CERC has not found merit in Adani Power’s petition for relief on account of “force majeure” or “change in law” or “frustration of PPAs”, says Nomura Equity Research in its Quick Note
The Central Electricity Regulatory Commission (CERC) has ruled that Adani Power needs to be compensated for an “intervening period” with a “compensation package” over and above the tariff discovered through competitive bidding as regards its 1,000 MW PPA (Power Purchase Agreement) with Gujarat Urja Vikas Nigam and 1,424 MW PPA with Haryana distribution companies. CERC opines that the tariff relief could be variable in nature, in line with the hardship that Adani Power is suffering on account of the unforeseen events leading to non-availability of adequate coal linkage or increase in international coal price affecting the import of coal (Government of Indonesia’s coal pricing regulation issued in 2010), which has affected its performance under the PPAs, reports Nomura Equity Research in its Quick Note.
The eight-member committee to be constituted to work out the specifics of the compensatory tariff have been directed to consider pass-through of the net profit (post- government taxes/levy) earned by Adani Power’s Indonesian coal mines from the 2010 benchmark price regulation by Government of Indonesia relating to supply of coal to Mundra, potential revenue share on sale of power beyond target availability of Mundra, and possibility of using low GCV (gross calorific value) coal without affecting the operational efficiency of project.
According to Nomura’s Quick Note, the CERC is not unanimous in its view on the “compensatory tariff” to Adani Power for its Mundra PPAs; one CERC member has issued a “dissenting order” on this issue. In both orders, the CERC has not found merit in the petition for relief on account of “force majeure” or “change in law” or “frustration of PPAs”.
In Nomura’s view, CERC’s order establishing the need for a “compensatory tariff” over and above the bid tariffs for Adani Power’s PPAs for 2.42 GW offtake from its 4.62 GW Mundra facility is positive for the company’s earnings outlook, although the magnitude of relief is uncertain.
Nomura’s analysts have done an earnings forecast for Adani Power and the following assumptions have been made: (a) Coal receipt for Bunyu at 7.5mt/9 mt for FY14/15, (b) Domestic coal supply under FSA (fuel supply agreement) by CIL (Coal India) at 65%/65% of the committed 6.4mtpa quantity for FY14/15, (c) Mundra-II
(2 x 660 MW) operates at 50% utilization level at the existing PPA tariff of Rs2.35/kWh, and (d) Mundra-III (3 x 660 MW) operates at 80% utilization level, with PPA offtake to Haryana at existing bid tariffs.
The closing share price of Adani Power was Rs46.85 yesterday on the Bombay Stock Exchange. Nomura’s analysts have recommended a target price of Rs35 and a rating of ‘Reduce’.
In conclusion, the following table on Adani Power gives the earnings forecast and target price sensitivity till FY14-15:
Bank credit increased at a slower rate by 14.4% in February on a year-on-year basis against an increase of 15.4% in February 2012. However, Nomura’s Equity Research states, “If we assume the same quantum of loan growth for March 2013 as was achieved during the same month last year, then we are likely to see a non-food credit growth of 13.8% for FY13F.”
Bank credit increased on a slower rate by 14.4% in February on a year-on-year (y-o-y) basis against an increase of 15.4% in February 2012, according to Reserve Bank of India (RBI) data on sectoral deployment of bank credit that was released yesterday.
Credit to industry increased by 14.7% y-o-y in February compared with the increase of 19.1% in February 2012. Credit to the agricultural sector grew by 18.2% y-o-y and retail by16.2% y-o-y. As per the RBI's weekly statistical supplement, non-food credit as of 8 March 2013 was 15.3% y-o-y.
Within retail, mortgages recorded a 17.7% y-o-y growth, credit cards 23.7%, vehicle loans 20.9% and personal loans 19.9% were the key growth areas, Nomura Equity Research in its Quick Note points out. However, consumer durable loans declined 6.7% y-o-y.
In February 2013 and within retail loans, vehicle loans had the highest y-o-y growth at 20.9%, followed closely by non-collateralized loans at 20.4% and mortgages at 17.7%. Mortgage loans have clearly picked up pace in February, the brokerage said.
Nomura Equity Research further adds that key growth drivers within the industry segment have been mining, power, iron & steel, chemicals, engineering, cement and roads. Within the industry sector, y-o-y growth for key sub-sectors was 30% for power, 20% for iron & steel, 17% for engineering, 18% for roads, and 22% for chemicals. Loans to the telecom sector were flat y-o-y.
Loans to SMEs gathered pace in February on a sequential basis, growing at 6.3% y-o-y in February compared with 4.6% in January.
In the services segment, loans to the retail trade had the highest y-o-y growth at 26% followed by loans to NBFCs (non-banking financial companies) at 17%. Bank loans to NBFCs continue to decline. In fact trade loans are the only category within services which has recorded increasing y-o-y growth rates over the last two years.
In conclusion, Nomura’s Equity Research states, “If we assume the same quantum of loan growth for March 2013 as was achieved during the same month last year, then we are likely to see a non-food credit growth of 13.8% for FY13F.”
The government’s proposal to disinvest 5% stake via the ‘buyback’ mechanism and only 5% via an OFS is a positive surprise, according to Nomura Equity Research
Global news agency Bloomberg, quoting a draft proposal by the Indian ministry of finance, states that the Government of India plans to raise Rs20,000 crore ($3.7 billion) by disinvesting 10% stake in Coal India (CIL) through a 5% sale to the public (i.e. secondary offering) and a 5% sale to the company (i.e., buyback), given CIL’s $12 billion cash chest.
The ministry of coal has been asked to take CIL’s workers’ unions into confidence and gather support for the share sale. The unions were assured at the time of CIL’s IPO in 2010 that there would be no further disinvestment. Coal secretary SK Srivastava is quoted as saying “We anticipate some labour issues and we will do our best to take them into confidence.”
Nomura Equity Research, in its Quick Note, on the government’s proposal believes that the prospects of a potential 10% disinvestment in CIL through a secondary offering (OFS) has been an overhang on the stock since the Government of India pegged its FY2014 disinvestment target at Rs40,000 crore in the Union Budget (presented on 28th February).
It adds that the overhang has been exaggerated in the backdrop of NTPC’s stock price correction between the government announcing its intent to divest stake in the company (November 2012) up to the actual stake sale (February 2013).
Accordingly, relative to expectations, the government’s proposal to disinvest 5% stake via the ‘buyback’ mechanism and only 5% via an OFS is a positive surprise, according to the brokerage.
Nomura states that CIL’s workers’ unions would need to be on board for any move by the government to lower its stake in the company, particularly via an OFS, to materialize. It further states that if the draft proposal is implemented, a buyback would potentially precede the OFS.
“We believe that when there is an OFS around the corner, it would likely be preceded by a ‘hike in price of notified coal’ in order to boost CIL’s operating margin (which is under pressure) and in turn, securing a better offering price, the report by Nomura Equity Research said.
According to the brokerage, a 5% share buyback by CIL at its CMP (Rs310.65 per share) would entail a cash outgo of Rs10,000 crore ($1.8 billion); with other things remaining constant, FY14F/15F normalized EPS (base case) may rise by 3.6%/2.8%.
On normalized earnings (pre-overburden removal EBITDA and PAT, excluding a potential incidence of 26% mining tax), the stock trades at FY14F 9.6x P/E, 5.2x EV/EBITDA. It maintains a ‘BUY’ on the stock.