PL Capital has initiated coverage on Adani Power Ltd. with a 'Buy' rating, setting a target price of Rs 259 per share. The domestic brokerage anticipates that the Adani group firm is well-positioned for strong earnings growth, primarily driven by recently signed power purchase agreements (PPAs) that offer higher capacity charges.
According to PL Capital, thermal power remains crucial for meeting India’s baseload and reliability requirements. Adani Power's current valuation premium is supported by its projected stronger earnings growth, improving capital efficiency, and declining leverage.
Ambitious Capacity Expansion Plans
Adani Power, India’s second-largest thermal power producer, currently contributes approximately 7% of the nation's coal-based installed capacity. The company aims for a substantial expansion, targeting an increase in capacity from 18.3GW in FY26 to an impressive 41.9GW by FY32. This ambitious growth strategy is expected to boost its market share to around 14%.
The company plans a significant capital expenditure (capex) of approximately Rs 2 lakh crore, or about Rs 8.4 crore per MW. Despite this elevated investment, PL Capital believes the capex remains manageable, with net debt to EBITDA projected to peak at 2.5 times in FY29E.
Mitigating Execution Risks
PL Capital noted that execution risk for this expansion program remains relatively contained. The company has already secured 100% of the necessary land and boiler-turbine-generator (BTG) equipment for its expansion pipeline. Furthermore, about 60% of the planned capacity additions are at brownfield sites, and 56% of the expansion pipeline is already tied up under long-term PPAs.
Financial Projections and Future Outlook
The brokerage highlights that upcoming plants will feature higher tariffs, with new PPAs carrying an average capacity charge of Rs 3.9 per kWh, a significant increase compared to about Re 1 per kWh for the existing fleet. These higher fixed charges are expected to improve Adani Power's return on equity (RoE) to 23% in FY32E from 19% in FY26. PL Capital also forecasts an EBITDA Compound Annual Growth Rate (CAGR) of 21% over FY26-FY29E, fueled by capacity additions of 1.3GW in FY27, 1.6GW in FY28, and 4.0GW in FY29E.
Regarding funding and leverage, PL Capital stated that despite elevated capex and negative free cash flow, strong operating cash flow should provide meaningful internal funding support. While net debt is expected to rise, EBITDA growth is projected to keep net debt to EBITDA at 2.5 times in FY29E, which is among the lowest across its peers. The ratio is expected to decline further to about 1.0 times by FY32E, providing the company with increased balance-sheet headroom as the expansion cycle progresses.
In addition to its thermal expansion, Adani Power has established Adani Atomic Energy and is evaluating up to 10GW of nuclear capacity by 2035, an early-stage but potentially significant long-term growth avenue.