Jefferies initiates coverage on Adani Power with 31% upside potential. Here's why

Jefferies, in a recent report, said it has started coverage on Adani Power Ltd (APL) shares with a 'Buy' call. The global brokerage has assigned a potential upside target of Rs 660, an uptick of 31.40 per cent from Monday's closing value of Rs 502.30.

"APL is India's second-largest thermal power generation company after NTPC, on its journey to raise capacity by 1.7x from 17.6 GW to 30.7 GW by 2030. Land requirements and financing plans are in place. Close co-ordination with BHEL for equipment delivery and inhouse EPC are ensuring capex is on schedule. Thermal capacity in an overall peak deficit scenario with merchant exposure is a positive. Initiate coverage at Buy," it stated.

The brokerage said that the company operates 12 power plants across eight states with 87 per cent capacity tied up with power purchase agreements (PPA). "98 per cent of the open capacity is closer to coal mines, enabling economic sourcing of coal. Coastal plants (43 per cent capacity) are dependent on imported coal but have a fuel cost pass-through/ index-linked price escalation in place," it added.

Jefferies expects APL's merchant capacity to be 12-13 per cent by FY30E, with an EBITDA contribution of 19-20 per cent compared to around 30 per cent currently. "We assume Rs 6/unit merchant realisations, vs Rs 7/unit average realisation for APL in FY24. Every 5 per cent rise in merchant realisation is a 2 per cent rise in FY27E EBITDA. We believe power demand should recover back to 7 per cent levels vs recent weakness, which is similar to the past capex upcycle phase of FY03-09. This is a key trigger for the stock," it highlighted.

"Rs 1.6 trillion (lakh crore) is incremental capex requirements for 13 GW, vs Rs 1.4 trillion operational cash flows in FY25E-30E. We expect debt requirements to peak in FY26E-27E at 1.4x net D:E v/s 1x in FY24 and drop from thereon," the brokerage also said.

"We estimate 10 per cent EBITDA CAGR for APL in FY24-27E, rising to 19 per cent CAGR over FY27E-30E as new capacity becomes operational. We value APL at 15x EV/EBITDA, vs 17x for JSW Energy (JSWE) given 50 per cent renewable energy exposure for JSWE. This is at a premium to NTPC (implied 11x target multiple) given merchant upside for APL," it further stated.

Mentioning the risks, the foreign brokerage said past PPA issues returning and impacting EBITDA, lower merchant realisations, demand disappointment and payment delays for the 1.6 GW Godda power plant (PPAs with Bangladesh) may impede the above view.