Buy Adani Power Ltd for the Target Rs.250 by Motilal Oswal Financial Services Ltd
Riding India’s thermal power renaissance
* We initiate coverage on Adani Power Limited (APL) with a BUY rating and TP of INR250/sh. We like APL for 1) ambitious growth plans (capacity up 2.3x to 42GW by FY32), 2) solid execution track record demonstrated by acquisition and turnaround of multiple distressed plants, and 3) optionality from nuclear foray + limited competition in the thermal segment.
* APL, is India’s largest private thermal power producer with a capacity of ~18GW in 1QFY27, accounting for 24% of private and 8% of aggregate coal and lignite-based capacity in India. APL sells power under long/medium-term PPAs with DISCOMs (with 95% of its operational capacity tied up) as well as through merchant contracts.
Thermal upcycle to continue; upside risks to CEA’s 86GW estimate
* India's thermal capacity remains substantial and is set to rise by ~86GW over FY26-36. Thermal dependency remains high across key states even as its share in the overall capacity mix declines. State-level plans, in fact, point to greater upside than the Center's estimate, with the top five states alone underwriting ~32.6GW of incremental thermal capacity versus ~14.2GW implied by the Center’s national plan.
* Unserved energy projections by FY36 (state estimates) are high across Tamil Nadu (~21%), UP (~21%), and Rajasthan (~17%), underscoring genuine reliability stress. Further, our scenario analysis reinforces this: a 10-30% delay in non-thermal capacity additions over ONLY the FY34-36 period would require an incremental ~6.5-19.5GW of thermal capacity.
Solar’s cost advantage set to narrow; thermal gains ground
* Currently, solar tariff is ~INR 3.3-3.5/kWh cheaper vs thermal. However, we expect solar's tariff advantage over thermal to shrink ~15-20% to below INR3/kWh in the next 3-4 years on the back of
1) withdrawal of ISTS waiver
2) ALMM-II/III-led cost escalation. Thus, the tariff differential that has underpinned solar's decade-long displacement of thermal generation is structurally compressing, and we believe this convergence shall fundamentally lead to improved competitive positioning of coal-based plants.
* While standalone solar by FY31E may remain cheaper than thermal, it is not a comparable product, as thermal PPAs deliver firm, dispatchable capacity, while solar, even with a battery, remains intermittent. Recently signed FDRE PPAs in India have been at ~INR5-6/kWh. Against this, APL's recent PPA at INR6.075/kWh (effective Dec’30) is no longer materially disadvantaged.
APL: Uniquely placed to take advantage of the thermal capacity upcycle
* We see APL as the natural winner of India's upcoming thermal capacity build-out and beneficiary of a benign competitive environment. As the Central Electricity Authority (CEA)’s 86GW thermal capacity pipeline expands further, we note that APL faces limited competition as
1) NTPC generally only participates in regulated tariff-linked projects
2) Tata Power has publicly stated its intent to focus away from thermal and towards renewables
3) JSW Energy already has an ambitious pipeline of thermal/RE projects with a target to reach 30GW by 2030
* Limited competition in various upcoming bids (UP, Gujarat, Rajasthan, Uttarakhand, and Andhra Pradesh) augurs well for project economics and places APL well to ride the next thermal capacity up-cycle.
Valuation and view: Initiate coverage with a BUY rating
* We value APL at 16x FY29E EBITDA, investments add INR1/share. The sum of these contributions, adjusted for net debt, results in a TP of INR250. APL is currently trading at an FY29E EV/EBITDA of 13.8x. We build an EBITDA CAGR of 21% over FY26-29E, a PAT CAGR of 9% over FY26-29E, and capacity additions of 1.3/1.6/3.2GW in FY27/FY28/FY29.
* APL’s substantial valuation premium over peers such as NTPC and JSW Energy is a function of
1) superior capital allocation with an average acquisition cost of INR35m/MW, significantly below the greenfield thermal plant cost of INR120m
2) strong growth trajectory with EBITDA potential of INR800b post completion of the current capex cycle
3) optionality from forays into nuclear.
Key risks
1) 44% of the upcoming thermal capacity is untied, leaving APL exposed to demand uncertainty
2) APL remains exposed to competition in the power sector, where the presence of multiple competitors can drive down project return
3) a slowdown in tendering activity can impact future capacity addition outlook for APL
4) APL has large capex commitments; delays or cost overruns can hurt its cash flows and returns; and 5) APL must adhere to strict environmental regulations, as failure to manage emissions, water usage, and waste effectively could result in penalties and legal issues.
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