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Please refer to important disclosures at the end of this report
Market Cap Rs148bn/US$3.7bn Year to March FY08E FY09E FY10E FY11EReuters/Bloomberg ADEL.BO/ADE IN Revenue (Rs mn) 197,444 247,687 323,268 397,934
Shares Outstanding (mn) 246.5 Net Income (Rs mn) 3,141 3,042 9,952 23,826
52-week Range (Rs) 1,274/205 EPS (Rs) 12.0 9.1 29.7 71.0
Free Float (%) 25.0 % Chg YoY 66.3 (24.4) 227.1 139.4
FII (%) 12.9 P/E (x) 50.0 66.2 20.2 8.5
Daily Volume (US$'000) 11,000 CEPS (Rs) 16.2 18.2 49.9 107.4
Absolute Return 3m (%) (50.2) EV/E (x) 29.9 21.3 12.0 9.0
Absolute Return 12m (%) 193.4 Dividend Yield 0.1 0.1 0.1 0.1
Sensex Return 3m (%) (22.9) RoCE (%) 7.6 5.1 6.6 8.1
Sensex Return 12m (%) 25.6 RoE (%) 20.9 5.9 10.0 18.2
Adani Enterprises BUY
Morphing to excel Rs601Reason for report: Initiating coverage
Equity ResearchMarch 31, 2008
BSE Sensex: 15644
Diversified
Shareholding patternJun'07
Sep'07
Dec'07
Promoters 66.9 75.0 75.0Institutionalinvestors 16.6 11.9 14.9
MFs and UTI 1.8 1.8 1.9Insurance Cos. - - 0.0FIIs 14.7 10.1 12.9
Others 16.5 13.1 10.2
Source: NSE
Price chart
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Jul-07
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Mar-08
(Rs)
Poonam Nishaloonam_nishal@isecltd.com91 22 6637 7443
Adani Enterprises (AEL) is set to ride the Indian Infrastructure growth wave bytransitioning from being a leading trading house to a diversified infrastructureplayer. Aggressive plans in power generation and real estate (supported by otherexpanding businesses) would result in 26% revenue CAGR and ~900bps EBITDAmargin expansion, implying 92% earnings CAGR over FY08E-11E. Huge capexoutlay of ~Rs510bn in the next four years would entail ~28% equity dilution. Oursum-of-the-parts (SOTP) based valuation suggests 12-month target price ofRs908/share. Material upside could accrue from better yields and new projects inpower/real-estate, coal mining & oil exploration. Initiate coverage with BUY.
Riding the infrastructure growth wave. AEL is undergoing a transition from beinga pure trading house to diversified infrastructure play, focussing on fast growingsegments such as power & real estate. In the next 4-5 years, it plans to set up
9,900MW power generation capacity, develop ~105mn sqft residential/commercialproperty and townships, engage in coal mining with 440MMT available reserves, setup oil & gas exploration units and introduce new agri storage & transportationoptions apart from expanding its existing trading business.
9,900MW capacity valued at Rs256bn, aided by access to low cost fuel. 80% ofthe 9,900MW capacity is likely to be sold on merchant basis as of now. Access tolow cost coal from owned mines in Indonesia and Maharashtra would aid the powerbusiness equity value at Rs256bn translating into Rs623/share for AELs stake.
Real estate development of 105mn sqft to add Rs79bn. AEL is developing twointegrated townships in Gujarat (Ahmedabad and Mundra) spanning ~96mn sqftcombined. Balance is split across three projects in prime locations at Mumbai, Kochiand Surat with residential, commercial and retail spaces. We estimate an equity
value of Rs79bn (Rs191/share for AEL stake) for this segment. Existing trading and other businesses valued at Rs75bn. AELs existing trading
business is expected to post 18% CAGR over FY08E-11E, led by robust growth inagri and coal trading. We have valued this segment at Rs43bn. Coal mining forRajasthan state electricity board, stake in the JV with the Wilmar Group, city gasdistribution and other agri-related businesses are valued at Rs32bn.
SOTP valuation suggests Rs908 fair value post 10% corporate discount and 28%dilution (without any contribution from the oil & gas business). Upside to emergefrom: i) higher yields in power tariffs or property prices, ii) acquisition of more miningassets, iii) successful venture in oil exploration and iv) lower equity dilution throughfunding at subsidiary level. Initiate coverage with a BUY.
INDIA
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TABLE OF CONTENTS
SOTP valuation suggests 51% upside...........................................................................3Power generation, largest asset creator forming 62% of value ......................................3Real estate Creating real value with 19% contribution ................................................4Trading & others constituting 16% of the total value ...................................................5AEL valued at Rs304bn post 10% corporate discount ...................................................6Upside to our fair value could emerge from:...................................................................6
Expanding horizons.........................................................................................................7Pipeline of 9,900MW capacity, valued at Rs256bn, aided by access to low cost fuel ...8Real estate Blend of residential & commercial projects, valued at Rs79bn ..............14Trading Providing the necessary initial capital, valued at Rs127/share ....................19Other segments adding another Rs18bn......................................................................24
Key risks .........................................................................................................................27Changing face of AELs financials...............................................................................28
Shift from trading to infra = move from current to fixed assets .................................28 supported by increasing financial leverage ..............................................................28Equity dilution of 28% expected to bridge funding gap.................................................29Expected earnings CAGR of >96% over FY08E-11E...................................................29
Financials........................................................................................................................31 Annexure 1: Power sector Economic growth to lead demand...............................35
Power demand to continue outstripping supply ............................................................35Continued investment required even beyond XI Plan...............................................36but power deficit may still continue........................................................................36
and per capita consumption may increase................................................................37Opportunity for the private sector..................................................................................38Few concerns remain ................................................................................................38
Annexure 2: Indian real estate proxy on growing economy ..................................40Foundations still good ...................................................................................................41
Annexure 3: Company background .............................................................................48Key management profile ...............................................................................................49
Annexure 4: Index of Tables and Charts .....................................................................52
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SOTP valuation suggests 51% upside
AELs traditional business of trading would act as a cash cow and provide necessary
equity for new projects in the beginning; however, to fully fund the capex for all
projects across business segments (power, real estate, oil & gas, trading etc), AEL
requires Rs510bn over the next 4-5 years, of which 59% is expected to be raised as
debt. Of the balance 41% (Rs210bn), we believe Rs60bn is the funding gap whichwould need to be bridged with additional equity. We have assumed the equity infusion
at a price of Rs815 (average of past six months), implying a dilution of 28% (excluding
that on account of FCCB conversion).
We have used the SOTP methodology for valuing the company owing to various
earnings streams and each stream being valued differently.
We present below key assumptions and valuation methodology used for valuing each
business segment and sensitivity to key variables.
Power generation, largest asset creator forming 62% of valueAll power projects are being developed under APL, which is 86% owned by AEL. We
have valued the projects on FCFE basis with conservative assumptions (Table 1).
Table 1: Valuation for power projects
Projects AEL Stake (%) Equity value (Rs mn) Capacity (MW) Rs mn/MWUnder constructionMundra 86 110,097 2,640 41.70Maharashtra 64 52,247 1,980 26.39
162,344 4,620Recent ProjectsMundra 86 38,770 1,980 19.58Rajasthan 86 21,692 1,320 16.43
Dahej 86 33,476 1,980 16.9193,938 5,280
Total 256,282 9,900 25.9Source: I-Sec Research, Company
Almost two quarters back, 3i Group plc had picked minority stake in APL valuing it at
Rs100bn (the Groups largest investment in India) for two projects announced till then
Mundra (2,640MW) and Maharashtra (1,980MW). We have further included the
value of other projects announced by the company over subsequent period. We
estimate the power business value to be ~Rs256bn, i.e. Rs25.9/MW (FY11E P/BV of
4x), higher than the implied valuation for peers owing to higher expected returns in the
range of 15-35% over next 3-4 years (Table 2).
Table 2: Relative valuations for power companiesEPS (Rs) P/E (x) P/BV (x)
Company nameCMP(Rs)
Mkt. cap(Rs bn)
RoE(%) FY08E FY09E FY08E FY09E FY08E FY09E
NTPC 197 1,624 15.0 9.4 10.3 21.0 19.1 3.1 2.8Reliance Energy 1,251 296 10.2 40.4 46.5 31.0 26.9 2.8 2.6Reliance Power* 318 476 0.8 0.2 (1.7) NM NM 3.4 3.4Tata Power 1,172 258 11.4 32.6 33.5 35.9 35.0 3.5 3.1CESC 412 51 12.9 28.0 30.1 14.7 13.7 1.5 1.4
* Adjusted for the bonus announcedSource: I-Sec Research, Bloomberg
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We have been conservative in terms of key assumptions such as tariffs, project
execution, fuel prices and discount rates. We present below the sensitivity of power
business value to variation in discount rates and tariffs (Table 3).
Table 3: Power generation valuation sensitivity to tariffs and discount rates
Tariff variation (%)(Rs bn) -5.0 0.0 5.0
14.0 213 244 27513.5 224 256 288Cost of equity (%)13.0 236 269 302
Source: I-Sec Research
We have not factored in potential upside (in the form of terminal value) from new
projects APL might bag in the future and valued only the present pipeline. APL has
been participating and focussing on multiple new projects, success in which would
provide scope for further upside.
Real estate Creating real value with 19% contribution
Each real estate project is owned by a separate SPV/subsidiary of AIDPL in
collaboration with local real estate developers. AIDPL in turn is 95% owned by AEL;
though retains the liberty for making critical business decisions.
We have used FCFE method for valuing these projects and taken a high discount rate
to reflect the level of uncertainty associated with respective projects. Our key
assumptions for all the projects are tabulated (Table 4).
Table 4: Valuation summary of real estate
Projects Holding (%) Equity mn sqft Rs/sqftBKC 85 37,306 2.18 17,113Khatau 57 8,312 1.90 4,375Shantigram 71 18,180 41.50 438
Surat 95 4,614 5.65 817Cochin 95 1,490 3.24 459Mundra 95 9,338 49.99 187Weighted sum 79,240 104.46 725
Source: I-Sec Research, Company
Based on these assumptions, we have valued the existing projects at Rs79bn.
Importantly, yields assumed for respective projects are conservative considering
present market rates and that property sale would happen over subsequent quarters.
Also, we have not taken any upside from projects that AIDPL would take up beyond
the announced projects. Sensitivity to yields assumed is high and every 5% change in
yields changes the value 9-10% (Table 5).
Table 5: Real estate valuation sensitivity to property prices and discount rates
Property prices variation (%)(Rs bn) -5.0 0.0 5.0
0.5 71.1 78.1 85.10.0 72.2 79.2 86.3
Cost of equityvariation (%)
-0.5 73.2 80.4 87.5Source: I-Sec Research
This valuation translates into equity value/sq ft of Rs725, which fares at a premium to
the average of current valuations of peers (Table 6), primarily due to the sharp
correction in the real estate sector since February and ownership of prime properties
like BKC and Khatau.
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Table 6: Relative valuation of real-estate companies
CompaniesFY09EP/E (x)
Market cap(Rs bn)
Land bank(mn sqft)
Value(Rs/sqft)
Unitech 12.6 448.3 689 651Purvankara 11.4 51.4 110 468Omaxe 6.4 36.1 170 213Sobha 12.9 43.9 225 195Parsvnath 8.2 38.8 125 310
Source: I-Sec Research
Trading & others constituting 16% of the total value
As mentioned earlier, AEL has a diversified portfolio of products for trading and enjoys
leadership in most segments of its presence. We have valued this segment on the
basis of FY10E P/E multiple, with multiples in 6-9x range, depending on the traded
product (Table 7), suggesting a value of Rs127/share for AEL.
Table 7: Valuation of trading businesses
ProjectsHolding
(%)FY10E P/E
(x)Equity value
(Rs mn)Remarks
Agro Commodities 100 9 10,369 High growth, increasing market shareCoal Trading 100 9 15,533 High growth, increasing market sharePower Trading 100 9 339 High growth, increasing market sharePOL 100 8 636 Moderate growth, high market shareIron Ore 100 7 1,744 Decreasing market sharePrecious Metals 100 8 8,713 Moderate growth, high market shareDubai Scrap 100 7 2,137 Decreasing market shareBelekeri Port 100 8 1,919 Moderate growth, high market shareFreight Brokerage 100 6
1,203Decreasing market share, shrinkingmargins
Total 42,595Source: I-Sec Research, Company
Apart from trading, AEL is also involved in coal mining, oil refining, agri-logistics, fruits
and vegetables storage and handling, city gas distribution and oil exploration. We are
assigning zero value to oil exploration as the business involves high uncertainity, longgestation and the company lacks proven track record. We have arrived at a equity
value of Rs32.5bn for the rest of the businesses (including coal mining) based on
FCFE/relative valuation, depending on the type of the segment (Table 8), implying a
value of Rs22.7bn or Rs68/share for AELs share.
Table 8: Valuation of other businesses (including brief remarks)
Projects Holding (%) Basis Equity RemarksCoal mining dealwith RRVUNL
76 FCFE 14,784 Volume build-up to maximumcapacity over five years, 3%escalation in service chargesand opex
Adani Wilmar 50 13x FY10E P/E 6,322 Volume led growth, operatingmargins to shrink to 2%,
earnings to report over 15%CAGR
Agri-logistics 100 FCFE 410 Cost of equity 18%, terminalgrowth 3%
Agri-fresh 100 FCFE 2,239 Cost of equity 18%, terminalgrowth 3%
Adani Energy 65 FCFE 5,676 Cost of equity 15%, terminalgrowth 3%, with cues fromfinancials for GAIL and IGL
32,488Source: I-Sec Research, Company
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AEL valued at Rs304bn post 10% corporate discount
SOTP suggests a total value of Rs338bn for AEL, which we have adjusted further to
the extent of 10% for corporate discount to arrive at Rs304bn as the fair value,
translating into Rs908/share as the target price post the required equity infusion.
Table 9: SOTP valuation for AELParticulars Equity Value of AELs stakePower Generation 208,908Coal Mining 11,236Real Estate 64,025Trading 42,595Other Ventures 11,486Total 338,250Post 10% corporate discount 304,425
Source: I-Sec Research
Table 10: Fair value of Rs926/share post dilution
Per Share Value Shares Equity Value RemarksCurrent 261.8 1,163 Post FCCB conversionPost dilution + FCCB 335.4 908 Post Rs60bn equity infusion
Source: I-Sec Research
Upside to our fair value could emerge from:
Equity infusion at a price higher than Rs815 or equity raised at business subsidiary
level, which would limit the extent of dilution, thus increasing per share fair value
Access to more mining assets
Higher yields realised in terms of power tariffs or property prices
Earlier-than-expected execution of power/real estate projects
Additional projects (in power and real estate) bagged by AEL Any success achieved in oil exploration
Considering the upside to our fair value of ~51% and potential for further upsides, we
initiate coverage on AEL with BUY rating.
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Expanding horizons
AEL has till date been a trading/export house (five star status), dealing in
commodities, coal, iron ore, power, agri produce etc, with leadership across trading
segments. Leveraging its presence in port development and power related (power &
coal) trading, the company has decided to spread its wings to other high-growth
potential business segments (Chart 1) such as power generation (Chart 2), real-estatedevelopment (Table 11), coal mining (Chart 3), oil & gas exploration etc.
Chart 1: AEL in transition mode
Source: Company
Chart 2: Power generation to grow at 10% CAGR
0
200
400
600
800
1,000
1,200
FY08 FY09 FY10 FY11 FY12
Energysupply(bnKwh) CAGR 10%
Source: I-Sec Research; Report of the Working Group on Power for XI Plan
Table 11: Investments in Real estate expected to report 12.8% CAGR
(US$ bn)Demand in
FY07Demand in
FY12EAverage demandin next five years CAGR (%)
Residential 51.7 90.6 74.1 11.9Office 3.0 7.7 5.7 20.9Retail 2.7 6.5 4.8 19.5Total 57.3 104.9 84.7 12.8Investments as a % of GDP 6.2 7.1 6.8
Source: I-Sec Research
Evolving business
model, focused on
high growth
segments like
Power: Greater
contribution
expected from
private players to
achieve this target
Real-estate:
presents compelling
investment
opportunities
From trading house to an asset intensive infrastructure play
Trading Business
AEL is a leadingcommodity trader inIndia
AEL has trading
capability in more than70 commodities andproducts includingpower, coal, metals,minerals, agro basedcommodities etcacross 60 countries
Power Generation
Plans to set upcapacity to generate~10GW power by 12
Real Estate
Plans to develop ~105mn sqftarea in Mumbai (commercial),Ahmedabad (integratedtownship), Surat (commercial& residential), Cochin(commercial & retail), Mundra(mass housing project)
Oil & Gas
City Gas Distributionnetwork, oil explorationbusiness JV withWelsupun, Ship Fuelling
Coal Mining
Access to coal miningvia mines in India andIndonesia
Food & Vegetable Processing
Developed ultra moderncontrolled atmosphere storagefacilities for processing of agriproducts
Logistics
Shipping business aims tocapitalise on the Groupstrading business
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Chart 3: Coal demand (from power and steel sectors) to grow at robust rates
0
100
200
300
400500
600
700
800
900
FY07 FY08E FY09E FY10E FY11E FY12E FY17E
(mnM
T)
13.4% CAGR
7% CAGR
Source: CEA, I-Sec Research
To realise this target, AEL has instituted various subsidiaries and formed JVs with
renowned players in each of the business segments. This completes the required skill-
set for new business lines, which the company intends to start.
Pipeline of 9,900MW capacity, valued at Rs256bn, aided byaccess to low cost fuel
AEL has been trading in coal and power for over four years with leading market share
among private players and plans to enhance presence across the value chain by
venturing into coal mining and thermal power generation.
AEL has lined up thermal power generation projects totalling up to 9,900MW capacity
in Gujarat (6,600MW), Maharashtra (1,980MW) and Rajasthan (1,320 MW), to be set-
up over the next 4-5 years (Chart 4) through its 86% owned subsidiary Adani Power
(APL). Of this, the largest project at Mundra with 2,640MW capacity is already underconstruction and the first phase with 1,320MW capacity will be operational by FY09E
end.
Chart 4: Planned projects with total of 9.9GW capacity
Rajasthan(1.3 GW)
Gujarat
Maharashtra
Mundra(4.6GW)
Dahej(2GW) Tiroda
(2GW)
Source: Company
Coal
mining/trading: Fuel
supply remains one
of the key hurdles for
various power and
steel projects
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Mundra (2,640MW, extendable by 1,980MW)
APLs largest project is coming up in the Mundra special economic zone with initial
capacity of 2,640MW (two phases of 2x330MW sub-critical + one phase of 2x660MW
super-critical); the first unit is scheduled to be commissioned by March 09. Financial
closure for this project is already achieved and EPC has been given to Chinese
companies - Sichuan Machinery and Equipment Corporation (SCMEC) for sub-critical
phase and SEPCO III Electric Power Construction Corporation for super-critical phase.
AEL already controls coal block in the Bunyu Island with 140MMT estimated reserves
in the central & northern part of the island covering 3,000 hectares of land. Coal mined
from here would be used for the Mundra project. The arrangement gives access to
coal at a price below US$25/te at the origin, much lower than the prevailing market
price in US$35-40/te range. This would support high returns for the Mundra project,
especially with merchant tariffs.
APL has entered into a 25-year power purchase agreement (PPA) for 2,000MW
capacity at Mundra with Gujarat Urja Vikas Nigam (GUVNL) at an average tariff of
Rs2.62/unit (higher than the level 2 bid at Rs2.26/unit won by Tata Power in Mundraultra mega power project). Rest of the planned capacity is kept as merchant, though
the company plans to enter into short- and long-term PPAs with state utilities and
other Discoms to maintain the balance between assured and merchant off-take of the
power generated.
Table 12: Mundra project details
Generation capacity (MW) 2640
Composition (2x330) + (2x330) + (2x660)
Expected CoD Jul-11
Land and water linkage Achieved
Fuel linkage Achieved from coal block in Bunyu Island, Indonesia
Financial closure Achieved
Project cost (Rs bn) 101.5
Implied per MW cost (Rs mn/MW) 38.4
Funding (D:E) 80:20
PPA with GUVNL for 2000MW
PPA tariff (Rs/Kwh) average Rs2.62
Merchant sales 640MW
Merchant tariff (Rs/Kwh) Rs2.75/unit
Fuel cost (Rs/Kwh) Rs0.67/unit
AEL stake (%) 86.0
IRR (%) 62.0
Source: company, I-Sec Research
APL has received approval from the State government to extend the capacity further
by 1,980MW (3x660MW), which is expected to be operational by FY13E. APL is alsosetting up 400kv 425km transmission line the largest being set up by any power
player to connect the plant with the western grid.
Advanced stage of
implementation
coupled with
access to low cost
fuel
and high tariffs
through 77% PPA
(which is reasonablyhigh) and 23%
merchant sales
would boost
returns
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Tiroda (1,980MW)
APL has taken up this project keeping in view the acute power shortage faced by the
state of Maharashtra. The project is split into two phases (2x660MW + 1x660MW)
based on super critical technology and has made decent progress till now. APL has
already secured 200 hectares land in Gondia district, near the eastern border of
Maharashtra and water linkage from the water resources department. Power off-take
would be secured by setting up 400KV 365km transmission line connecting it towestern grid.
Fuel linkage is being provided from the coal mines allotted in Lohara West & Lohara
(Ext) with reserves of ~100MMT. APL intends to place 26% stake in this project with
strategic investors, restricting exposure in the project to 74%.
Table 13: Tiroda project details
Generation capacity (MW) 1980
Composition (3x660)
Expected CoD April-12
Land and water linkage Achieved
Fuel linkage Achieved
Financial closure Yet to be achieved
Project cost (Rs bn) 92.47
Implied per MW cost (Rs mn/MW) 46.7
Funding (D:E) 80:20
PPA Nil
PPA tariff (Rs/Kwh) NA
Merchant sales 1980 MW
Merchant tariff (Rs/Kwh) 2.75
Fuel cost/unit (Rs/Kwh) 0.57
AEL stake (%) 64.0
IRR (%) 50.7
Source: Company, I-Sec Research
Dahej (1,980MW) and Rajasthan (1,320MW)
APL has announced two more projects one each in Dahej (1,980MW) and Rajasthan
(1,320MW). Both the projects would be based on super-critical technology with
composition of 3x660MW and 2x660MW respectively.
Dahej would likely be based on imported coal, while Rajasthan would be indigenous
coal based, though the fuel linkage is yet to be established. Since these are new
projects, APL has not made any significant progress. The company expects the
projects to be on-stream by FY12, though we are factoring in operational benefits
FY13 onwards.
Higher tariffs owing
to power supplied to
high power deficit
western and northern
regions
coupled with low
cost of fuel
would boost
returns
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Table 14: Dahej and Rajasthan projects
Dahej RajasthanGeneration capacity (MW) 1980 1320Composition (3x660) (2x660)Expected CoD September-12 July-12Land and water linkage Yet to be achieved Yet to be achievedFuel linkage Yet to be achieved Yet to be achievedFinancial closure Yet to be achieved Yet to be achieved
Project cost (Rs bn) 89.1 59.4Implied per MW cost (Rs mn/MW) 45.0 45.0Funding (D:E) 80:20 0PPA Nil NilPPA tariff (Rs/Kwh) NA NAMerchant sales 1980 MW 1320 MWMerchant tariff (Rs/Kwh) 2.75 2.75Fuel cost/unit (Rs/Kwh) 0.81 0.88AEL stake (%) 86.0 86.0IRR (%) 38.6 30.9
Source: Company, I-Sec Research
Factoring in the above mentioned assumptions, free cashflow-to-equity (FCFE)-based
valuation of these projects suggests a value of Rs256bn, translating into Rs623/share
value for AELs stake.
Table 15: FCFE based valuation of power projects
Projects Holding (%) Equity value (Rs mn) Capacity (MW) Rs mn/MWMundra 86 110,097 2,640 41.70Maharashtra 64 52,247 1,980 26.39
162,344 4,620Under PlanningMundra 86 38,770 1,980 19.58Rajasthan 86 21,692 1,320 16.43Dahej 86 33,476 1,980 16.91
93,938 5,280Total 256,282 9,900 25.9
Source: Company, I-Sec Research
Coal mining, providing the necessary access to fuel and boostingvalue
AEL has bagged mining rights for two coal mines one as a part of the 74:26 JV with
Rajasthan Rajya Vidyut Utpadan Nigam (RRVUNL) and other for mining a large block
in Bunyu Island, Indonesia.
RRUVNL High pricing to provide impressive returns
The deal with RRVUNL involves mining 200MMT coal over ~30 years (starting FY11)
and selling it to Rajasthan state electricity board (RSEB) at a predetermined price
(Rs958/MT) agreed upon by the concerned parties. The work is under progress and
the mining is expected to start in FY11E with annual volumes reaching 8MMT after it
becomes fully operational. Based on FCFE, we have valued the deal at Rs33/share(Table 16). AEL is also pursuing such deals further with other states.
In the pipeline, fuel
linkage likely to be
provided from mining
assets sought in
Sumatra
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Table 16: Key assumptions and valuation of mining deal with RRVUNL
Total mineable reserves (MMT) 200Mining starts FY11Annual volumes starting with 2MMT, going up to 8MMT over next 4-5
yearsServices charges levied on RRUVNL Rs 958/MTEscalation assumed in service charges and operatingexpenses
3%
Capex involved (Rs mn) 4,834Cost of equity 15%FCFE value 14,784
Source: Company, I-Sec Research
Indonesian mine Access to good quality fuel at low cost
Coal availability at very attractive prices has been the key value creator for AEL. As
regards the Indonesian mine, the coal block is situated in the island of Bunyu (in E.
Kalimantan near the border of Malaysia to the North and 33kms off the island of
Tarakan). The reserve size is expected to be ~140MMT with favourable strip ratio of
1:3.5 located in Central and Northern part of island covering 3,000 hectares land.
Commercial operations have already started for phase I (Chart 5) of the project (of the
total four phases). The coal produce would be used for captive requirement arising
from Mundra project and thus we have not valued this asset separately. The cost at
the Indian port works out to be ~US$22-25/te (mining cost ~US$12-15 and balance
shipping cost), which is quite low as compared to the prevailing market rate of US$30-
35/te. We have taken the cost at US$28/te in our estimates to keep cushion for any
cost overruns or re-negotiations.
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Chart 5: Progress made in Bunyu Island for coal mining
Mining at work coal stacks
Coal loading on the ship
Source: Company
Any new mining asset to be a bonanza
We have not taken into account the value of any other mining asset for AEL despite
the company processing other deals at different stages at various locations in Sumatra
Kalimantan. The company has received the preliminary survey licence and is
preparing the exploration & exploitation report for the allotted ~250,000 hectares land
in Sumatra and Kalimantan regions (believed to be having mineable reserves of over
300MMT).
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It has also bid for some coal mines in India and could emerge as the winner. We have
assumed that the company would have access to adequate coal reserves by FY12 to
serve the requirement of its planned thermal plants, though at prevailing market prices
(to maintain our conservative approach).
Real estate Blend of residential & commercial projects, valued
at Rs79bn
Size remains the key for AEL in all business segments. It is a leading name in
commodities trading registering the highest (and increasing) volumes. The ~10GW
planned power capacity puts it in the league of Tata Power, JP Power Ventures etc.
And, so are its real estate plans. With a total saleable area of ~105mn sqft, AEL
compares with established players such as Purvankara, Parsvnath, Omaxe and Marg.
AEL operates real estate development business via its 95% owned subsidiary Adani
Infrastructure Developers Private (AIDPL), which in turn has varying stake in each of
the real estate projects. AIDPL has raked in renowned local real estate players as
partners to lend experience and to gain visibility among potential buyers. The
company is developing three properties two in Mumbai and the third in Ahmadabad
totalling 46mn sqft of commercial, retail and residential space. It is also developing
three more properties in Surat, Cochin and Mundra totalling 59mn sqft of space
which are at nascent stages of development.
Table 17: Real estate space Break-up
Project City PartnerAIDPL
Stake (%)Saleable Area
(mn sqft)Commercial
(%)Residential
(%)
Shantigram Ahmedabad SaumyaConstruction(25%)
75 41.6 55 37
BKC Mumbai Mayfair housing(11%)
89 2.2 100
Khatau Mumbai-Borivali
1.2 80 20
Mumbai-Byculla
Marathon Group(40%)
600.8 100
Surat Surat NA 100 5.6 65 35
Cochin Cochin NA 100 3.2 15 85
Mundra Mundra NA 100 50.0 100Source: Company, I-Sec Research
The real estate portfolio is well diversified in terms of the type of construction
residential, retail and commercial, and geography Mumbai, Ahmadabad, Surat,
Mundra and Cochin. The first three projects are joint ventures with local developers,
which allows AEL to leverage local expertise and knowledge of the real estate market.
The company is further planning to sell 5% stake in AIDPL to part fund the plannedcapex.
The portfolio of real estate consists of properties such as Bandra-Kurla Complex
(BKC) and Khatau in Mumbai on one hand (which are relatively smaller in size but
offer high value) and Shantigram and Mundra in Gujarat on the other (which are large
scale projects but offer low returns due to high risk). Thus, we have used lower
discount rate for the former but higher for larger projects.
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Chart 6: Prime location properties fetch higher value
(5)
-
5
10
15
20
25
(5) 5 15 25 35 45 55
Saleable area (mn sq ft)
NAV/sqft(R
s'000)
MundraShantigram
Cochin
Surat
Khatau
BKC
Size of bubble represents contribution to total real estate valuationSource: I-Sec Research, Company
Bandra-Kurla Complex forming largest chunk of value for AIDPL
Adani is developing 2.2mn sqft office and retail space in Bandra-Kurla Complex one
of the first planned commercial hubs in Mumbai, opposite the already existing offices
of ICICI Bank and IL&FS.
It is a slum rehabilitation project, wherein AIDPL is buying land and development rights
in phases from Housing Development & Infrastructure Ltd at pre-negotiated rates.
Hafeez contractor has been roped in as the architect and Sterling Engineering is
providing the structural design consultancy for the project. Thus, the execution risk for
this project is low and so far the progress is going as per schedule. The first phase of
the land transfer is through and AIDPL has taken charge of ~0.5mn sqft of land, which
is being developed.
BKC is emerging as a strong commercial hub and as an alternative to Nariman Point
(the biggest commercial area housing headquarters of many companies); especially
with the apparent supply constraints and as property prices have sky rocketed for
commercial property in South Bombay (Chart 7). The area has strong growth potential
because of its central location between South Mumbai and Mumbai suburbs, and
proximity to Santa Cruz Export Zone and the domestic airport (Chart 8). It already
houses offices of Wockhardt, the National Stock Exchange, Citibank and Reliance
Telecom.
Prime location and
attractive cost
proposition would aid
value
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Chart 7: Commercial property prices in South Bombay
0
5
10
15
20
25
30
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
(Rs'000/s
qft)
0
50
100
150
200250
300
350
400
450
(Rs/sqft/month)
Nariman Point - comm sale
Nariman Point - comm rental (RHS)
Source: Bloomberg, Cushman & Wakefield
Chart 8: Location map of BKC
North Mumbai
Khar
Bandra
Worli
Mahalaxmi
South Mumbai
P DMello
Colaba
Cental Mumbai
Bandra-Kurla Complex
Nariman Point
Borivali
Byculla
North Mumbai
Khar
Bandra
Worli
Mahalaxmi
South Mumbai
P DMello
Colaba
Cental Mumbai
Bandra-Kurla Complex
Nariman Point
Borivali
Byculla
Source: I-Sec Research, Maps of India
Rising commercial
property prices and
supply constraints in
South Mumbai have
led to suburbs
emerging as strongalternatives for office
spaces
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Khatau robust returns expected from properties in Byculla and
Borivali
AEL is also building a residential complex in Borivali (over 1.2mn sqft area) and a
commercial complex in Byculla (~0.7mn sqft area), both of which are part of the Mill
Land Development programme (MLDP). AEL has partnered with Marathon Group in a
60:40 JV to develop this land, thus bringing local expertise and knowledge of MLDP.
The land has been acquired through BIFR process, ensuring clean title and no legal
issues. Factory closure permission & environment clearances have also been
received.
Borivali, a Mumbai suburb is facing increasing demand as a residential area because
of supply constraints in the southern suburbs of Mumbai. AIDPL plans to set up a
high-end residential complex with five towers of 20 storeys each. Property in Byculla is
being developed as a complete commercial space. Byculla is very close to the
commercial hub of Mumbai and would provide good alternative to companies seeking
office space in Southern Mumbai. While property prices across the region have been
soaring, we have been conservative on property yield assumptions on account of
upcoming projects over the next 3-5 years.
Shantigram integrated township project spanning over 578 acres
Shantigram is an integrated township project being developed by AEL spanning an
area of over 578 acres (over 41mn sqft saleable area at 1.65x FSI). Located on the
Sarkhej-Gandhinagar Highway, very close to Ahmedabad, the township is being
developed at a cost of Rs46.5bn and will include residential and retail property along
with commercial space (Chart 9).
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Chart 9: Shantigram proposed plan
Source: Company
Ahmedabad is the third most prosperous city with the third highest per capita income
in India and receives interest from players involved in trading and infrastructure
development, being close to the west coast predominantly used for trading purposes
relating to capital & engineering goods, coal, oil & gas etc.
Others Mundra (township project), Surat and Kochi
Apart from the projects mentioned above, AIDPL is also developing a township at
Mundra, Mundra Ports and SEZ (MPSEZ) spanning over 600 acres of land for the
group company. The work for this project has already started, which would primarily
be a mass housing project, building initial infrastructure support for families involved in
developing MPSEZ over the next 5-10 years. Total saleable area is expected to be~50mn sqft, providing low income housing to start with.
AIDPL is also working on developing 5.6mn sqft of commercial and residential
property in Surat. Land acquisition of 57 acres is going on and sale is expected to start
from FY10.
AIDPL has tapped the southern region with a project spanning 27 acres of land in the
prime location in Kochi. The plan involves developing 3.2mn sqft of saleable area with
85% high-end residential and 15% commercial/retail space.
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Real estate valuation
We have valued these projects on FCFE basis with varying cost of equity to reflect
suitable risk involved.
Table 18: Real estate: assumptions and valuation details
Khatau
Project BKC Borivali Byculla Shantigram Surat Kochi MundraAssumptionsAEL stake (%) 85 57 71 95 95 95Saleable area (mn sqft) 2.18 1.15 0.75 41.50 5.65 49.99 49.99Plotted:residential:commercial 0:0:100 0:100:0 0:0:100 8:37:55 0:35:65 0:100:0 0:100:0Project completion Dec-11 Mar-10 Mar-10 Jun-12 Dec-13 Dec-16 Dec-16Land cost (Rs mn) 25,202 2,325 7,440 2,200 891 4,999Sale rates (Rs/sqft)Base Sale Rate Residential NA 4,000 NA 1,500 2,200 1,600 1,600Max Sale Rate Residential NA 4,840 NA 2,083 3,100 2,606 2,606Base Sale Rate Commercial NA NA NA NA 3,400 NA NAMax Sale Rate Commercial NA NA NA NA 3,400 NA NABase Lease Rate 300 NA 200 15 NA NA NAMax Lease Rate 350 NA 231 21 NA NA NAAvg. Lease Rate 345 NA 226 18 NA NA NABase Construction Rate - Residential NA 1,800 NA 650 1,600 1,000 1,000
Base Construction Rate - Commercial 3,930 NA 3,200 800 1,600 NA NAMax Construction Rate - Residential NA 1,800 NA 800 1,600 1,000 1,000Max Construction Rate - Commercial 4,520 NA 3,200 925 1,600 NA NA
FCFE based valuationCost of Equity (%) 18 18 19 19 19 17Capital yield for commercial lease properties (%) 10 NA 10 10 NA NA NATotal value (Rs mn) 37,306 8,312 18,180 4,614 1,490 9,338Implied NAV/sq ft 17,113 4,375 438 817 459 187Value of AEL's stake 31,710 4,738 12,908 4,384 1,415 8,871
Source: Company, I-Sec Research
Trading Providing the necessary initial capital, valued atRs127/share
Adani started as a trading house and now plans to diversify into power and real estateover the next few years. We believe that trading will continue to be the major cash cow
for AEL, especially in the short-to-medium term because of its experience and
expansion plans in this area. The company is currently trading in agri-commodities
such as maize, wheat, de-oiled cakes (DOC) and non-agri commodities such as coal,
iron ore, precious metals and power.
While agri-commodities will continue to yield stable cashflows, the growth is likely to
be driven by coal and power in the long run. As such we have valued both these
businesses separately, while other trading desks, including high growth areas such as
iron ore, precious metals etc have been clubbed together.
Table 19: Assumptions and valuation for tradingCoal trading Agri-trading Others
Current volumes (mnte) 11.1 2.2 NMVolume CAGR over FY08-FY11E (%) 23.6 17.6 NMYields CAGR over FY08-FY11E (%) 7.9 7.0 NMRevenue CAGR over FY08-FY11E (%) 33.4 25.9 8.7Current operating margins (%) 4.0 2.8 2.7Earnings CAGR over FY08-FY11E 26.3 38.4 5.8FY10E P/E multiple assumed (x) 9.0 9.0 7.6Implied value of business (Rs mn) 15,533 10,369 16,692AEL's stake (%) 100.0 100.0 100.0Value of AEL's stake (Rs mn) 15,533 10,369 16,692
Source: Company, I-Sec Research
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Coal to drive growth in trading segment
Demand for coal set to rise
In India, coal is the primary source of energy and is used mainly for power production
and making steel.
Chart 10: Key uses of coal
Pow er74%
Fertilizer
1%
Cement
5%
Others
11%Steel & Coke
Ovens
9%
Source: Ministry of Coal Report for Coal Sector Reforms
At the end of the X five year plan, Indias coal-based power generation capacity was
71,121MW of the total capacity of 132,329MW. The XI five year plan targets a further
addition of 54,355MW in coal, of the total addition of 78,577MW.
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Chart 11: Region-wise coal based power generation capacity and planned addition
Jammu & Kashmir
HimachalPradesh
Punjab
Haryana Uttranchal
Uttar PradeshRajasthan
GujaratMadhya Pradesh
Bihar
Jharkhand
Chhattisgarh
West Bengal
Maharashtra
Karnataka
Goa
Kerala
Tamil Nadu
Andhra Pradesh
Assam
Meghalaya
Nagaland
Manipur
MizoramTripura
Sikkim
Orissa
Low power deficit
Medium power deficit
High power deficit
Very high power deficit
Low power deficit
Medium power deficit
High power deficit
Very high power deficit
Arunachal Pradesh
Total Capacity: MW 18194 CapacityAddition in XIth Plan: MW 12930
Total Capacity: MW 22574 CapacityAddition in XIth Plan: MW 16125
Total Capacity: MW 13996 CapacityAddition in XIth Plan: MW 15190
Total Capacity: MW 15973 CapacityAddition in XIth Plan: MW 9360
Total Capacity: MW 385 CapacityAddition in XIth Plan: MW 750
Source: Ministry of Power, CEA, I-Sec Research
While in the past, plan targets have usually not been met but we believe that this five
year plan may be able to meet its target as more than 76% of coal-based power plants
are already in different stages of construction. Considering that most of the coal in
India is consumed by the power sector (nearly 75%), we foresee strong growth in coal
consumption.
Increased opportunity for coal trading
While coal consumption is expected to rise significantly, we do not see coal production
to rise proportionally. Thus, we believe Indias dependence on imported coal is likely to
increase in the future, especially because many private power producers entering the
industry are setting up plants on imported coal. These plants are likely to source fuel
either directly from mines in Indonesia and South Africa or buy fuel from coal traders
who import it for them (Chart 12).
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Chart 12: Major seaborne coal trade routes
Source: World Coal Institute, I-Sec Research
We believe that coal demand may increase to 509 MT by 11-12, which will require
import of more than 159 MT, most of which will be for power plants and is likely to be
imported by them via direct linkages with coal mines outside India (Chart 13).
Nevertheless, this represents a huge opportunity for coal trading companies to supply
coal on a short-term basis to Indian power plants, while entering into long-term
contracts at the same time.
Chart 13: Coal Demand-supply gap
200
250
300
350
400
450
500
550
FY07 FY08E FY09E FY10E FY11E FY12E
(mnte)
Demand for Coal Supply of Domestic Coal
Source: Committee on Infrastructure, CEA, I-Sec Research
In fact, because of imported coals high calorific value and low ash content, it is more
efficient for power production than domestic coal and thus we believe that India will
continue to import coal even if domestic production rises significantly.
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implies increasing opportunity for AEL
AEL ventured into coal trading in 1998 and today imports coal from China, South
Africa and Australia. It is a full service provider, responsible for sourcing, importing,
managing logistics and supplying coal directly to the customer. Thus, it can not only
meet short-term demand supply gaps for power producer, but also get into long-term
contracts to supply thermal coal to them. While its current list of customers includes
captive power producers such as Birla Corporation, ACC etc, the future growth is likelyto come from utilities that will import coal to produce power.
AEL imported ~8mnte non-coking coal of the total imports of 25mnte in 06-07. We
believe that coal trading will grow at 32%+ CAGR till FY12E aided by robust demand
growth in the sector and captive mining undertaken by the company. We have valued
the coal trading segment at Rs15.5bn using FY10E P/E of 9x.
Agri-trading to provide stability
Indian agri-GDP growth declined from 3.2% in the 80s to 1.5% in the 90s. Despite
this, the XI Five Year Plan 07-12, targets a growth of 4.1% per annum, based on the
investment rate of 35.1% of the GDP.
Table 20: Plan growth rates versus investment ratio
Average Growth Rate (%) Investment Ratio (%)IX Five Year Plan 2.1 23.8X Five Year Plan 2.3 27.5XI Five Year Plan 4.1 35.1
Source: Report of the Working Group for XI Five Year Plan, CSO
This increase in investment is not possible without the involvement of private sector
and accordingly, nearly 25% of the GDP is expected to come via private and public-
private partnerships. This focus of the Government coupled with an expected demand-
supply gap in food grains has increased opportunities for private sector players in
trading.
Table 21: Supply to remain under constraint even in best-case scenario
(mnte) 2011-12Demand 244Min Production 214Max Production 240Current Production 212Ten Year CAGR (%)
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The portfolio is well balanced between regulated but stable commodities such as
wheat, and un-regulated, export oriented commodities such as DOCs. Thus, we
believe that agri-trading division will grow 15% per annum in volume terms in the
immediate few years backed by increasing exports of de-oiled cakes and 4-6% growth
in Indian agriculture. Accordingly, we have valued the equity for this division at
Rs10.4bn. The company now plans to foray into oil & gas exploration through two
blocks (of 75sqkm in Cambay, Gujarat and another of 95sqkm in Assam) awarded bythe Government in NELP VI, in collaboration with Wels pun and two blocks in
Thailand. AEL also plans to participate in NELP VII and has been actively looking at
Indonesia, Australia, Egypt and Yemen for more gas blocks.
Other trading divisions boosting value
AEL also trades in iron ore, petroleum products, precious metals, power and ship
scrap. The equity value of these divisions put together is estimated at Rs16.7bn, of
which we believe iron ore, valued at Rs1.7bn, will generate maximum growth in the
immediate future as the company exploits the rising demand for steel in China, where
Indian iron ore is trading at a spot price of US$200. We believe that in the long term,
however, this demand for iron ore will slow down as Chinese steel production declinesand the Indian Government takes measures to reduce ore exports. The equity of
power trading business along with precious metals, currently valued at Rs0.3bn and
Rs8.7bn respectively, is likely to drive growth in the long term as reforms in the sector
take off.
Further, we have valued the equity of non-trading businesses of port and freight
brokerage at Rs1.9bn and Rs1.2bn respectively.
Other segments adding another Rs18bn
Apart from the above mentioned business segments, AEL also has presence in city-
gas distribution, agri-logistics, oil refinery (50:50 JV with Wilmar Group) and coldstorage of fresh fruits (through Adani Agri-Fresh). These segments are not very large
at present, with the company having started operations in the past 18 months (except
for Adani-Wilmar), but have good growth potential (Table 22). We have been
conservative while valuing these segments due to their nascent stage and these too
could provide upside depending on the success of the segments.
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Table 22: Brief overview of distribution-related business segments
Business segment AEL stake Brief overview
Gas distribution (AdaniEnergy)
65% City gas distribution of compressed & piped natural gas in Ahmedabad & Vadodarato: i) industries, commercial outfits, domestic users through a pipeline network, ii)vehicles through a CNG station network
Current status: Operating 45 CNG stations and 8,000 domestic, 245 industrial & 95commercial connections with daily contracted quantity of 0.43MMSCMD (expectedto reach 2.4MMSCMD in the next two years). Steel ring network of over 230kmsand PE network of over 500kms across six cities already completed
Expansion plans: Proposes to set up facilities in Faridabad (Haryana), Noida (UP),Khurja (UP), Lucknow (UP), Jaipur (Rajasthan) and Udaipur (Rajasthan)
Planned steel ring network of 493kms and 104 CNG stations across six cities,while facility plans for Jaipur and Udaipur are being developed
Proposed expansion would likely result in 45%+ revenue CAGR and 120%+earnings CAGR for AAFL in the next two years
Adani Wilmar (AWL) 50% Oil refining and distribution business under the brand, Fortune. AWL has thelargest refining capacity in India (3,200TPD) with a network of 80 branches, 5,000distributors, 1mn outlets & 20mn households. Exports to more than 19 countries inthe Middle-East, South East Asia & East Africa
As per AC Neilsen data, AWL has leadership in edible oil ( Fortune, Indias largest
edible oil brand commanding 17% share), soya (34 % domestic market share) andgroundnut oil (20% domestic market share)
Other growing brands include Naturalle, Raag, Kachi Ghani. While the proposedexpansion plans and leadership would help maintain high revenue growth (over30% CAGR), earnings growth would be muted due to surging raw material prices
Adani Agri Fresh 100% AAFL is into developing integrated controlled atmosphere storage facility (CASF),handling and transportation infrastructure for fruits & vegetables
Currently operational at three locations in Rohru, Theog & Rampur in HimachalPradesh with a total storage capacity of 18,000MT
Has already been dealing with leading fresh fruit/vegetable retail chains, FoodBazar, Reliance Fresh, ITCs Choupal Fresh, Metro, Trinetra, Fab Mall, MotherDairy, Big Apple, Heritage(AP/Karnataka) and owns a strong marketing network in30 major towns across India for wholesaling, cash & carry and organised retail,including Delhi, Ahmedabad, Coimbatore, Lucknow, Chennai, Mumbai, Surat,
Nasik, Kolkata etc
Plans to roll out pack house facilities in Maharashtra, Gujarat, Andhra Pradesh andKarnataka and expand universe to procure grapes, orange, pomegranate and otherfruits in the medium term. AAFL has launched its wholesale brand, Farm Pikandplans to grow it sizeably
Adani Agri-Logistics(AALL)
100% AALL is pioneering the concept of developing vertical silos to store grains & bulkmovement in top loading/bottom discharge wagons in India with the project beingdeveloped for Food Corporation of India (FCI) on BOO basis over a long-termcontract for 20 years.
It involves storage of 0.55mnte per month with guaranteed annual tonnage of400,000MT at base depots (in states of Punjab & Haryana) and another150,000MT at distribution depots (in Tamil Nadu, Karnataka, Maharashtra andWest Bengal, expected to be operational by FY08 end)
207 special wagons for bulk grain transportation are being procured (ordersalready placed)
Being a pioneer concept, the project has been given 100% income tax deductionfor the first five years and 30% for the next five years
Source: I-Sec Research, Company
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The equity value of all these segments combined is estimated at Rs17.7bn (Table 23)
and AELs stake at Rs11.5bn (Rs34/share), though there could be significant upside
depending on growth in these relatively nascent businesses.
Table 23: Assumptions and valuation of other businesses
(%)Adani Wilmar Agri-logistics Adani Agri Fresh Adani Energy
Revenue CAGR over FY08-FY11E 29.9 2.8 84.6 32.9Current operating margins (%) 2.7 74.1 0.4 16.0Earnings CAGR over FY08-FY11E 15.4 NM NM 208.1FY10E P/E multiple assumed (x) 13.0 NA NA NAImplied value of business (Rs mn) 6,322 NA NA NAFCFE based valuation 410 2,239 8,733AEL's stake (%) 50.0 100.0 100.0 65.0Value of AEL's stake (Rs mn) 3,161 410 2,239 5,676
Source: I-Sec Research, Company
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Key risks
We perceive the following as key challenges for AEL in the present scenario:
Execution risk. AEL is on an aggressive expansion spree, that too in related and
unrelated business domains. From being a leading trading house, the company is
moving to an infrastructure play, which is highly capital intensive in nature. AELdoes not have any prior experience in many of the segments it is venturing into
primarily power generation and real estate development, which exposes it to
considerable execution risk. However, the Group has a decade long experience in
handling large scale projects such as Mundra Port and Wilmar Refinery. To
mitigate such challenges, the company has been proactive in appointing, as
business heads, some of the most renowned talents from industry for respective
businesses. Yet timely execution of projects within the set budget would be very
crucial to achieve appropriate returns.
Arranging funds for planned projects. With the present balance sheet size of
~Rs90bn, primarily locked up as inventory and debtors, funding capital intensive
projects requiring close to Rs510bn over the next 4-5 years appears challenging.A large proportion (59%) of this sum would be funded via debt. However,
arranging for such sizeable debt with minimal experience in planned projects
would be difficult task for AEL. Also, there would be ~Rs60bn gap between
required equity funding and internal accruals, which would lead to equity dilution
High Government intervention in agri-trading restricts volumes and scope for
players. While AEL is diversifying its revenue streams significantly, any adverse
Government policy in highly regulated sectors such as power generation, coal
mining and export-import of agricultural produce could deter financials.
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Changing face of AELs financials
Shift from trading to infra = move from current to fixed assets
AEL, till now, has been primarily associated with trading business as is reflected in thin
operating margins and high working capital with net current assets constituting over
70% of the total assets. However, with changing business composition, operatingmargins would get a boost and the proportion of net current assets would likely start
declining in favour of fixed assets on the back of increasing proportion of power and
real estate businesses (Chart 14).
Chart 14: Changing asset composition and improving operating margins
0%
10%
20%
30%
40%
50%60%
70%
80%
90%
100%
FY05 FY06 FY07 FY08E FY09E FY10E FY11E
0
2
4
6
8
10
12
14
(%)
Net Current assets Net Fixed assets Operating margin (RHS)
Source: I-Sec Research, Company
supported by increasing financial leverage
Huge planned capex required to build these fixed assets would FY08-12E would be
funded largely through debt implying higher leverage and dampened cashflows over
the medium term (Chart 15).
Chart 15: Aggressive expansion impacting cashflows, largely funded by debt
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY05 FY06 FY07 FY08E FY09E FY10E FY11E
(40)
(30)
(20)
(10)
0
10
20
30
40
(Rsbn)
Debt Equity FCF (RHS)
Source: I-Sec Research, Company
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Equity dilution of 28% expected to bridge funding gap
To fund its expansion plans, AEL requires close to Rs510bn (Table 24) over FY07-
12E, ~59% of which would likely be funded via debt, 18% from internal accruals, 9%
as minority share, 2% from FCCB conversion and the balance 12% from fresh equity
infusion (Chart 16). Alternatively, AEL is also considering raising money at the
subsidiary level (APL, AIDPL) to fund the gap.
Table 24: Funding requirement by various business segments
Rs mn FY07-FY12E
Power 424,749
Real-Estate* 78,601
Trading 3,607
Mining & Others 10,908* Net of investment and salesSource: I-Sec Research
Chart 16: Sources of funding
293
95
47 10 60
0
100
200
300
400
500
600
Debt Internal
accruals
Minority share FCCB
conversion
Funding gap
(Rsbn)
Source: I-Sec Research
The FCCB conversion price has been fixed at Rs645, which will likely fetch Rs9.8bn to
AEL. The dilution on account of fresh equity issue is expected to be ~28%, assuming
issue price of Rs815 (based on the average of past six months).
Expected earnings CAGR of >96% over FY08E-11E
Till FY08, AELs P&L primarily reflects the numbers for trading businesses; however,
the new business units would start shaping up in the next couple of years. By FY11E,
we expect 1,980MW of capacity to be on-stream at Mundra, all the real estate projectsto start booking sales and other businesses (such as AEL) to assume significant size
(by expanding to over eight cities).
Increasing proportion and size of non-trading businesses would result in robust
revenue growth of close to 26% CAGR over FY08E-11E. This would also result in
margin expansion of 8.8pps leading to EBITDA CAGR of ~95% (Chart 17).
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Table 25: Financials Various business segments
(Rs mn, year ending March 31)FY08E FY09E FY10E FY11E
RevenuesPower - 20 14,373 27,526Real-Estate 1,077 5,685 17,762 25,633Trading 166,517 197,739 235,256 274,575Mining & others 29,850 44,243 55,877 70,199
Total Revenues 197,444 247,687 323,268 397,934
EBITDAPower - 15 10,242 19,343Real-Estate - 426 8,450 15,136Trading 4,961 6,320 7,306 8,231Mining & others 1,534 3,369 3,994 5,509Total EBITDA 6,495 10,130 29,992 48,218
EBITDA margin (%)Power - 73.6 71.3 70.3Real-Estate - 7.5 47.6 59.0Trading 3.0 3.2 3.1 3.0Mining & others 5.1 7.6 7.1 7.8Total EBITDA margin 3.3 4.1 9.3 12.1
PAT
Power - (89) 4,554 10,829Real-Estate (538) (2,578) 118 6,225Trading 3,470 5,478 4,724 5,154Mining & others 209 231 556 1,617Total PAT 3,141 3,042 9,952 23,826
PAT margin (%)Power (446.1) 31.7 39.3Real-Estate (49.9) (45.3) 0.7 24.3Trading 2.1 2.8 2.0 1.9Mining & others 0.7 0.5 1.0 2.3Total PAT margin 1.6 1.2 3.1 6.0
Source: I-Sec Research
Chart 17: Robust growth expected supported by evolving business model
167 198 235 275
1418
30
44
56
69
28
26
12.1
9.3
4.13.3
0
50
100
150
200
250
300
350
400
450
FY08E FY09E FY10E FY11E
(Rsbn)
0
2
4
6
8
10
12
14
(%)
Coal-miningOthersReal-estatePow er generationTradingEBITDA margin (%)
Source: I-Sec Research
While AEL would have ~Rs290bn debt by FY11E, interest outgo would be limited to
only 4% on account of lower interest incidence for power projects. The interest
payment in these cases starts only post project commissioning and most of the
projects would likely be commissioned in FY12 and FY13. Effectively, net earnings
(post minority interest payment) are expected to report 96% CAGR over FY08E-11E.
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Financials
Table 26: Profit & Loss statement
(Rs mn, year ending March 31)FY06 FY07 FY08E FY09E FY10E FY11E
Total Revenues 123,415 169,491 197,444 247,687 323,268 397,934
Less:Cost of material used 115,576 158,733 184,764 225,894 277,561 331,883Other Manufacturing Expenses 4,677 6,055 2,591 2,836 4,496 6,567Power and Fuel 3,594 8,827 11,220 11,266
Total Operating Expenses 120,253 164,788 190,949 237,557 293,277 349,716EBITDA 3,162 4,702 6,495 10,130 29,992 48,218Depreciation & Amortisation 50 163 855 1,435 3,104 4,288Other Income 14 42 444 900 884 406EBIT 3,125 4,581 6,084 9,594 27,772 44,335Less: Net Interest 1,533 2,286 2,068 5,090 9,811 9,110
Recurring Pre-tax Income 1,592 2,295 4,016 4,505 17,961 35,226Add: Extraordinary Income 148 2 1 - - -Less: Extraordinary Expenses (4) (7) (7) - - -Less: Taxation 390 516 623 1,063 4,826 7,211Net Income (Reported) 1,355 1,787 3,401 3,441 13,135 28,015Less: Minority Interest 252 399 3,183 4,189Recurring Net Income 1,202 1,778 3,141 3,042 9,952 23,826
Source: Company data, I-Sec Research
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Table 27: Balance Sheet
(Rs mn, year ending March 31)FY06 FY07 FY08E FY09E FY10E FY11E
ASSETSCurrent Assets, Loans & Advances
Cash & Bank balance 7,150 16,316 11,441 39,976 10,550 12,636Inventory 4,597 17,991 19,955 22,475 27,552 30,250Sundry Debtors 23,988 24,184 33,055 42,948 51,287 62,393
Loans and Advances 5,683 6,636 7,964 9,556 11,468 13,761Total Current Assets 41,417 65,128 72,414 114,955 100,857 119,040Current Liabilities & ProvisionsCurrent Liabilities 20,499 22,464 25,139 30,506 40,347 42,510
Sundry Creditors 19,835 18,900 20,790 22,869 25,156 27,671Other Current Liabilities 665 3,564 4,349 7,637 15,191 14,839Others 2,394 3,122 4,500 5,400 6,480 7,776
Provisions 854 1,304 1,565 1,878 2,254 2,705
Total Current Liabilities and Provisions 23,747 26,890 31,204 37,784 49,081 52,991
Net Current Assets 17,670 38,238 41,210 77,171 51,776 66,049Total Investments 665 128 236 236 236 236Fixed Assets
Gross Block 1,612 4,654 16,227 59,578 119,784 200,447Less Accumulated Depreciation 211 513 1,369 2,804 5,908 10,196Net Block 1,401 4,141 14,859 56,774 113,876 190,251
Add: Capital Work in Progress 429 9,669 20,000 59,138 161,288 181,857Total Fixed Assets 1,830 13,810 34,859 115,912 275,164 372,107Total Assets 20,165 52,175 76,305 193,318 327,176 438,392
LIABILITIES AND SHAREHOLDERS' EQUITYBorrowings
Short Term Debt 3,155 11,362 22,448 72,820 189,281 266,001FCCBs 1,323 11,063 11,063 11,063 - -Long Term Debt 7,166 18,240 24,201 24,201 24,201 24,201
Total Borrowings 11,644 40,664 57,712 108,084 213,482 290,202
Share CapitalPaid up Equity Share Capital 226 247 247 247 262 262
No. of Shares outstanding (mn) 226 247 247 247 262 262Face Value per share (Rs) 1 1 1 1 1 1
Preference Share Capital (convertible) - 3 - - - -
Reserves & SurplusShare Premium - - - - 9,789 9,789Others - - - 60,000 60,000 60,000General & Other Reserve 8,299 11,257 14,268 17,142 26,917 50,567Less: Misc. Exp. not written off 4 36 9 9 9 9Minority Interest - 42 4,087 7,855 16,735 27,582
Net Worth 8,521 11,511 18,593 85,234 113,693 148,190Total Liabilities & Shareholders' Equity 20,165 52,175 76,305 193,318 327,176 438,392
Source: Company data, I-Sec Research
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Table 28: Cashflow statement
(Rs mn, year ending March 31)FY06 FY07 FY08E FY09E FY10E FY11E
Cash Flow from Operating ActivitiesReported Net Income 1,355 1,787 3,401 3,441 13,135 28,01Add:
Depreciation & Amortisation 67 303 855 1,435 3,104 4,28Provisions 406 450 261 313 376 45
Less:Other Income 14 42 444 900 884 40Net Extra-ordinary income 153 8 8 - -
Operating Cash Flow before Working Capital change (a) 1,661 2,489 4,065 4,290 15,731 32,34Changes in Working Capital(Increase) / Decrease in Inventories (1,299) (13,395) (1,964) (2,520) (5,077) (2,698(Increase) / Decrease in Sundry Debtors 35 (197) (8,871) (9,893) (8,340) (11,106(Increase) / Decrease in Operational Loans & Adv. (2,241) (953) (1,327) (1,593) (1,911) (2,294(Increase) / Decrease in Other Current Assets - - - - -Increase / (Decrease) in Sundry Creditors 1,161 (935) 1,890 2 ,079 2,287 2,51Increase / (Decrease) in Other Current Liabilities (561) 3,627 2,163 4,189 8,634 94Working Capital Inflow / (Outflow) (b) (2,906) (11,851) (8,109) (7,738) (4,407) (12,638Net Cash flow from Operating Activities (a) + (b) (1,244) (9,362) (4,044) (3,448) 11,324 19,71Cash Flow from Capital commitments
Purchase of Fixed Assets (1,330) (12,283) (21,904) (82,488) (162,357) (101,231Purchase of Investments (565) 537 (108) - -Cash Inflow/(outflow) from capital commitments (c) (1,895) (11,745) (22,012) (82,488) (162,357) (101,231Free Cash flow after capital commitments (3,139) (21,107) (26,056) (85,937) (151,032) (81,521(a) + (b) + (c)
Cash Flow from Investing ActivitiesPurchase of Marketable Investments - - - - -(Increase) / Decrease in Other Loans & Advances - - - - -Sale of Fixed Assets - - - - -Sale of Investments - - - - -Consideration received for sale of undertaking/division - - - - -Other Income 14 42 444 900 884 40Net Cash flow from Investing Activates (d) 14 42 444 900 884 40
Cash Flow from Financing ActivitiesIssue of Share Capital during the year 1 20 - 60,000 9,804Proceeds from fresh borrowings 5,105 29,021 17,047 50,372 105,398 76,72Repayment of BorrowingsBuyback of Shares - - - - -Dividend paid including tax (117) (129) (129) (168) (176) (176Others (119) 1,312 3,810 3,368 5,696 6,65Net Cash flow from Financing Activates (e) 4,870 30,224 20,728 113,572 120,722 83,20Net Extra-ordinary Income (f) 153 8 8 - -Total Increase / (Decrease) in Cash 1,897 9,167 (4,876) 28,535 (29,426) 2,08(a) + (b) + (c) + (d)+ (e) + (f)
Source: Company data, I-Sec Research
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Table 29: Key ratios
(Year ending March 31)FY06 FY07 FY08E FY09E FY10E FY11E
Per Share Data (Rs)EPS(Basic Recurring) 5.3 7.2 12.7 12.3 38.0 91.0Diluted Recurring EPS 5.3 7.2 12.0 9.1 29.7 71.0Recurring Cash Earnings per share (CEPS) 5.5 7.9 16.2 18.2 49.9 107.4Free Cashflow per share (FCPS-post capex) (13.9) (85.6) (105.7) (348.6) (577.1) (311.5)
Reported Book Value (BV) 37.7 46.5 58.8 313.9 370.5 460.9Dividend per share 0.5 0.5 0.5 0.5 0.5 0.5
Valuation Ratios (x)Basic Price Earning Ratio 113.0 83.2 47.1 48.7 15.8 6.6Diluted Price Earning Ratio 113.0 83.2 50.0 66.2 20.2 8.5Price to Recurring Cash Earnings per share 108.4 76.2 37.0 33.1 12.0 5.6Price to Book Value 15.9 12.9 10.2 1.9 1.6 1.3EV / EBITDA 44.2 36.6 29.9 21.3 12.0 9.0EV / Total Operating Income 1.1 1.0 1.0 0.9 1.1 1.1EV / Operating Free Cash Flow (Pre-Capex) (112.3) (18.4) (48.0) (62.6) 31.8 22.0EV / Net Operating Free Cash Flow (Post-Capex) (44.5) (8.2) (7.4) (2.5) (2.4) (5.3)Dividend Yield (%) 0.1 0.1 0.1 0.1 0.1 0.1
Growth Ratios (% YoY)Basic Recurring EPS growth NA 35.7 76.6 (3.1) 208.1 139.4Diluted Recurring EPS Growth NA 35.7 66.3 (24.4) 227.1 139.4
Diluted Recurring CEPS Growth NA 42.3 105.8 12.0 174.7 115.3Total Operating Income Growth NA 37.3 16.5 25.4 30.5 23.1EBITDA Growth NA 48.7 38.1 56.0 196.1 60.8Recurring Net Income Growth NA 47.9 76.6 (3.1) 227.1 139.4
Operating Ratios (%)EBITDA Margins 2.6 2.8 3.3 4.1 9.3 12.1EBIT Margins 2.5 2.7 3.1 3.9 8.6 11.1Recurring Pre-tax Income Margins 1.3 1.4 2.0 1.8 5.6 8.9Recurring Net Income Margins 1.0 1.0 1.6 1.2 3.1 6.0Raw Material Consumed / Sales 93.6 93.7 93.6 91.2 85.9 83.4SGA Expenses / Sales 3.6 3.2 3.1 4.7 4.8 4.4Other Income / Pre-tax Income 0.8 1.8 11.1 20.0 4.9 1.2Other Operating Income / EBITDA 0.4 0.9 6.8 8.9 2.9 0.8Effective Tax Rate 24.5 22.5 15.5 23.6 26.9 20.5
Return / Profitability Ratios (%)Return on Capital Employed (RoCE)-Overall 13.8 9.8 7.6 5.1 6.6 8.1Return on Invested Capital (RoIC) 29.1 19.2 12.9 9.3 12.8 13.0Return on Net Worth (RoNW) 15.1 17.8 20.9 5.9 10.0 18.2Dividend Payout Ratio 9.7 7.3 4.1 4.3 1.4 0.6
Solvency Ratios / Liquidity Ratios (%)Debt Equity Ratio (D:E) 57.7 77.9 75.6 55.9 65.3 66.2Net Working Capital / Total Assets 87.6 73.3 54.0 39.9 15.8 15.1Interest Coverage Ratio-based on EBIT 49.0 49.9 34.0 53.0 35.3 20.5Cash and cash equivalents / Total Assets 38.8 31.5 15.3 20.8 3.3 2.9
Turnover RatiosInventory Turnover Ratio (x) 31.3 15.0 10.4 11.7 12.9 13.8Assets Turnover Ratio (x) 7.2 4.7 3.1 1.8 1.2 1.0Working Capital Cycle (days) 45.8 60.2 73.4 87.2 72.8 54.0Average Collection Period (days) 71.0 51.9 52.9 56.0 53.2 52.1
Average Payment Period (days) 56.9 41.7 36.7 32.2 27.1 24.2Source: Company data, I-Sec Research
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Annexure 1: Power sector Economic growth tolead demand
The XI Five Year Plan targets GDP growth of 9 per annum from 07 to 12. With the
Indian GDP already growing at 9.4 in 06-07 and expected to grow at 9+ in the current
financial year, energy consumption in the country (at 15.4 quadrillion BTUs in 04) is
expected to explode in the coming years.
The challenge for the Indian energy sector constituting both public and private
players is thus to meet this energy demand and reduce shortages. This has created
opportunities, especially for players in the power sector as demand in this sector
cannot be met by imports (which can be done in case of oil).
Power demand to continue outstripping supply
The Indian economy, till now has been able to grow despite power shortages (Chart
18). But with India experiencing 8-9 growth in the past three years, we believe this
shortage will not only increase but also slow down growth.
Chart 18: Power shortage versus GDP Chart 19: Power supply Demand gap remains
3
5
7
9
11
13
15
17
FY03 FY04 FY05 FY06 FY07
(%)
Peak Shor tage Energy Shor tage GDP Growth
450
500
550
600
650
700
FY03 FY04 FY05 FY06 FY07
(bnKwh)
Energy Demand Energy Supply
Source: Economic Survey 2006-07; Report of the Working Group onPower for 11th Plan
Source: Central Electricity Authority
Thus, the XI Five Year Plan envisages not only GDP growth of 9 per annum but also
Power for all by 2012 by increasing per capita consumption to 1,000KWh from the
current 600KWh. These twin objectives require power generation to grow by nearly 10
per annum on a CAGR basis till 12 (Chart 20).
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Chart 20: Power generation to grow at 10 CAGR
0
200
400
600
800
1,000
1,200
FY08 FY09 FY10 FY11 FY12
Energysupply(
bnKwh) CAGR 10%
Source: I-Sec Research; Report of the Working Group on Power for 11th Plan
Indias current capacity of ~135,000MW is obviously inadequate to meet this growth
requirement and thus the XI Five Year Plan has targeted a capacity addition of
78,577MW (over 132,329MW installed at the end of X Plan), requiring an investment
of Rs4,109bn in power generation sector.
Continued investment required even beyond XI Plan
With economic growth of 8-10 per annum, additional capacity of 71,000-108,000MW
will be required in the XII Five Year Plan as well.
Table 30: Looking beyond the XI Plan
GDPGrowth
(%)
GDP/ElectricityElasticity
ElectricityRequirement
(bn KwH)
PeakDemand
(MW)
InstalledCapacity
(MW)
Capacity AdditionDuring XII Plan (MW)
0.8 1,415 215,700 280,300 70,80080.9 1,470 224,600 291,700 82,2000.8 1,470 224,600 291,700 82,20090.9 1,532 233,300 303,800 94,3000.8 1,525 232,300 302,800 92,800100.9 1,597 244,000 317,000 107,500
Source: Report of the Working Group on Power for 11th Plan
Even assuming a conservative estimate, by the end of XII Five Year Plan, India must
have added 70,800MW capacity, apart from 78,577MW in the XI Five Year Plan. In
the next 10 years, India will have to add at least as much capacity as it has added in
the past 60 years!!!
but power deficit may still continuePrevious Five Year Plans have not been successful in meeting capacity addition
targets (Chart 21).
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Chart 21: Achievement of planned targets in previous plans
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
5th
(1974-79)
6th
(1980-85)
7th
(1985-90)
8th
(1992-97)
9th
(1997-02)
10th
(2002-07)
(MW
)
0
20
40
60
80
100
120
(%
)
Target (MW) Achivement (MW) Success Rate
Source: White paper on Strategy for XI Plan
While the XI Five Year plan appears to do better as 62 of the planned capacity
expansion is already under implementation, nevertheless most of these projects will
be commissioned post 10 (Chart 22) and this increases the chance of delays and
hold-ups in commissioning.
Chart 22: Commissioning of power projects
20.8
8.6
17.9
23.9
28.8
0
20
40
60
80
100
120
FY08 FY09 FY10 FY11 FY12
(%)
Source: White paper on Strategy for XI Plan
In fact, we believe, 75 of the capacity may actually be operational by 17, which means
power supply is not going to increase dramatically any time soon.
and per capita consumption may increase
While there may not be a dramatic change in the power supply situation, we believe
power demand will increase both on account of increased economic growth and rising
per capita consumption.
At 600KwH per capita consumption of power, India is still among the lowest power
consumers globally. However, as GDP grows at 8+, we believe demand per capita
may be higher than 1,000Kwh as envisaged by Power for All by 12. This is because
the current economic growth will put India into a high growth trajectory and per capita
power consumption will become comparable to global peers (Chart 23).
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Chart 23: Economic growth to lead to increased power consumption
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
0 6,000 12,000 18,000 24,000 30,000 36,000 42,000
Per Capita GDP (2004) US$
PerCapitaPower
Consumptio
(Kwh,20
03)
USA
UK
Italy
SpainIsraelCzech Rep.
MexicoBrazil
India
China
Source: UNDP Human Development Report 2006
Hence, power deficit may not decrease in the near future, even when more capacity is
added in the XI and XII plans.
Opportunity for the private sector
With the Government not having enough financial resources to create adequate
capacity and demand outstripping supply, we believe private sector has a huge
opportunity to exploit and supply competitively priced power. In fact, in terms of
investment, private companies have 7,528MW of projects under construction as part
of the XI Plan. Overall, the planned target of 13 capacity addition from private sector
requires an investment of more than Rs410bn.
More importantly, power demand is likely to continue outstripping supply. Thus, we
believe that power tariffs will keep on offering attractive returns to the private sector,especially through the merchant power route, wherein short-term contracts offer an
upside based on demand-supply scenario.
Few concerns remain
While opening of the power sector augurs well for private players in particular and the
whole sector in general, most private and Government investment up till now and in
the future is in coal-based thermal power projects (Chart 24).
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Chart 24: Sector-wise distribution of power projects
9,6853,605
3,263
24,310 23,135 5,460
2,0373,380
450
1,000
762
1,490
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Central Government State Government Private
Hydro Coal Lignite Gas&Liquid Fuel Nuclear
Source: Central Electricity Authority
This raises fuel supply concerns in the future. While India does have abundant coal
reserves (253.2bnte); the mineable electricity generating coal may be much lesser. In
fact, CEA estimates that by 11-12, 40mnte of imported coal, which is equivalent to
68mnte of Indian coal, will have to be imported to meet power sector requirements
(Chart 25). Currently, coal is already being imported from Australia, Indonesia and
South Africa.
Chart 25: Estimated coal requirement and availability for power generation
0
100
200
300
400
500
600
FY08 FY09 FY10 FY11 FY12
(mnte)
Total Coal Requirement Total Availability
Source: Central Electricity Authority
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Annexure 2: Indian real estate proxy on growingeconomy
We estimate the size of Indian real estate market at FY07 end to be US$57bn or 6.2%
of the Indian GDP. In value terms, we expect the real estate market to grow at 12.8
CAGR in the next five years to US$105bn or 7.1 GDP by FY12E. In the next five
years, the average annual investments required in the real estate sector are at
~US$85bn, of which the residential segment constitutes 88 at US$74bn. We estimate
annual investments for the office space to be US$5.7bn and retail segment at
US$4.8bn. These estimates are based on requirements of investment in land and the
construction cost of developments to meet the intrinsic real estate demand in India.
These estimates are not based on sales as they would present a distorted picture
since the mark up on costs could vary with market conditions.
Table 31: Investments required in Indian real estate sector
(US$ bn)Demand in
FY07Demand in
FY12EAverage demandin next five years CAGR (%)
Residential 51.7 90.6 74.1 11.9Office 3.0 7.7 5.7 20.9Retail 2.7 6.5 4.8 19.5Total 57.3 104.9 84.7 12.8Investments as a of GDP 6.2 7.1 6.8
Source: I-Sec Research
We estimate that as of end-FY07, the stock (in terms of constructed area) was at
~38bn sqft for residential units, ~135mn sqft for office space and ~90mn sqft for retail.
In FY07, ~1.8bn sqft residential space, 35mn sqft office space and 24mn sqft retail
space was added to the stock. We estimate the market to grow at 4.6% CAGR with
residential, commercial and retail segments growing at 4.2%, 15.2% and 14.3% CAGR
respectively. Also, we expect the next five-year average annual demand for
residential, office and retail space at 2bn sqft, 65mn sqft and 37mn sqft respectively.
Table 32: Real estate Segment-wise demand forecast
(mn sqft)Current
stockDevelopment
in FY07Demand in
FY12EAverage demand for
next five yearsCAGR
(%)Residential 37,822.5 1,763.4 2,165.7 1,998.2 4.2Office 135.0 39.8 80.6 64.8 15.2Retail 89.8 23.9 46.6 36.5 14.3Total 38,047.3 1,827.1 2,292.9 2,099.5 4.6Share of residential 99.4 96.5 94.4 95.2
Source: I-Sec Research
Going forward, hotels, logistics and warehousing would create significant real estate
demand. As per industry estimates, next five years would see additions of 100,000-
125,000 hotel rooms in India.
There is tremendous opportunity for developers to capture the burgeoning real estate
market. However, developers need to re-invent themselves to meet changing
customer needs and offer differentiated, quality products at the right price.
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Foundations still good
Real estate growth in Indian is based on strong economic growth, improving
demographics, rise of the services sector and the upcoming organised retail hospitality
& logistics industry. This growth is further fuelled by increasing money flow in the
sector and Government initiatives such as SEZs to generate additional demand.
These drivers are expected to remain strong in the visible future,
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