Jefferies initiates coverage on Adani Power with ‘Buy’ rating, sees 30% upside

The company has secured coal linkages for its PPA-based plants through long-term Fuel Supply Agreements (FSAs) or pass-through mechanisms for imported coal.

Jefferies India has initiated coverage on Adani Power Ltd with a ‘Buy’ rating, forecasting a 30 percent potential upside to Rs660 a share from its current price. The potential upside in the stock is driven by expectations of increased earnings as Adani Power, India’s second-largest thermal power generation company after NTPC, expands its capacity.

The company is on track to nearly double its capacity from 17.6 GW to 30.7 GW by 2030, which is expected to boost its revenue and profitability. The company has secured coal linkages for its PPA-based plants through long-term Fuel Supply Agreements (FSAs) or pass-through mechanisms for imported coal.

Meanwhile, merchant capacities have access to both domestic and imported coal, with fluctuations in merchant power prices helping to offset volatility in coal costs. Jefferies estimates that every 5 percent increase in merchant realizations could result in a 2 percent rise in FY27E EBITDA.

In a base case scenario, Jefferies expects merchant realizations at Rs 6/unit, similar to FY24, driven by sustained demand-supply tightness, with Revenue and EBITDA CAGR of 19% and 14%, respectively, over FY24-30E. In an upside scenario, it expect 48 percent rise in stock price to Rs 755 a share. It said a sharp rise in power demand could drive higher merchant realizations of Rs 7/unit, similar to FY24, resulting in Revenue and EBITDA CAGR of 19% and 16%, respectively, over FY24-30E.

Adani Power’s leverage is expected to decline from a net debt-to-equity ratio of 1.0x in FY24 to 0.6x by 2030, as it moves past its peak capex phase. Jefferies values Adani Power at 15x enterprise value to EBITDA, a discount to JSW Energy’s 17x multiple, given Adani Power’s pure coal-based portfolio, whereas JSW Energy has a 50 percent renewable energy mix, the brokerage said.

Jefferies also believes power demand should recover to 7 percent levels, similar to past capex upcycles like FY03-09, making this a key trigger for Adani Power’s stock. The brokerage estimates 10 percent EBITDA CAGR for FY24-27E, rising to 19 percent CAGR over FY27E-30E as new capacity becomes operational. It values Adani Power at 15x EV/EBITDA, compared to 17x for JSW Energy due to its renewable energy exposure, and at a premium to NTPC’s implied 11x multiple, considering merchant upside potential for Adani Power.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.