Provisions 2,431 3,212 6,494 2,400 2,444
Total current liabilities & provisions 45,128 50,176 63,184 64,345 83,707
Net current assets 62,733 67,722 147,739 155,711 194,368
Others 236 131 161 161 161
Uses of funds 156,320 253,983 556,068 712,806 763,414
Book value per share (INR) 61.2 121.2 190.7 240.1 257.9

Free cash flow (INR mn)


Year to March FY09 FY10 FY11E FY12E FY13E
Net profit 5,050 9,193 24,761 38,009 43,165
Depreciation 822 1,515 5,586 11,284 21,250
Others 550 61 24,263 6,489 22,276
Gross cash flow 6,421 10,769 54,609 55,783 86,691
Less: Changes in WC 10,387 1,634 36,961 (14,983) (2,130)
Operating cash flow (3,966) 9,135 17,649 70,766 88,822
Less: Capex 48,732 92,144 139,800 159,419 53,082
Free cash flow (52,698) (83,010) (122,151) (88,653) 35,740

Cash flow metrics


Year to March FY09 FY10 FY11E FY12E FY13E
Operating cash flow (3,966) 9,135 17,649 70,766 88,822
Investing cash flow (48,732) (92,144) (139,311) (158,780) (52,254)
Financing cash flow 61,827 51,026 165,053 98,211 (5,757)
Net cash flow 9,129 (31,983) 43,391 10,196 30,811
Capex (48,732) (92,144) (139,800) (159,419) (53,082)
Dividends paid (472) (368) (1,100) (383) (393)
Share issuance/(buyback) 4,993 252 55,265 - -

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Power

Profitability & efficiency ratios


Year to March FY09 FY10 FY11E FY12E FY13E
ROAE (%) 19.9 20.3 18.7 16.1 15.8
ROACE (%) 7.8 7.7 8.9 10.1 11.1
Inventory day 44 46 54 51 38
Debtors days 33 45 59 68 59
Payable days 59 71 91 104 91
Cash conversion cycle (days) 19 20 22 15 7
Current ratio 2.4 2.3 3.3 3.4 3.3
Debt/EBITDA 12.1 10.3 7.7 5.5 4.2
Fixed asset turnover (x) 19.2 8.0 2.0 1.0 1.1
Average working capital turnover 5.2 4.5 2.8 2.7 3.6
Average capital employed turnover (x) 2.2 1.3 0.7 0.5 0.6
Debt/Equity 4.0 2.9 1.5 1.5 1.5
Adjusted debt/equity 4.0 2.9 1.5 1.5 1.5
Net Debt/Equity 3.1 2.4 1.2 1.2 1.1

Operating ratios
Year to March FY09 FY10 FY11E FY12E FY13E
Total asset turnover 2.2 1.3 0.7 0.5 0.6
Fixed asset turnover 19.2 8.0 2.0 1.0 1.1
Equity turnover 10.2 5.7 2.0 1.3 1.5

Du pont analysis
Year to March FY09 FY10 FY11E FY12E FY13E
NP margin (%) 1.9 3.5 9.6 12.5 10.3
Total assets turnover 2.2 1.3 0.7 0.5 0.6
Leverage multiplier 4.8 4.5 3.0 2.7 2.7
ROAE (%) 19.9 20.3 18.7 16.1 15.8

Valuation parameters
Year to March FY09 FY10 FY11E FY12E FY13E
Diluted EPS (INR) 10.3 18.4 23.0 34.6 39.2
Y-o-Y growth (%) 35.1 78.5 25.0 50.5 13.6
CEPS (INR) 12.0 21.4 28.0 44.8 58.6
Diluted PE (x) 61.9 34.7 27.8 18.4 16.2
Price/BV (x) 10.4 5.3 3.3 2.7 2.5
EV/Sales (x) 1.5 1.8 3.5 3.3 2.4
EV/EBITDA (x) 40.9 28.1 23.3 14.1 10.2
Dividend yield (%) 0.2 0.1 0.2 0.1 0.1

6 Edelweiss Securities Limited


RATING & INTERPRETATION Adani Enterprises

Company Absolute Relative Relative Company Absolute Relative Relative


reco reco risk reco reco Risk
Adani Enterprises HOLD SU M CESC BUY SO H
GMR Infrastructure BUY SO H GVK Power and Infra HOLD SO H
Lanco Infratech BUY SO H Marg BUY SO H
Mundra Port & SEZ BUY SO M Navabharat Ventures BUY SO H
NTPC HOLD SP L Power Grid Corp of India BUY SP L
PTC India BUY SO L Reliance Infrastructure BUY SO M
Tata Power Co BUY SO M

ABSOLUTE RATING
Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING


Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVE RISK RATING


Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

Edelweiss Securities Limited 7


Power

Edelweiss Securities Limited, Edelweiss house, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelcap.com

Vikas Khemani Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Power


Adani Power, Adani Enterprises, CESC, GMR Infrastructure, GVK Power and Infra, Lanco Infratech, Marg, Mundra Port & SEZ, NTPC,
Navabharat Ventures, PTC India, Power Grid Corp of India, Reliance Infrastructure, Tata Power Co

Adani Enterprises EW Indices

1,400
800
Hold
650 1,150
Hold
(INR)

Hold
500 Hold 900

350 650

200
400
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11

11-May-10 11-Nov-10 11-May-11


Adani Enterprises Ltd.
EW Power Index
Nifty

Distribution of Ratings / Market Cap Recent Research

Edelweiss Research Coverage Universe Date Company Title Price (INR) Recos
Buy Hold Reduce Total 11-May-11 NTPC Tax grossing up saves the 177 Hold
day; Result Update
Rating Distribution* 118 51 17 189
* 3 stocks under review 10-May-11 PTC India Firing on all cylinders; 89 Buy
Result Update
> 50bn Between 10bn and 50 bn < 10bn
09-May-11 GVK Power Further strains on balance 24 Hold
Market Cap (INR) 111 61 17 & Infra. sheet;
Result Update

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