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What’s Behind the Rally of Adani Power - Detailed Analysis

02 June 2022

The index provider MSCI has recently included Adani Power, one of the key players in the power sector, in its global index. 

The stock of Adani power went up nearly 15% since its inclusion in the index. Since January this year, the stock has given over 200% returns to its investors. BSE Sensex on the other had declined about 6% during the same period. The stock hit its record high of Rs 327 per share on BSE in recent days. 

Before we understand the rally behind Adani Power, let’s get an idea about MSCI Index and its importance. 

What is MSCI Index?

The MSCI (Morgan Stanley Capital Index) Index, a leading provider of research-based indexes and analytics, is designed to measure the performance of the large and mid-cap segments of the Indian equities market. With 106 constituents, the index covers approximately 85% of the Indian equity universe. 

For a stock to be eligible for inclusion in an MSCI index, Foreign Inclusion Factor (FIF) must reach a certain threshold. That is, the FIF of security is defined as the proportion of shares available for purchase in the equity markets for international investors. 

Foreign investors mostly use the MSCI India index to understand the stability and volatility in the prices of a share. The amount of funds that a foreigner will invest in Indian equities depends directly on its weightage on the MSCI index. 

According to media reports, a note by Edelweiss stated that Adani Power is likely to see flows of $150 million going ahead. 

Why did Adani Power rise? 

After the stock of Adani Power was included in the MSCI index in May this year, considering the investors’ interest in the company. 

Though the stock has surged about 12% in the past month, it fell nearly 8% in this past week. Many analysts as per media reports state that Adani Power is down mostly due to profit booking as the stock had run up quite a lot. And the valuations of the company are expensive as well. And not many analysts or brokerages firms could be seen covering Adani Power taking into account its expensive valuation. 

In addition to inclusion in the MSCI Index, in the past few months power stocks, in general, have been on the rise, including Adani Power and Tata Power. This is mainly on the back of an increase in power consumption due to extreme heat waves across many regions in the country. And companies are operating at full capacity since the easing of Covid related restrictions across many States. This bodes well for power companies as they can cater to the increasing demand.

Since January this year BSE Power Index has gained about 20% (about 45% in the past year) and has also reached an all-time high this year. 

Another factor attributable to the rise in the stock of Adani Power is its recent March quarter performance where the company had delivered strong results. 

Adani Power reported a multi-fold rise in consolidated profit after tax (PAT) at Rs 4,645 crore in Q4 FY22 versus a net profit of Rs 13 crore during the same period last year. Total revenue grew 93% y-o-y to Rs 13,308 crore.

To know more about Adani Power Q4 results, read here.

The stock is also rallying after a favourable court ruling where Adani Power to receive dues of about Rs 30.5 billion and additional interests.

The company’s acquisition of Essar Power’s 1200 MW thermal power project was also concluded this year.  

What is the stock outlook? 

India’s power demand is on the rise and is likely to remain strong in the coming years led by industrial and residential demand. This bodes well for the prospects of Adani Power. The company has 8 strategically located power plants across key regions in the country. 

While India’s transition to renewable energy is underway, the progress is relatively slow. Therefore it presents a better outlook for thermal power generators. As per the company’s statement, about 87% of overall generation units are supercritical and ultra-supercritical. That is a type of coal-fired power plant that is more efficient and profitable than traditional plants. 

The dependence on thermal power also presents opportunities for long-term power purchase agreements for power companies, including Adani Power. As of FY21, for Adani Power, about 75% of the power generated is secured through long-term power purchase agreements. 

But before investing in Adani Power, it is better for investors to be cautious considering the high valuation of the stock. 

To read the RA disclaimer, please click here
Research Analyst: Bavadharini KS

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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