Macquarie slashes Adani Power target by 47%, sees FY16 loss

In a massively downbeat forecast, brokerage firm Macquarie Capital Securities today slashed its price target for India's largest private power producer Adani Power by 47 percent, from Rs 43 to Rs 23.The firm said it expects the company to swing from a profit of Rs 490 crore last year to a loss of Rs 1,350 crore this year.Speaking to CNBC-TV18, Macquarie's Inderjeet Singh Bhatia said the research firm had also cut Adani's EBITDA forecast by 5-18 percent.The loss this fiscal is expected on account of high interest costs and low realizations and plant load factor.In the power sector, his top pick remains NTPC. Other stocks that enjoy Macquarie's outperform rating include JSW Energy and CESC, Bhatia said, adding he had a neutral rating on Tata Power.Below is the transcript of Indrajeet Singh Bhatia’s interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.Reema: Can you walk us through the rationale for nearly cutting down the target price or fair value in the stock by 50 percent and lowering your earnings per share (EPS) estimates as well significantly?A: First thing I would want to clarify that we actually resumed coverage on this name after a fairly long time because we are restricted for certain regulatory reasons. Our key reasons that we continue to remain extremely concerned about the debt levels within the company. Second is that there are very significant regulatory events which are lined up for the next few quarters. Now, company would have to go back to Appellate Tribunal for Electricity (Aptel) and Central Electricity Regulatory Commission (CERC)to get a hearing on the compensatory tariff done. Currently, Adani Ports continues to book those revenues as part of their profit and loss (P&L). Now, we are worried that if a regulatory event goes against them, then the balance sheet worries will only mount from the current levels. They have already a debt equity of almost close to about 10 times. So, that is the principle reason for us to be negative on the name at this point of time.Anuj: So, if you could give us some numbers. As you were saying, they continue to recognise those numbers in P&L. What kind of numbers are we talking about? If the ruling goes against them, what kind of numbers will they have to show in the P&L account?A: If you look at this point of time, the company has been booking on an annualised basis somewhere between Rs 10 billion and Rs 15 billion of compensatory tariff. Now, this compensatory tariff is also linked to the current coal price. So, if the coal price goes down, the compensatory tariff also will go down. Now, we are kind of worried that if this verdict goes against them, then obviously, they would have to write off all those gains that they have been booking on that which will take their debt equity to a much higher level from current 10 times already. So, then that would make it very difficult for Adani Power to continue operations in the current form. So, it would have to recapitalise immediately. So, from that perspective, that is a clear reason, why we are kind of negative at this point. Watch video for more.