Introduction
Adani Power Limited, listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), has been a focal point for investors interested in the Indian power sector. This article provides a comprehensive fundamental and technical analysis, examining the financial health, valuation, and expected performance of the company, with an emphasis on long-term investing strategies.
Fundamental Analysis
The core of fundamental analysis involves evaluating the intrinsic value of a company based on its financial metrics and business performance. Adani Power's recent performance highlights several key financial indicators, which will be reviewed in detail.
Sales and Profit Trends
Adani Power's financial performance over the last few years reveals a mix of growth, decline, and stabilization.
2016: Despite a 35.83% sales growth, the company reported a significant loss of -167.53 and improved margins by 6.54 points.
2017: There was a sales downturn of -10.88% with a pronounced reduction in profit to -1220.93 crore, indicating a decline in margins to -29.47 points, and a reduction in borrowings to -0.46 crore.
2018: Sales fell by -8.86%, but the loss reduced to -65.67 crore, and margins improved by 17.02 points, despite an increase in borrowings to 0.67 crore.
As of March 2019, the projected performance shows further deterioration in sales, reduction in losses, and improvements in margins, yet a significant decrease in share price of -93.54% and an estimated share price of INR 1.65.
Fundamental Indicators
Several fundamental ratios provide a lens into the company's profitability, liquidity, and overall financial stability. As of the financial year ending March 2018, the following ratios were observed:
Net Income/Sales: -0.10 Net Income/Pre-Tax Income: 1.01 Pre-Tax Income/EBIT: -0.60 EBIT/Sales: 0.17 Sales/Assets: 0.27While Return on Equity and Return on Assets are significantly negative, other ratios, such as the Price to Earnings (P/E) ratio, might offer more favorable signals if adjusted for the company's unique financial context.
Valuation Metrics
Market Capitalization: INR 9853 crores Debt: INR 52835 croresOther relevant financial metrics include:
Enterprise Value: INR 62687 crores Net Profit: INR -2119 crores Interest: INR 5570 crores Tax Savings on Interest: INR -64 crores Other Income: INR 482 crores Firm Profits: INR 3032 crores Sales: INR 20611 crores Total Income: INR 21093 crores Firm Margin: 14% Enterprise Value to Total Income: 2.97 Enterprise Value to Total Income to Firm Margin: 20.67 Price to Earning: -4.65 Price to Book Value: 11.14 Debt to Equity: 59.73 Free Cash Flow to Firm: INR 5555 crores Free Cash Flow to Equity: INR -15 crores Price to Earning Growth: 0.07
These metrics offer a more nuanced view, considering the company's debt load and profitability figures, which are crucial for a robust investment decision.
Technical Analysis
Technical analysis involves studying historical price movements and trading volumes to predict future price trends. Adani Power's share price, volatility, and trading patterns provide valuable insights for both short-term and long-term traders.
Current Share Price
As of the review point on October 17, 2018, Adani Power Limited was trading at INR 35.80. Given the historical performance, an expectation of a return of 10% over 6 to 12 months suggests a potential to exit the position.
Technical Indicators
Price to Earnings (P/E) Ratio: Below 18 is generally considered favorable, provided the earnings are not depressed by unique market conditions. Price to Book Value: Below 2 is a strong indicator, as it suggests the company's assets are valued above book value. Debt to Equity Ratio: Below 2 is a positive sign, indicating that the company's liabilities are not excessively high relative to its equity.Adani Power's debt-to-equity ratio of 59.73 is notably high, indicating a significant reliance on debt financing. While this suggests a higher level of financial risk, it can also imply more growth potential if leveraged effectively.
Conclusion
Adani Power's current trading value is INR 35.8, with a fair value estimated at INR 32.1 based on a discounted cash flow model. Given the expected share price of INR 1.65 by the end of March 2019, investors should tread cautiously. The technical analysis, despite some favorable metrics, also points to challenging times, especially concerning the debt burden and market sentiment.
For long-term investors, understanding the complex interplay of fundamental and technical indicators is crucial. A combination of these analyses can help navigate the uncertainties of the Indian stock market, ensuring better investment outcomes in the long run.