Rs 6,000cr Adani-Lanco deal win-win for both: IIFL

In an interview with CNBC-TV18, Harshvardhan Dole, Vice President Institutional Equities, IIFL shares his first views on the big-ticket deal.

We don't officially recommend Adani Power. We will be more comfortable if the overall leverage on the company comes down and one gets great comfort on the cash flows that are generated at Mundra

Harshvardhan Dole

Vice President Institutional Equities

IIFL

Adani Power Ltd , controlled by billionaire entrepreneur Gautam Adani, is set to acquire  Lanco Infratech Ltd 's 1,200 megawatt (MW) Udupi thermal power plant in Karnataka in a deal worth over Rs 6,000 crore that will offer the latter cash in hand and help it reduce considerable debt.

Harshvardhan Dole, Vice President Institutional Equities, IIFL sees the enterprise value (EV) of Rs 6000 crore as a win-win for both the companies involved in the deal. In an interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy, he shares his first views on the big-ticket deal .

Below is the verbatim transcript of the interview:

Q: The dotted line has not been signed on but assuming that this is how the deal will work out. What would you do with Lanco Infratech?

A: I do not cover Lanco but I should congratulate Adani Power for signing this deal. If I get the things correct as per the press release issued by Lanco, there is a jetty associated of 4-4.5 million tonne, which shall also be transferred to the acquirer that is Adani Power. Therefore, it appears that the EV of Rs 6,000 crore is not a bad deal. It is EV per mega watt of close to Rs 4.5 crore to Rs 5 crore which is a good deal. It is lower than the current replacement cost and since the plant sells power on longer term assured return on equity (RoE) basis, Adani Power should not have any material challenge selling or rather structuring the power purchase agreement (PPA) hereon. So prima facie it appears to be good deal for Adani Power. Lanco of course will see reduction in debt, their debt should come off by about 10 percent odd and to that extent that should be seen positively by the lenders.

Q: What could be the stock impact on Adani Power today and what the stress would be on their balance sheet, whether they will have to raise fund etc?

A: In case of Adani Power, one needs to understand two things – (1) how would Adani Power fund equity component of this deal because while the debt associated on the books of the power plant, the interest thereon is a clear pass-through in the tariff as per Central Electricity Regulatory Commission's (CERC) order and (2) we need to understand how Adani will arrange the equity funding and that will be a key issue for the stock to perform from hereon. If they borrow the debt either through the promoters or through the banks, interest on that is not a pass-through and one need to monitor that closely from hereon.

As far as other plans, we all know that CERC has given a favourable order; Appellate Tribunal (APTEL) is considering various pleas of Adani and Tata Power , so those issues remain separate and I also monitor that closely. It is a good deal but we need to take care of the leverage and how Adani funds this particular deal.

Q: What is your best case? It is deeply indebted company, will not that weigh on the stock. Would you still buy it?

A: We don't officially recommend Adani Power. We have positive view on the other group company, which is Adani Ports  and Special Economic Zone but Adani Power, we will be more comfortable if the overall leverage on the company comes down and one gets great comfort on the cash flows that are generated at Mundra which is currently not generating healthy cash flows. The other two units Kawai and Tirora are the issues there that are dealable because there the company is getting linkage coal and hopefully, if the coal supply improves, those issues are addressable. I think the key issue remains at Mundra.

Adani Power stock price

On August 14, 2014, at 11:12 hrs Adani Power was quoting at Rs 53.10, up Rs 1.05, or 2.02 percent. The 52-week high of the share was Rs 68.50 and the 52-week low was Rs 31.65.

The company's trailing 12-month (TTM) EPS was at Rs 4.65 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 11.42. The latest book value of the company is Rs 27.11 per share. At current value, the price-to-book value of the company is 1.96.

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