Acquisitions Of Moxie Power And Others Will Boost India's Future Power Capacity

Key Takeaways

• The company's strategic acquisitions and expansion projects may significantly enhance operating capacity and future revenues amid increasing power demand in India.
  
• Focus on fuel security and ESG improvements could lower costs and attract ESG-focused investors, potentially boosting margins and stock valuations.
  
• Declining merchant tariffs and increased financial costs from expansions may pressure Adani Power's margins and profitability amid regulatory and demand variability challenges.

Catalysts

Engages in the generation, transmission, and sale of electricity under long term power purchase agreements (PPA), supplemental PPA, medium and short term PPA, and on merchant basis in India.

• Adani Power's recent acquisition of Moxie Power, Coastal Energen, Korba Power, and the Dhamra power plant is likely to increase operating capacity, providing a potential boost to future revenues as it meets growing power demand in India.
  
• The ongoing expansion projects at Mahan and Raipur and plans for additional projects signal a focus on increasing generating capacity, which could significantly enhance future revenue streams as demand for power continues to grow.
  
• Strategic investments in fuel security, such as acquiring commercial coal mines, aim to reduce dependency on external coal markets, potentially lowering fuel costs and positively impacting net margins.
  
• Adani Power's focus on resolving regulatory matters has reduced recognition of prior period revenues, indicating a shift to more stable and predictable revenue streams, likely leading to improved earnings stability.
  
• The company's ESG improvements and efforts to secure high ESG ratings can attract ESG-focused investors, potentially leading to higher stock valuations and improved earnings through enhanced investor confidence and reduced capital costs.

Adani Power Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Adani Power's revenue will grow by 14.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.9% today to 18.5% in 3 years time.
• Analysts expect earnings to reach ₹153.1 billion (and earnings per share of ₹40.66) by about February 2028, up from ₹121.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, up from 15.7x today. This future PE is lower than the current PE for the IN Renewable Energy industry at 29.0x.
• Analysts expect the number of shares outstanding to decline by 3.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.62%, as per the Simply Wall St company report.

Adani Power Future Earnings Per Share Growth

Risks

• There is observed variability in power demand due to weather conditions, which can result in lower plant load factors (PLF) and reduced revenues if such conditions persist. This impacts revenue and profitability.
  
• Merchant sales tariffs have decreased significantly compared to the previous year, leading to reduced income from these channels. A continued decline in merchant tariffs can pressure overall margins and revenues.
  
• The recognition of prior period revenues and regulatory income has decreased, which previously boosted earnings. A further reduction in these revenues could negatively impact overall net income.
  
• New acquisitions and expansions, although beneficial for growth, have raised depreciation and finance costs, which might strain net margins if growth does not outpace these additional expenses.
  
• Regulatory risks, such as changes in government policies and Section 11 implications, might affect operations, potentially leading to unanticipated impacts on recurring revenue and earnings.

Valuation

• The analysts have a consensus price target of ₹660.0 for Adani Power based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹826.9 billion, earnings will come to ₹153.1 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 12.6%.
  
• Given the current share price of ₹494.1, the analyst price target of ₹660.0 is 25.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.