For long, Adani Power Ltd’s stock was the first among equals in the private power producer category because it had a good execution track record and had hedged its bets by buying coal mines abroad. But, in the past month or so, it has fallen from grace after its June quarter earnings and other reasons.

The latest blow is the Appellate Tribunal for Electricity’s dismissal of Adani’s appeal against the Gujarat Electricity Regulatory Commission. The regulator didn’t allow Adani to go back on its agreement to supply power to the state electricity board because, ironically, it couldn’t tie up the desired coal supply at cheaper rates. A cancellation or even re-negotiating the tariffs could have benefited Adani, but for now, that is not the case. Brokerages had pencilled in this eventuality in their forecasts and had already downgraded Adani’s earnings.

One reason is its increasing dependence on domestic coal supply as capacity is added quickly.

JP Morgan India Pvt. Ltd points out the Adani uses imported coal for only about 3,000 megawatts (MW). The firm has 6,600MW of commissioned and under-construction capacity, and more are planned. The domestic coal shortage could lead to idling assets. This could become a problem as early as this year when it commissions its Mundra-IV and Tiroda-I power plants for which some domestic coal is necessary.

There is also the grey area of how the Indonesian government regulation asking exporters to sell coal at market prices will affect the company. Adani Power imports coal from group company Adani Enterprise Ltd.

So while the management has indicated—as per JP Morgan—that the burden would be borne by the exporter, there is a possibility that the power company might have to share the hit; especially since some of its power purchase agreements are at fixed tariffs.

Then again, even the merchant portion of the power Adani sells is under pressure. Merchant tariffs are falling because state electricity boards can’t pay for expensive power. As it is, Adani’s average realizations for the June quarter were 2.82 a unit compared with 3.14 for the three months ended March.

These factors have led brokerages to cut Adani’s earnings forecasts for this fiscal between 7-30%. Despite that, the scrip trades at some 2.48 times its estimated book value for fiscal 2012, a premium to other firms; so it’s difficult to make a case for it to outperform the broader index.

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