Adani Power: Beyond ‘Adani’

Adani Power Q1 FY25 Analysis: Key takeaways!!

Adani Power Limited has delivered a strong performance in Q1 FY25, with significant year-on-year growth in PLF to 78% and increased power dispatch across all plants. The company is benefiting from growing power demand, lower imported coal prices, and a competitive position in merit order dispatch. APL’s strategically located open capacity has also capitalized on high merchant demand and tariffs. The management is optimistic about the future, citing favorable outlook for India’s thermal power capacity growth.

Strategic Initiatives:

1. Capacity Expansion: APL is aggressively pursuing capacity expansion through both organic and inorganic routes. The company aims to increase its capacity from the current 15 GW to 30.67 GW by FY29-30.

2. Mahan Energen Phase II: The 1600 MW Ultra-supercritical expansion project is on track for completion by June 2027.

3. New Projects: APL has initiated preparations for three new 1600 MW projects each at Raipur, Raigarh, and Mirzapur.

4. Acquisitions: The company is awaiting NCLT approval for resolution plans of Lanco Amarkantak and Coastal Energen, which will add 1800 MW of operating capacity and 1320 MW of under-construction capacity.

5. Fuel Security: APL is focusing on enhancing fuel security through commercial mining licenses under an asset-light model.

Trends and Themes:

1. Rising Power Demand: India’s power demand is projected to grow significantly, with peak demand estimated to reach 400 GW by 2031-32.

2. Thermal Power Necessity: Despite renewable energy growth, thermal power remains crucial for meeting base load and peak demand.

3. Long-term PPAs: State governments are inviting bids for long-term power purchase agreements (PPAs) to meet future demand.

4. Merchant Power Opportunities: High merchant demand and tariffs are providing additional revenue streams for power producers.

Industry Tailwinds:

1. Government’s Revised Projections: The government has increased its power demand projections, indicating a need for 80-90 GW of additional thermal power capacity by 2031-32.

2. Resource Adequacy Requirements: States are mandated to ensure 24×7 power supply, driving demand for firm power contracts.

3. Favorable Regulatory Environment: Improved resolution of regulatory petitions and recovery of past dues from DISCOMs.

Industry Headwinds:

1. Competition from Renewable Energy: Increasing renewable capacity and battery storage solutions may impact thermal power demand in the long term.

2. Potential Carbon Taxes: Future implementation of carbon taxes could impact profitability if not adequately passed through to consumers.

Analyst Concerns and Management Response:

1. Concern: Exposure to merchant power market risks.
   Response: Management aims to maintain an 80:20 ratio of long-term PPA to merchant capacity to balance stability and upside potential.

2. Concern: Acquisition strategy and integration risks.
   Response: APL is selectively evaluating acquisitions based on criteria such as equipment quality, location advantages, and expansion potential.

3. Concern: Future carbon taxes impact.
   Response: Management expects carbon taxes to be treated as change in law events, allowing pass-through under PPAs.

Competitive Landscape:
The thermal power generation sector in India is consolidating, with fewer developers available. APL’s aggressive expansion plans and strategic acquisitions position it favorably to capture a significant market share in the growing power demand scenario.

Guidance and Outlook:
The management expressed confidence in doubling capacity to 30 GW by FY29-30 and expects revenue growth to outpace capacity growth due to potentially higher realizations.

Capital Allocation Strategy:
APL is pursuing a balanced approach, utilizing strong cash flows for debt reduction and funding expansion plans. The company is open to both organic growth and strategic acquisitions that align with its objectives.

Opportunities & Risks:

Opportunities:

1. Significant demand growth in the Indian power sector.
2. Potential for higher realizations in the merchant power market.
3. Acquisition of stressed assets at attractive valuations.

Risks:

1. Regulatory changes affecting PPA terms or tariff structures.
2. Volatility in fuel costs, particularly for imported coal.
3. Potential disruption from renewable energy and storage technologies.

Regulatory Environment:
The regulatory environment appears supportive, with improved resolution of past regulatory issues and recovery of dues. The management expects future regulatory changes, such as carbon taxes, to be passed through under PPA provisions.

Customer Sentiment:
Customer sentiment appears positive, with growing power demand from both industrial and residential sectors. State utilities are proactively seeking long-term power supply arrangements to meet future demand.

Top 3 Takeaways:

1. APL is targeting aggressive capacity expansion from 15 GW to 30.67 GW by FY29-30 through a mix of organic growth and strategic acquisitions.

2. The company is maintaining a balanced approach with 80% capacity under long-term PPAs and 20% for merchant sales to optimize returns while managing risks.

3. Strong industry tailwinds, including government projections of significantly higher power demand, position APL favorably for sustained growth in the coming years.