Adani Enterprises – Infra conglomerate – Buy

BOFA Merrill has initiated coverage on Adani Enteprises with a BUY Rating. Adani is transforming its business model to sustainable annuities with high-margin / RoE (23.9% / 34.7% by FY12E) and heavy capex from a volatile, low capex, and low margin / RoE (3.8% / 16.7%) trading business. It plans to invest Rs412bn over FY10-13E with IPP and coal mining accounting for 74%, which imparts visibility to scale. Its control over coal mine to power value chain shall drive superior margins.

ADE is executing a 14x scale-up in IPP capacity by FY14E via an unregulated model (no cap on ROE). It has pre-sold 77% of power at an attractive tariff and secured fuel/funding resulting in visibility of 15x EPS over FY10E-12E. Production of its Indonesian coal mines, which started operations in FY09, will reach 10mt pa by FY14E while Indian mines will start operations in FY12E (70mt pa by FY18E). We believe port cargo should grow 2.4x to 100mt pa by FY13E. IPP would account for 19% of revenue and 52% of EBITDA by FY12E.

BOFA Merrill has set a price target of Rs590 – Comprises 35% from port & SEZ, 26% from IPP and 32% from coal businesses. As ADE enters new areas to create scale, risks are execution & leverage (net D/E of 2.4 by FY12E vs 3.2 in FY09).
Sum of the Parts Valuation of Adani Enterprises – Holding company for all group projects is as follows,
Ports, Logistics and SEZ – 244
Power Generation – 183
Coal Mining – 94
Trading – 106
Real Estate – 30
Agro – 14
Oil & Gas – 9
Total Valuation is Rs 590