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Event update: Adani Power (Underperformer) - Mundra Relief: Under recovery to reduce significantly

Event

Central Electricity Regulatory Commission (CERC), the apex regulator for power sector in India, has approved Adani Power Mundra’s amended 2000MW PPA, providing a huge relief for distressed Mundra assets.

Details

• Adani Power Ltd’s (APL) Mundra power plant has been facing huge under recovery due to increase in coal prices, following the Indonesian government’s mandate that prices under all coal supply agreements should be aligned with international coal prices (Case details inside).
• The government of Gujarat (GoG) formed a high-powered committee (HPC) to address the issue. Based on HPC’s report and Supreme Court’s observations, the GoG amended power purchase agreements (PPA) and approached CERC’s for the approval.
• CERC has approved the amendments in the original PPA without any modifications, providing huge relief to Mundra Thermal Power Station.
• Key features of the amended PPAs are: a) energy charge is a complete pass through (ceiling of USD110/ton) b) reduction of 20ps/Kwh in capacity charge for supply upto 80% availability c) additional tie up of 434MW capacity at original charge d) sharing of mining profits from Indonesia (minimum 5ps/Kwh), and e) effective date of PPA is 15 Oct 2018 (Details in the note).
• We have cut our loss for FY19E/FY20E/FY21E to Rs23bn/Rs5bn/Rs3bn from Rs28bn/Rs14bn/Rs8bn, respectively, but maintain Underperformer on steep valuations.

View and valuation

While we estimate under recovery for both PPAs to reduce sharply, the order faces the risk of being challenged in higher courts. Note that the start of the payment under the amended PPA will be crucial. Further, APL has various claims for Tiroda and Kawai, which are being heard by various regulatory/appellate bodies. Favourable judgement from these claims will help the company further reduce debt and cut losses (not in our profit estimates). We value APL at a revised target price of Rs39/share (valuing all finalised claims at 100% and other claims at appropriate discounts). We maintain our Underperformer on the company, given its expensive valuations and risk of further litigations.