Adani Power vs Tata Power vs NTPC

NTPC, Adani Power & Tata Power are three of the biggest Power producers in the country, whose shares are listed on the stock exchanges. NTPC is the public sector behemoth with a current installed capacity of around 47,200 MW. Adani Power comes next with an installed capacity of around 10,500 MW. Tata Power has been overtaken by the much much younger Adani Power last year as it's installed capacity stands at around 9200 MW. While NTPC and Adani Power are pure-play Power Producers, Tata Power is also into Power Distribution and Transmission.

There are quite a few State Electricity Boards who have power generation capacity higher than that of Adani Power, but none of them are investible for the general public. NTPC single-handedly meets nearly a quarter of the country's total power demand. The Private sector currently contributes just about 35% of the country's power requirement, but their contribution is increasing with every passing year as nearly 60-65% of incremental capacity addition is taking place in the private sector. Most of these use the latest technologies, which are more efficient than that used at the older power plants of the public sector units. Over a period of time, even these ageing power units will either have to shut down operations or swap their machinery for the latest technology.

For this comparison, I have considered three important financial parameters of the three companies for the last 4 fiscals, which gives us an idea of the comparative progress made by the three of them.

1) Total Income: Between FY'13 and FY'16, NTPC's Total Income has shown negligible growth. The lowest figure was Rs.75,279 crores in FY'13 and the highest figure was Rs.82,675 crores in FY'15. In FY'16, NTPC's Total Income again dipped below the Rs.80,000 crores mark. That means NTPC's Total Income has grown just about 6-7% over the last 3 fiscals. Tata Power too hasn't done much better with it's Total Income having improved by about 13% over these 3 years and now stands at Rs.37,559 crores. On the other hand, Adani Power, which was a baby in FY'13 with Total Income of just under Rs.7000 crores, has rapidly grown up to touch a figure of Rs.25,402 crores. Most of it's existing capacity was commissioned in these 3 years. I am expecting Adani Power to be on the verge of overtaking Tata Power in Total Income stakes by the end of FY'18 or before.

NTPC did not add much capacity over the recent few years, but it does have some large capacity addition projects under construction since the last 1-2 years, which will be commissioned over the next 1 to 3 years timeframe. Some of these larger projects will enable the company to shut down some of the very-old, inefficient & polluting power plants. Tata Power has announced several small to medium sized renewable energy projects over the recent few quarters, involving Wind & Solar Power. It seems like Tata Power is currently more focused on improving it's Power distribution business in Mumbai & Delhi regions. The Power Distribution business has the potential to generate strong recurring cash profits once it reaches a critical mass.

2) EBITDA: NTPC is again the worst performer here with it's EBITDA down by about 5% over the last 3 fiscals. Still it's worth mentioning that despite being a PSU, it's EBITDA margins are around 25%. Yes, these margins are substantially lower than what most Private sector projects generate after being in operations for more than a couple of years. But the average age of NTPC's assets runs into a couple of decades. Add to that certain PSU-related inefficiencies. And then the 25% EBITDA margin figure starts looking respectable.
Coming to Tata Power, it has seen a substantial jump in EBITDA in FY'16, after it being near-stagnant for 3 years. It's FY'16 EBITDA is nearly 33% higher than FY'13 levels. Tata Power's EBITDA margins currently stand at under 25% levels, but things have been improving over the last 1 year, both on Generation front as well as Distribution side. We could see further noticeable improvement in FY'17.
Use of latest technology is clearly showing in the huge improvement shown by Adani Power's EBITDA numbers over the last 3 years. Eventhough Adani Power's Total Income had jumped about three & half times, it's EBITDA has jumped about 7 to 8 times over the same period. Adani Power's EBITDA margin currently stands at just over 34% and there is scope for some more improvement as some of it's recently commissioned projects reach maturity stage. Adani Power even managed to turnaround the operations of the 1200 MW Udipi Power project (which it acquired from Lanco) within 1 year.

3) Interest Cost: The biggest outgo for any Capital Intensive business after EBITDA is the Interest Cost. The Interest Cost is generally the heaviest in the initial few years post commissioning and gradually reduces as the project matures and starts repaying portions of the debt every year. Here the higher age-profile of NTPC & Tata Power assets becomes their advantage. The annual Interest Cost of both these companies is much lesser than that of Adani Power. Still it is worth noting that NTPC's Interest Cost has been increasing with every year over the last 3 years. From a level of Rs.2481 crores in FY'13, it has increased to Rs.4151 crores in FY'16. That means over the last 3 years, NTPC's EBITDA has come down by about Rs.1000 crores, but it's Interest outgo has increased by about Rs.1700 crores, resulting in reduced Pre-Tax Cash Profits.
Tata Power has done better here. It's Interest outgo saw a jump in FY'14, but has remained steady around the Rs.3500-3600 crores mark. This has resulted in a smart jump in Tata Power's pre-Tax Cash Profit during FY'16 and FY'17 is expected to be even better.
Adani Power being in the commissioning phase of it's different projects over the last 3 years, has seen it's Interest Cost jump from Rs.1703 crores in FY'13 to Rs.5964 crores in FY'16. In fact Adani Power's EBITDA for FY'13 was nearly Rs.550 crores lower than it's Interest cost for that year. But things improved substantially in FY'14 & FY'15 when it's EBITDA was higher than it's Interest outgo by about Rs.700-800 crores each time. During FY'16, the gap between Adani Power's EBITDA and it's Interest cost has jumped to almost Rs.2800 crores. This Cash-Profit comfort is very crucial for Adani Power during it's next phase of growth. I would say that this is the start of Adani Power's golden period. Going forward I am expecting only a moderate increase in Adani Power's Interest Cost with every new project commissioning as the improving Cash Flows from existing projects will help keep the Interest burden in check. This should lead to substantial increase in Cash Profits in the coming couple of years & beyond.

Valuations:

At current levels, NTPC's Market Cap stands at around Rs.1,50,000 crores, while that of Tata Power is close to Rs.20,000 crores and Adani Power's at around Rs.10,000 crores. I am expecting things to change dramatically over the next 5 years. Both Tata Power & Adani Power could see their Market Caps to surge past the Rs.50,000 crores mark during the coming 5 years, i.e. by the end of FY'21. Why am I so confident? Demand for Power is expected to grow at a healthy pace, given that Indian economy has the potential to maintain 7+% annual rate of  growth. With the Govt. aggressively trying to ensure that electricity reaches each & every village and 24x7 Power supply across the country before the end of year 2020, we could very well see Electricity demand grow faster than it has in the past. Adani Power with it's highly efficient power plants will certainly benefit from this expected demand surge. Adani Power itself has set a target of achieving 20,000 MW installed capacity by year 2020, that means approximately double of what it has today. With Govt wanting to setup 100 Smart Cities, there is a possibility of auction of Power Distribution licenses with substantial Private sector participation expected. Here again companies like Adani Power & Tata Power could be beneficiaries. Tata Power's city-level Distribution experience will certainly come in handy here.

In short, there is immense scope for progress for efficient & capable producers as well as service providers. NTPC too will gain from it, but because of it's size & PSU roots, the percentage gain will be much smaller when compared to aggressive & nimble-footed private sector competitors.

Adani Power Ltd. - Seems like Good times are rolling in.

Adani Power Ltd is amongst the newest Thermal Power companies in India, but probably is already the largest Thermal Power producer in the Private sector, overtaking the big daddy (in terms of Age) Tata Power. NTPC, from the public sector, is the largest Power producer in India by miles. But many of it's power plants are old and are due for complete overhaul of equipment & machinery. On the other hand Adani Power Ltd. has built quite a few medium to large capacity Power plants using the latest super-critical technology, which makes it on the most efficient power producers in the country. Apart from building it's own power plants, Adani Power is also on the lookout for potential acquisitions. Last year it completed the acquisition of Lanco's Udipi project of 1200 MW, which is now making profits for the company, and is already planning on expanding it's capacity further by 1600 MW in the coming few years. Another couple of smaller acquisitions are in still awaiting clearances.

As things stand, Adani Power already has over 10,000 MW of Thermal Power generation capacity in operations and is looking to expand this capacity to about 20,000 MW by the year 2020. Eventhough this target is pretty aggressive to achieve, I think Adani Power is well prepared to be very close to that goal by that time. In order to achieve that goal, Adani Power needs to ensure that it's existing power plants are in good financial shape and are generating decent amounts of Cash Profits. Power Generation being not just a very Capital Intensive business, it also takes about 3-4 years to build & commission a new power project and then another year or two for it to breakeven on the Cash Profit front. It's interesting to see how Adani Power's financials have progressed over the last few quarters.

As usual I prefer to check the Trailing-Twelve-Months numbers while analysing financials of any business as it gives us some idea of a trend. Have a look at the T-T-M Total Income chart of Adani Power. After remaining steady within a range for a few quarters, it has started moving up again. As an when a new project gets commissioned, it starts adding to the company's revenues and the numbers for following 4 quarters show an increasing trend on T-T-M basis due to that project. Adani Power's Total Income crossed the Rs.25,000 crores mark after the most recent jump in March'16 quarter. Even if the Q4-FY'16 numbers are annualised, Adani Power's 12-months Income should be very close the Rs.30,000 crores level in another 3 quarters. This will take Adani Power to within 20% of Tata Power's Consolidated Total Income figure, which currently stands at around Rs.37,500 crores mark. If this trend continues, Adani Power should be overtaking Tata Power in another couple of years. And remember that Tata Power's Consolidated numbers includes many things other than it's Thermal Power generation business, like Renewable energy, Power Distribution business, Foreign assets, as well as a small unit dedicated to defence-related technologies. On the other hand Adani Power is a pure-play Thermal Power producer. (I understand that Adani Group's investments in Solar

Power generation projects were done by Adani Enterprises Ltd & not by Adani Power Ltd.. I am not sure if there has been transfer of assets arrangement between the two group companies as yet. I will try & find out more about it from Adani Power's FY'16 Annual Report.)

Coming to Adani Power's progress on the EBITDA front, it has got a substantial jump in the latest quarter, which took the T-T-M EBITDA of the company to it's best ever figure of Rs.8754 crores. In the next 1 or 2 quarters, it should be past the Rs.10,000 crores mark. Adani Power's 12-months EBITDA number is now within 5% of Tata Power's 12-months EBITDA number. The former will overtake the latter here as well within the next 1 or 2 quarters. It seems like some of it's projects, which were commissioned in the last 1 or 2 years, have reached peak operating performance. This combined with the operating turnaround of Adani Power's last acquisition, i.e. Lanco's Udipi Power project, seem to have boosted Adani Power's EBITDA as well as EBITDA margins. With the increased rollout of Central Govt.'s UDAY scheme, the financial health & payment track record of State Electricity Boards is expected to improve in the coming quarters. This will also help Power producers like Adani Power to receive their dues in full and with lesser delay. This will indirectly help these companies to control their Interest Costs, which is the biggest outgo from their EBITDA.

Since setting up a Power project is extremely Capital Intensive & most projects are funded by approximately 80:20 - Debt:Equity Ratio, the Interest burden forms a large portion of the project's cost, especially in the initial few years of the project's commissioning. From the time of Financial Closure of a project file & start of EPC work, it takes anywhere between 2 to 4 years to complete all the EPC work & commission the power plant. After commissioning, it takes about a year or two for the plant to reach near-peak operating performance levels. That is when the project starts generating healthy operating profits to not just cover the recurring Interest Cost, but also leave some Cash Profit to start repaying the Debt associated with that project. That is when we can say that the Project has matured.

Have a look at the T-T-M Interest Cost chart. Adani Power's 12-months Interest Cost stood at just over Rs.4000 crores in March'14, while it's EBITDA was over Rs.4800 crores then. By March'15, it's EBITDA jumped by just under 25%, but it's Interest Cost jumped by about 33%, which suppressed the company's Cash Profits. The situation has drastically improved over the last 1 year. Between

March'15 and March'16, Adani Power's 12-months EBITDA jumped by about 45%, while it's 12-months Interest Cost increased by only about 10%. This has led to a substantial expansion in Cash Profits for the company. Have a look at the T-T-M Interest/EBITDA % chart. From a peak level of about 93%, the situation has rapidly improved over the last 3 quarters and now Interest Cost forms just under 70% of the company's EBITDA. We could see some reversal in this trend for a few quarters as and when a new project is commissioned. But the existing operating projects, which have either reached maturity stage or approaching it, will help the company keep a tab on it's Interest Costs.

A quick comparison with Tata Power's 12-months Interest Cost number tells us that Adani Power's Interest Cost is nearly 70% higher than the former. In case of Tata Power, Interest Cost forms less than 40% of the company's EBITDA. This is case primarily because most of Tata Power's generating assets are much much older and many of them have already been paid for. Even in case of Adani Power, as the average age of it's generating assets increases, we will see the Interest/EBITDA % coming down to even more comfortable levels from the current near-70% levels.

Valuations: At the current share price of around Rs.29/- and considering the existing Equity base of 333.4 crore shares, the Market Cap of the company stands at about Rs.9700 crores. The Promoter Group increased it's shareholding in the company during March'16 quarter by 5%, when it converted the warrants it was holding at the rate of Rs.28 per share. This took the Promoter holding in the company to over 63%. Few weeks ago, another set of warrants were issued for 52.3 crore shares and the conversion price was set at Rs.32.54/-. Assuming full conversion sometime during the next 12 months, the Equity base will expand to just over 385 crore shares. Considering the expanded Equity base, Adani Power's Market Cap at current price will be around Rs.11,000 to 11,500 crores. At this Market Cap level, Adani Power is trading at less than 1.5 times it's T-T-M EBITDA and about 4 times it's T-T-M Cash Profit. Considering the fact that both the EBITDA and Cash Profit of Adani Power is set for a big surge over the next few quarters, I think this current valuation of the company is just too mouth-watering to ignore for Investors. Adani Power could very well prove to be a 2 or 3-bagger over the next 1 to 3 years. Excellent investment for the medium to long term.

Adani Power Ltd. - Focus will now shift to profitability.

Adani Power Ltd. has been in the news quite often over the last 12 months over acquisition of different Power projects. In August'14, Adani Power announced signing of agreements for acquisition of Lanco's 1200 MW Udipi Power plant and the deal was completed just after Q1 of this fiscal started. In November'14, Adani Power has announced takeover of Avantha Group's Korba West unit of 600 MW Coal-based plant. That deal too is expected to be completed anytime now. Apart from the Korba unit, Adani Power's operational power generation capacity stands at 10,440 MW, almost all of it being Coal-based projects. The addition of Korba unit will take it to over 11,000 MW capacity, consolidating it's position as the largest Private sector Power Producer in India.

Adani Power will not stop expanding here. As per currently known plans, the Korba West unit is already implementing addition of another 600 MW capacity, which Adani Power will expedite soon after completing acquisition formalities. Adani Group has also signed agreements for setting up 10,000 MW Solar power capacities with Govt. of Rajasthan. But this agreement has been signed by Adani Enterprises and not Adani Power. So it's likely that Adani Power may not play any role in that investment.

Quarterly Numbers

Adani Power is likely to pursue acquisition of other troubled Coal-based Power projects to add to it's capacities in the coming years. But at the moment, it will surely be looking at boosting profitability of it's existing operations. Things have been turning favourable on this front with substantial drop in Coal prices and increased production volumes by Coal India, which in turn is making more Coal available in the domestic market. A substantial part of Adani Power's capacity is running on imported Coal, which is putting pressure on the company's profitability. I think Adani Power would like to partly compensate that with domestic Coal to bring down the average cost.

Two other developments are under process, which should boost Adani Power's operations: One is the refinancing of it's debt under RBI's 5/25 scheme, where Banks can extend loans to large Infrastructure Projects for longer durations of upto 20 or 25 years, depending on the project's expected cash flows. Adani Power is already to talking to it's Bankers to converting it's loans under this scheme. If successful, it should help reduce the pressure to some extent on the company's Cash outflows towards Interest payment as well as Principal repayment. This will be an incremental gain apart from the possibility of reduction of rates in the coming monitory policy announcements.

The Second reason is the Govt of India's action towards improving the health of the several financially ill State Discoms. The Central Govt is closely working with many State Govts to work out packages for turning around their Discom's operations to make them sustainable. Thanks to huge accumulated losses as well as ongoing operating losses, many of the state discoms were either not able to make full payments towards power purchased from producers or not able to purchase more power to meet the increasing demand for power, leading to continued Load-shedding in several regions of different states. On one hand the Discoms are being pushed to reduce their leakages, which will make their operations become sustainable and on the other hand the Govts will step in to workout a package to take care of their past dues. This process will happen in stages over the next 1-2 years and we could start seeing some evident results only by end of next year.

The demand for power normally grows at a rate faster than the economy's growth rate. If the economy is expected to grow at 7-8% Y-o-Y, then Power demand could post a growth of around 10%. Many of the older power plants, which have been in operations for over 30 or 35 years, will need to be shut sooner or later as they are a lot less efficient than the newer ones, leading to high pollution as well as high cost of production. This is where the newer projects will come in as replacement capacities for the older capacities, primarily owned by State Utilities or NTPC.

To summarise..... the worst seems to be over for most of the troubled as well as operational power producers, who haven't seen profits since a very long time. Things are expected to improve substantially over the coming 4 to 8 quarters, though the improvements will vary from project to project.