Karvy Stock Broking has recommended 'Sell' on Adani Power with target price of Rs 35 as against current market price (CMP) of Rs 37 in its report.
Commenting on the investment rationale, the stock broker said, ''Adani Power has made application under Sec-79 of Electricity Act, 2003 for evolving a mechanism for regulating including changing and/or revising tariff on account of frustration and/or of occurrence of 'force majeure' (Article-12) and/or change in law (Article-13) events under the PPAs due to change in circumstances for the allotment of domestic coal by GoI-CIL and enactment of new coal pricing regulations by Indonesian Government.
APL has signed power supply agreements with GUVNL (1,000MW; Rs. 2.35/Kwh) & Haryana utilities (1,400MW, Rs 2.89/Kwh). To meet the coal requirement, APL entered into coal supply agreements with Adani Enterprises for 10MT to be imported from Indonesia & CIL subsidiary MCL for 6.4MT. However post this, Indonesia has changed law for coal pricing and was linked to international prices. Also, MCL also supply below the contracted quantity which increases APL's dependence on imported coal. To offset rise in fuel cost APL petitioned the CERC for tariff hikes.
We keep option value for APL at Rs. 7 a share while maintain our base case TP at Rs 35 a share. At CMP, the stock is trading at 2.6x P/B in FY15E with 11% RoE. We maintain our 'Sell' recommendation on the stock, as we believe that the stock is expensive given high risks on high leverage, uncertainty on coal linkages.''
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