Adani Enterprises Visit Note Oct 07 EDEL

8/8/2019 Adani Enterprises Visit Note Oct 07 EDEL

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Adani Enterprises

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Recently, we met the management of Adani Enterprises (AEL). The key highlights of ourinteraction are as follows:Power plant to lead the valuation pack

Adani Enterprises (AEL) is setting up a 2,640 MW thermal power plant in Mundra (Gujarat)

through Adani Power, a wholly-owned subsidiary. This power plant has coal linkages with

an Indonesian block having a reserve of 140 mn MT. The power has been pre-sold to

Gujarat Electricity Board (GUVNL) at a purchase power agreement (PPA) rate of INR

2.60/KWH. We have used the DCF method to value the equity part of the investment (25%

of total capital employed) at INR 127 bn, which comes to INR 518 per AEL share.

Trading business to provide stabilityAEL is a successful trading company with presence across commodities such as agro,coal, power, gas, petroleum, fertilizers, fruits and vegetables, and metals and minerals. In

FY07, it recorded a turnover of INR 1,70 bn and a PAT of INR 1.7 bn. We have valued the

trading business using residual income valuation model at INR 24 bn, which comes to INR

98 per AEL share.

Coal blocks to provide comfortAEL has struck coal blocks in Indonesia and India. While the Indonesian block (140 mn MT)

will be used to meet the captive requirement of the power plant at Mundra; the Indian block

(200 mn MT) will be used for mining coal for Rajasthan State Electricity Board (RSEB). We

have valued the Indian block at INR 13.7 bn, which values each AEL share at INR 55.6.

ValuationsWe have valued AEL using the sum-of-parts (SOTP) methodology, with the total value of AEL

at INR 755 per share. We have adopted the most conservative approach for valuing all the

businesses of the company, as they are still in their implementation stage. Hence, our SOTP

value bears risks of further upsides. However, given its history of successfully turning around

the Mundra port, we feel that the management has the bandwidth of executing various

projects in the pipeline.

October 01, 2007

Bhargav Buddhadev+91-22-4009 [email protected]

Reuters : ADEX.B

Bloomberg : ADE I

Market Data52-week range (INR) : 640 / 12

Share in issue (mn) : 246.

M cap (INR bn/USD mn) : 151.5/3,810

Avg. Daily Vol. BSE (000) : 81

Share Holding Pattern (%)Promoters : 66.

MFs, FIs & Banks : 1.

FIIs : 14.

Others : 16.

India Equity Research | Conglomerate Visit Note

ADANI ENTERPRISES INR615Powering away NOT RATED

Edelweiss Research is also available on Bloomberg EDEL , Thomson First Call, Reuters and Factset.

Financials (Consolidated)Year to March FY04 FY05 FY06 FY07Revenue (INR mn) 89,112 150,053 123,415 169,491

Rev. growth (%) NA 68.4 (17.8) 37.3 EBITDA (INR mn) 1,391 2,139 3,167 4,705

Net profit (INR mn) 1,403 1,225 1,352 1,776

Shares outstanding (mn) 220 226 226 246

EPS (INR) 6.4 5.4 6.0 7.2

EPS growth (%) NA (14.6) 10.0 20.6

P/E (x) 96.8 113.4 103.1 85.5

EV/ EBITDA 98.2 66.4 45.7 34.3

ROE (%) 22.5 18.8 18.7 20.8

ROCE (%) 21.6 17.2 17.4 21.1

* comparable Consolidated numbers are not available for FY03

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Real estate is the cherry on the cakeCurrently, AEL is working on three real estate projects - one in Ahmedabad and two in Mumbai at

Bandra Kurla complex and Borivli+Byculla. We have used the NAV method for valuing each project.

The combined value comes to INR 83 per share.

Business Description(A) Trading

AEL is a successful trading company with presence across commodities such as agro, coal,

power, gas, petroleum, fertilizers, fruits and vegetables, and metals and minerals. In FY07, it

recorded a turnover of INR 1,70 bn and a PAT of INR 1.7 bn. The companys trading business

are described below:

Power/coal tradingEstablished player in the power trading business

Commenced operation during 2003 with reform in Electricity Act, permitting private sectorplayer to trade in power.

Largest private sector power trader in India with a 20% market share (total units traded tilldate more than 5 bn units).

Future initiatives to include the trading of surplus power from the Group operating powerplants and evaluating the power trading markets in neighbouring countries like Bhutan,

Nepal, and Bangladesh, and setting up transmission lines as a backward integration

measure.

The largest importer of coal in India

The company moved ~8 mn metric tonnes of coal into India in FY07, which accounted foralmost 34% of Indias coal imports.

Entered into long-term exclusive coal supply arrangement with the largest mining companyof Indonesia.

Developed relationship with 12 large miners of Indonesia and all four miners ofChina.Agro Leading trader in diversified agri commodities with emphasis on entire range of oil and oil

meals, food grains, and pulses.

Leading player in soya, castor, and pulses, sharing 15% of the bulk trading market in India. Expertise in bulk sourcing, aggregating, logistic management, and distribution. Long-term relationship with leading players worldwide for sourcing and supplying agri

products with repeat contracts.

Geographical presence in the US, Europe, Japan, Korea, China, Canada, Australia, SouthEast Asia, Middle East, South Asia, and almost all over India.

Handled 1.5 mn MT of cargo during FY07, targeting to touch 3 mn MT by 2010


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Adani Enterprises

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Edible Oil (Adani Wilmar; 50% share) Largest refining capacity in India (3,500 tonnes per day). One of the top three food processing companies in India (Source: Business World, 2005). A network of over 1,500 distribution centers. Amongst the top 50 FMCG brands in India. Fortune is Indias largest edible oil brand, commanding 17% market share. Other Growing Brands : Naturalle, Raag, Kachi Ghani. Leader in soya, with a 38% domestic market share (Source: A C Neilsen). Leader in groundnut oil, with a 20% domestic market share (Source: A C Neilsen). Largest exporter of edible oil from India.Adani Agri fresh (AAFL) Developing integrated controlled atmosphere storage facility (CASF), handling, and

transportation infrastructure for fruits and vegetables.

Currently operational at three locations with production centers in Himachal Pradeshhaving a total storage capacity of 18,000 metric tones.

Handled 4,800 MT of apples in FY07 and plans to procure around 25,000 MT of apples inFY08.

Planned rollout of additional capacities in Jammu, Maharashtra, Karnataka, and Gujarat. Plans to procure cherry, lichee, pomegranate, and other stone fruits during FY08 on a test

scale basis.

Adani Agri Logistics (AALL) Developing vertical silos to store grains and enable bulk movement in top loading/bottom

discharge wagons on BOO basis for long-term contract period of 20 years. The salient

features of this contract include:

Storage of 0.55 mn tonnes per month. Guaranteed annual tonnage of 400,000 MT at Base Depots and another 150,000 MT

at distribution depots.

Inflation adjusted contracted value each year. Base depot silos in Punjab and Haryana with total storage 400,000 MT. Distribution silos in Tamil Nadu, Karnataka, Maharashtra and West Bengal - total storage

1,50,000 metric tonnes

400 special wagons for bulk grain transportation. 100% income tax deduction for the first five years and 30% for the next five years. 100,000 MT of wheat movement projected in FY08.


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Adani Enterprises

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Metals Largest importer of steel scrap in the Indian sub-continent through subsidiary in the Dubai

Free Zone.

Ship dismantling business Bay Bridge Enterprises BBE: Ship dismantling yard in Virginia, USA, US MARAD

approved unit for decommissioned Naval and Coast Guard ships.

MOU signed with French shipyard for dismantling. Leading player in un-branded studded jewellery and gold medallion with manufacturing

base in Surat SEZ and outsourcing with large manufacturers.

Minerals Captive port facility at Belekari in Karnataka to support iron ore business. Mechanisation facility for faster movement of cargo and handle larger size vessels to save

on freight.

Long-term relationship with domestic mines and importer in China, Korea, and Japan. Proposed iron ore mining operations in Karnataka and Orissa.Ship fuelling business bunkering Commenced Bunker fuel business from Mundra port with procurement of two products

barges of 3,000 MT each.

First private sector company to enter into bunkering at a strategic location in Gulf of Kutch,where leading oil companies like Reliance Petro, IOCL, BPCL, HPCL, and Essar have

established their refining and storage facilities and 8-10 VLCC are called every month.

Target for 2009 1mn MT and potential to achieve 3 mn MT volume by 2010.

Deals in furnace oil, HSD, and naphtha.

Gas distribution business Distribution of compressed and piped natural gas in Ahmedabad and Vadodra to

industries, commercial outfits, and domestic users through pipeline network.

Present status: 45 CNG stations, 8000 domestic, 245 industrial, and 95 commercialconnections.

Daily contracted quantity = 0.32 MMSCMD; projected: 2.4 MMSCMD. Steel ring network of 198 kms and PE network of 534 kms across six cities already

completed.

Proposes to set up facilities in Faridabad (Haryana), Noida (UP), Khurja (UP), Lucknow (UP),Jaipur (Rajasthan), and Udaipur (Rajasthan).

Planned steel ring network of 514 kms and PE network of 3163 kms across six cities. Facility plans for Jaipur and Udaipur are being developed.


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Adani Enterprises

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(B) Power generationDetails of power plant About 2,640 MW thermal coal-based power project - Mundra SEZ area in three phases:

Supply of power to SEZ and third-party units. Signed PPA with GUVNL for supply of 2,000 MW for 25 years. Actively participating in competitive bids invited by SEBs for supply of power.

Machineries BTG package on EPC basis to SCMEC China for the first two phases. Includes boiler from 'Babcock & Wilcox with designs and technology, and turbine and

generator from Beijing Beizhong Steam Turbine Generator Co.

Tie ups with Indian players like ABB and Siemens for supply of other machineries. Equipment erection work and boundary work already started.2 x 330 MW phase I Financial closure achieved. Expected to be operational by January 2009.2 x 330 MW phase II Financial closure achieved. Expected to be operational by July 2009.

(C) Coal miningPTA Adani Global Indonesia (for captive consumption of the above power plant) Block identified in the Island of Bunyu in E. Kalimantan, near the border of Malaysia to the

north and 33 km of the island of Tarakan.

Approx 140 mn MT estimated reserves in the central and northern part of the islandcovering 3000 hectares of land.

Favourable strip ratio of 1:3.5. Proximity to the port. Mining rights obtained in a phased manner. Received exploitation license for one concession. Commercial operations will commence from December 2007. Captive mining arrangements planned in Australia and Indonesia.Coal mining India 74:26 JV formed with RSEB for captive coal mining 200 mn MT. Pursuing other similar projects.


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Adani Enterprises

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(D) Adani Welspun Exploration (AWEL: 65% Share) According to Ministry of Petroleum and Natural Gas, India ranks twelfth in terms of natural gas

reserves with almost 3 bn cubic meters of the gas. Most of these reserves are located in the KG

basin, upper Assam and Cambay region, and Gujarat.

AWEL been awarded two onshore blocks by GoI in the recently concluded NELP VI throughconsortium, where AEL has a major stake.

One block of 75 sq. kms is located in Cambay, Gujarat, and another block of 95 sq. kms islocated in Assam. The total reserves are in the range of 50 MMBBL of oil and 1,500 MMSCM of

gas.

AWEL has also been awarded one onshore block by Government of Thailand in the easternprovinces of Nakhon Ratchasima and Buri Ram with a total area of 3,900 sq. kms.

AWEL plans to participate in the next NELP VII and is actively looking at Indonesia, Australia,Egypt, and Yemen for gas blocks

(E) Real estateShantigram in Ahmedabad It is an integrated township spanning over 500 acres with frontage on the main Sarkhej

Gandhi nagar highway.

Township will include SEZ, IT park, residential retail malls, hotels, commercial office space,schools, and hospitals.

It is in joint venture with Somya construction which holds 26% shareBandra-Kurla complex (BKC) Located in the International Finance and Business Centre opposite the ICICI Bank and

IL&FS building. The current occupants in BKC include - government offices, public sector

undertakings and banks, Wockhardt, Dow Corning, Tianshi, ICICI Bank, IL&FS, IBM, Sun

Microsystems, Lucent, Cisco, Oracle, Intel, National Stock Exchange, Cisco Systems,

Citibank, and Reliance Telecom.

Area with strong growth potential. Commercial rentals growing at 28.51% every half year,as per a Cushman & Wakefield report.

Proximity to MIDC, Andheri, and Santacruz Export Zones. Nearly, 80% commercial + 20%retail development with a total of 2 mn sq ft development.

Construction to commence by third quarter of FY08. Appointed Hafeez Contractor as architect. It is in joint venture with Mayfair that owns 11% share.

Mill land development in Borivli and Byculla 60:40 joint venture with the Marathon Group, a reputed real estate company with three

decades of experience, for developing two mill areas in Borivali and Byculla.

The land will be handed over through a BIFR process (scheme already approved), clearingtitle for the developer.

Borivli: 1.3 mn sq ft of development. Byculla: 0.7 mn sq ft of development. Product mix: Residential (50%), commercial (30%), and retail (20%).


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Adani Enterprises

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Valuations(A) Trading businessWe have valued the trading business using a residual income valuation model.

Methodology We have added the net worth for all the trading companies and multiplied it by the

difference between the ROE and cost of equity.

Resultant figure is the residual income. We have discounted the residual income with thecost of equity, to arrive at the present value of all the trading businesses.

We have done this exercise up to 2011-12 and then used a terminal valuationmethodology.

The present values of all the trading businesses are as follows:

Table 1: Present value of trading businessTrading businesses Amount (INR mn)Agro 1,554

Adani Agri Logistics 2,733

Coal Trading 11,094

City Gas Distribution 40

Power Trading 100

Petroleum and Lubricants 2,306

Fertilizer 192

Ship Dismantling 526

Dubai Scrap 2,477

Belekari 3,122

Total 24,144Value per share INR 98 Source: Edelweiss research


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(B) Power generationWe have valued the power generation business using a DCF methodology. The assumptions are as

follows:

Table 2: Assumptions for DCF calculations (INR mn)Sum of PV 26,864

Terminal value calculationTerminal growth (%) 4

Terminal value

Total value 139,279

Less: Debt 11,905

Total value 127,374

Total shares 246

Per share value (INR) 518Debt/Total capital (Ratio) 0.75

Cost of debt (%) 11

Tax rate (%) 0

After tax cost of debt (%) 11

Cost of Equity (%) 15Beta (x) 1.25

Risk free rate (%) 8

Risk premium (%) 6

Cost of equity (%) 15

WACC (%) 12 Source: Edelweiss research


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(C) Coal mining (Indian block)We have valued the Indian block at Chhattisgarh having a potential reserve of 200 mn MT on the

basis of present value of savings that a coal block can generate on a period of 25 years. The

assumptions are as below;

Table 3: Coal mining valuationParticulars Indian BlockTotal reserves (Mn Tonnes) 200

Enterprise value per tonne ( 3.2$ per tonne) (INR) 128

Stake (%) 74

Total enterprise value (INR Mn) 25,600

Adani enterprises stake (74%) 18,986

Debt (INR Mn) 5,300

Equity part (INR Mn) 13,686

Value per share (INR) 55.6 Source: Edelweiss research

We have not valued the Indonesian block since it is to be used for captive requirements.


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Adani Enterprises

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(D) Real estateShantigram (Ahmedabad)We have adopted the most conservative approach for valuing the Shantigram project by

assigning valuation only to the 500 acre of property which is owned by the company.

Table 4: Valuation of ShantigramParticularsLand (Acres) 500

Prevailing rate per acre (INR mn) 30

Total sale price (INR mn) 15,000

Less Debt (INR mn) 1,650

Equity part 13,350

Share of AEL (%) 74

Value per share 41 Source: Edelweiss research

Bandra Kurla complexThe assumptions for the Bandra Kurla complex project are as below;

Table 5: Valuation of Bandra Kurla complexParticularsSquare feet (In Mn) 2

Selling price (Per sq feet) 25,000

Cost of construction (Per sq feet) 2,500

Land cost (Per sq feet) 10,200

PBT 24,600

PAT 16,482

Discounting (In years) 3

WACC (%) 14

Share of Adani enterprises (%) 89

Value per share 42 Source: Edelweiss research

Mill land developmentWe have not ascribed any value to the mill land development at Borivli and Byculla because it

involves development of land and not owning the same. However even if we assign a value

using a NAV basis we do not think that the project provides substantial upsides.


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Key RisksExecution challenge:

The biggest challenge for AEL is the execution risks for all the projects in the pipe line. As of now it

has only the trading business to fall back on which is valued at INR 98 per share. The balance value

is coming from all the projects that are in the pipeline.


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Adani Enterprises

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Financial Statements (Consolidated)Incom e sta tem ent (INR m n)Year to M arch FY04 FY05 FY06 FY07Income from operations 89,112 150,053 123,415 169,491

Direct costs 84,155 143,413 115,576 147,775

Employee costs 124 155 270 481Other expenses 3,442 4,347 4,402 16,530

Total operating expenses 87,721 147,914 120,248 164,786

EBITDA 1,391 2,139 3,167 4,705

Depreciation and amortisation 33 23 50 163

EBIT 1,359 2,116 3,117 4,541

Interest expenses 662 703 1,533 2,286

Other income 752 26 14 42

Profit before tax 1,448 1,439 1,598 2,297

Provision for tax 55 227 390 516

Extraordinary items (9) (14) (144) 5

Reported profit 1,403 1,225 1,352 1,776

Adjusted net profit 1,403 1,225 1,352 1,776

Shares outstanding 220.5 225.5 226.2 246.5

Dividend per share 0.4 0.4 0.5 0.5

Dividend payout (%) 40.0 39.1 45.2 54.2

Comm on size metr ics- as % of net revenuesYear to M arch FY04 FY05 FY06 FY07Operating expenses 98.4 98.6 97.4 97.2

Depreciation 0.0 0.0 0.0 0.1

Interest expenditure 0.7 0.5 1.2 1.3

EBITDA margins 1.6 1.4 2.6 2.8

Net profit margins 1.6 0.8 1.1 1.0

Growth metr ics (%)Year to M arch FY04 FY05 FY06 FY07Revenues NA* 68.4 (17.8) 37.3

EBITDA NA 53.8 48.1 48.5

PBT NA (0.6) 11.0 43.8

Net profit NA (12.7) 10.3 31.4

EPS NA (14.6) 10.0 20.6 Cash flow statement (INR mn)Year to March FY04 FY05 FY06 FY07ENet profit NA 1,225 1,352 1,776

Add: Depreciation NA 23 50 163Add: Misc Expenses written off NA (19) 28 -

Add: Deferred tax NA 36 4 -

Gross cash flow NA 1,265 1,434 1,939

Less: Dividends NA 88 102 134

Less: Changes in W. C. NA 2,658 2,991 4,631

Operating cash flow NA (1,481) (1,659) (2,826)

Less: Change in Investments NA (227) 1,463 -

Less: Capex NA 225 270 1,200

Free cash flow NA (1,479) (3,391) (4,026)


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Balance sheet (INR m n)As on 31st M arch FY04 FY05 FY06 FY07EEquity capital 321 226 226 246

Reserves & surplus 5,917 6,547 7,478 9,120

Shareholders funds 6,237 6,773 7,704 9,367

Secured loans 2,653 3,827 8,722 8,722

Unsecured loans 862 4,566 4,475 4,475

Borrowings 3,515 8,393 13,197 13,197

Sources o f funds 9,752 15,166 20,902 22,564Gross block 434 614 817 2,017

Depreciation 98 117 144 308

Net block 336 497 672 1,709

Capital work in progress 24 65 109 109

Total fixed assets 360 562 781 1,818

Investments 694 467 1,929 1,929

Inventories 2,195 3,231 3,884 5,333

Sundry debtors 11,428 21,404 22,439 30,817

Cash and equivalents 1,996 4,794 5,889 1,883

Loans and advances 2,148 3,304 5,451 5,451

Total current assets 17,767 32,732 37,662 43,484Sundry creditors and others 8,873 18,189 18,651 23,848

Provisions 177 370 753 753

Total CL & provisions 9,049 18,559 19,404 24,601

Net current assets 8,717 14,173 18,258 18,884

Net deferred tax (28) (64) (67) (67)

Others 9 28 0 0

Uses of funds 9,752 15,166 20,902 22,564Book value per share (BV) (INR) 28 30 34 38

RatiosYear to M arch FY04 FY05 FY06 FY07EROE (%) 22.5 18.8 18.7 20.8ROCE (%) 21.6 17.2 17.4 21.1

Current ratio 2.0 1.8 1.9 1.8

Debtors (days) 13 14 18 18

Fixed assets t/o (x) 247.5 325.6 183.8 130.4

Debt/Equity 0.6 1.2 1.7 1.4

Valuat ions parametersYear to M arch FY04 FY05 FY06 FY07EEPS (INR) 6.4 5.4 6.0 7.2

Y-o-Y growth (%) NA (1462.1) 999.1 2055.9

CEPS (INR) 44.8 55.4 62.0 78.7

P/E (x) 96.8 113.4 103.1 85.5

Price/BV (x) 21.8 20.5 18.1 16.2

EV/Sales (x) 1.5 0.9 1.2 1.0

EV/EBITDA (x) 98.2 66.4 45.7 34.3


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Adani Enterprises

14Edelweiss Research is also available on Bloomberg EDEL , Thomson First Call, Reuters and Factset.

Naresh Kothari Co-Head Institutional Equities [email protected] +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities [email protected] +91 22 2286 4206

Shriram Iyer Head Research [email protected] +91 22 2286 4256

Coverage g roup(s) of stocks by primary analyst(s): Engineering and Power:AIA Eng., BEML, Elecon Eng., McNally Bharat Eng., TIL, TRF, Finolex, Havells

Adani Enterprises Recent Research

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Edelweiss Securities Limited,14th Floor, Express Towers, Nariman Point, Mumbai 400 021, Board: (91-22) 2286 4400, Email: [email protected]

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Rating InterpretationRating Expected toBuy appreciate more than 20% over a 12-month periodAccumulate appreciate up to 20% over a 12-month periodReduce depreciate up to 10% over a 12-month periodSell depreciate more than 10% over a 12-month period

Date Company Title Price (INR) Recos22-Aug-07 McNally Gaining traction; 167 BuyBharat Visit Note2-Aug-07 Elecon Acquisition aroundEngineering the corner; 634 Buy

Result Update

1-Aug-07 AIA Mining growth; 1,413 Buy Engineering Result Update1-Aug-07 McNally Stellar margins; 186 BuyBharat good times ahead

Result Update

Edelweiss Research is also available on Bloomberg EDEL , Thomson First Call, Reuters and Factset.

Distribution of Ratings / Market CapEdelweiss Research Coverage Universe

Buy Accumulate Reduce Sell TotalRating Distribution* 100 48 23 6 183

* 6 stocks under review / 2 rating withheld

> 50bn Between 10bn and 50 bn < 10bnMarket Cap (INR) 83 66 34

Adani Enterprises Visit Note Oct 07 EDEL

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