Adani Power(AP): My reasons to get in at CMP (ie. <350 levels).
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Tata Power* put all it’s might to raise money for it’s Renewable Energy Projects, however the acute supply disruptions Covid brought in the World(particularly India) gave a reality check that it cannot do away with Coal, just yet. At least for this decade, the Coal is here to stay. This “fundamental-assumption” helped put the entire Coal Sector back on Investor’s agenda.
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Since 2016, no New Thermal Power plant has been sanctioned due to India’s commitments to Paris Agreement. However, AP quite smartly, has been vying for distressed Thermal Power Plants, thereby gaining a disproportionate market share in Power Generating Companies(GenCos), eg. it bought GMR, DB Power, Udupi PC, Lanco etc. Its’ Jharkhand, Godda Districts’ under-construction plant(set to begin operations within 6-months), was carefully crafted as a SEZ(to supply power exclusively to Bangladesh), ie. the tax benefits will be accrued. Till recently, securing Coal for this plant was a major roadblock, but the opening up of Carmichael Coal Mines’(Australia), has ensured a steady & disproportionate supply for the fuel needs of AP, vis a vis its’ Thermal Peers. This is a major “backward-integration”, which will increase the earnings visibility for AP in an ever increasing power demand in a country like India.
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GenCos in India usually stay under severe Financial Stress(in part due to legacy issues of Over Capacities built during UPA-II) and majorly due to inability of Discoms(Distribution Companies) to collect bill amounts and payback the GenCos in time. The inability of Discoms to collect money from the general populace is left unabated by the Political Executive of the states, for whom collection becomes an election issue. However, the Central Govt’ usually incentivizes the GenCos by bailing out the distressed DisComs, eg. UDAY Program, which was launched in 2015. Another such program is in making, ie. 2022 and may see light soon as a budget-announcement.
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AP’s debt is majorly the deliverables from the Discoms, however, the company is not only looking up for Central Govt’s package but actually fighting tough legal battles to recover them back. eg. It did major recoveries by winning legally over Rajasthan, Haryana, Jharkhand, Maharasthra in 2021 and now UP, TN, MP are next. This is also favourable to Central Govt(which may help create conditions for such recoveries), as those recoveries will form part of State’s Budget. One may say that this is Adani’s clout which is helping it recover the dues, but this is a fair-pratice & favours the overall business atmosphere in the country. Recoveries must be promoted and timely collection should be ensured by State Govts.
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It is presently(shifted up from ASM-IV today) in ASM-III( ie. negativity is priced in), which should give investors time to to study & get in. Upon a reasonable sideways performance(3 months now), it should start to show an upmove soon, ie. when it(tends to) get out of the ASM Framework. Additionally, it’s inclusion in MSCI Index in May, brought in funds from BlackRock and Fidelity, which will actually pave way for sustained FII(and Institutional) interest in Short to Medium Term. The Power Demand picks up in Summers, consequently, the Demand for Power Sector Stocks, plummets in Winters. Personally I see a cyclical+value opportunity in AP.
Did I tell you something?
*****(a peer which common investors so fondly claim as a great firm, having Thermal + Wind + Solar + New Projects eg. Hybrid, all built in).
Disclaimer: Not a buy/sell reco, only an analysis. This will help provide people some perspectives on how they should value this firm, beyond the obvious high-debt/‘adani’/coal narrative.
