- Wealth PMS (50L+)
Last part of our series simplifying Adani Group Companies and their businesses. This one covers the business of Adani Power Ltd.
Read all posts in the series here: Adani Group Explainer
Conglomerate’s power arm – Adani Power – is the largest private thermal power producer in India. It has a power generation capacity of 12,450 MW comprising thermal power plants in Gujarat, Maharashtra, Karnataka, Rajasthan, and Chhattisgarh and a 40 MW solar power project in Gujarat.
Apart from this, more than 7,000 MW capacity power generation plants are in making. It has upcoming projects in the states of Jharkhand, Madhya Pradesh, Gujarat, Rajasthan, and Karnataka.
Out of total operational coal-based thermal power generation capacity of 12,410 MW on a consolidated basis, Adani Power has tied up nearly 72% of its gross power generation capacity with diverse off-takers under 25-year PPAs providing good revenue visibility.
The credit risk profile of most of the off-takers is weak to moderate, which results in delays in payment of bills leading to cash flow mismatches at times. Adani Power’s promoters have extended financial support over the past few years and Adani Enterprises has offered an extended credit period on coal supplies which have helped the company during such cash flow mismatches.
Contrary to other Adani group companies, Adani Power is saddled with tonnes of debt. It made a loss of ₹ 2,275 crore last year on the back of high fuel cost, coupled with the falling rupee and high-interest cost.
It is also the only Adani group stock that has opted for voluntary delisting.
Well, high debt is not the only issue faced by the company. The company was involved in a long-standing dispute with the Gujarat Urja Vikas Nigam Ltd. (GUVNL) with respect to its Bid-2 power purchase agreement (PPA). The said PPA was entered on the condition that the GMDC (Gujarat Mineral Development Corporation) will provide 4 MTPA of domestic coal to the plant. When GMDC could not provide the coal, the company got involved in long-standing litigation with the GUVNL to obtain the said PPA canceled as the tariff under the same was not viable. In July 2019, the Supreme Court ruled in the company’s favour and said that termination of the PPA is valid with effect from January 4, 2010.
The Supreme Court also allowed a one-time compensation to the company for all the additional costs borne under the PPA since inception, with the amount to be determined by the CERC. The company filed its application with the CERC in Q4FY20. However, no order has come in the matter as of now as CERC’s operations were impacted with the onset of the covid-19-led lockdown. Subsequently, the operations remained impacted, and an outcome in the matter is now expected to come over the next few months.
Now post the cancellation of Bid-2 PPA, a little more than one-fourth of its total power capacity does not have any buyers. The company is using the remaining capacity to sell power at the merchant and short-term markets. In the meantime, not only did the merchant tariffs started to decline, but also the plant load factor was severely impacted on account of the fall in power demand.
The Deadly Debt
No doubt that the Adani group of companies have grown their businesses, but with that, the debt has also increased. Though India’s most valued company – Reliance Industries – went on a deleveraging exercise to reach a zero net debt status, the Adani Group embarked on a debt-fuelled expansion spree.
However, the group has still managed to keep its leverage under check. Though the group’s total debt has increased by 37% since FY17, its leverage ratios – debt-to-equity and debt-to-EBITDA – have improved. So has its interest coverage ratio.
Lowering leverage ratios over the years could be one reason why the group seems to be comfortable with net debt of ₹ 1.26 lakh crore. The Group does not expect its leverage ratio to exceed its internal target of 5.5x.
Conventional wisdom would indicate even a target of 5.5x represents excess leverage.
Now, though the current leverage is below the Group’s internal target, one needs to keep this mind, that the Adani Group has a lot of planned capital expenditure ahead.
To put this in context, RIL even after completing most of its capital expenditure and despite earning an EBITDA of close to ₹ 88,000 crore in FY20 was not comfortable with net debt of ₹ 1.61 lakh crore. However, the Adani Group, with a lot of capital expenditure ahead, is apparently comfortable with a net debt at 78% of RIL and EBITDA at 25% of RIL.
Tim Buckley, an energy analyst based in Australia who tracks India, called Gautam Adani as Modi’s Rockefeller. This was clearly because of his close connections with the country’s Prime Minister. According to an FT report, the meteoric rise of Adani started when he offered support to Narendra Modi in 2003.
It’s hardly a secret that the businessman has been one of the key supporters of the current Prime Minister of India – Narendra Modi for almost two decades. This has been serving well for the group as they have aligned their businesses with the PM’s vision. But could well be a risk if there is a change in power.
Recently, the group has witnessed backlash, because of its business links with the Myanmar military.
Adani Ports is building a container terminal with an investment of $290 million along Myanmar’s Yangon river on a 50-year deal. The land has been taken on lease from the military-backed Myanmar Economic Corporation (MEC). Due to this, Adani Ports was removed from S&P Dow Jones’ sustainability index.
In a media statement, the company said that similar to their peers, they are watching the situation in Myanmar carefully and will engage with the relevant authorities and stakeholders to seek their advice on the way forward.
Myanmar’s military has been accused of human rights abuses after a coup this year. More than 700 people have been killed since a Feb.1 military coup that ousted an elected government led by Aung San Suu Kyi.
The removal is a setback for the Adani Group that has been striving to raise its sustainability profile for securing access to new debt and equity capital with environmental, social, and governance risk evaluation increasingly playing a prominent role in global financial markets.
The Baffling Valuations
The six listed companies of the Adani group are expected to have combined earnings of close to ₹ 9,500 crore in FY21. And they are currently valued at close to ₹ 7 lakh crore. This means their FY21 price-to-earnings stands at 75 times.
With net debt of close to ₹ 1.26 lakh crore, the enterprise value comes to around ₹ 8.26 lakh crore. The group’s combined FY21 EBITDA is expected to be around ₹ 26,000 crore. This translates into an EV/EBITDA of 32 times.
Given its scale and history of good execution, the Adani Group could go on to successfully expand its businesses in newer areas. However, we continue to remain uninvested in this group because of its high debt which would possibly increase further given the planned capital expenditure, not so comfortable leverage, and expensive valuations.
Other Suggested Reading:
This article is for information only, and should not be considered as a recommendation to buy or sell any stocks. Stocks discussed might be part of Capitalmind Portfolios
For immediate access to probably the best platform in India for active investors, join Capitalmind Premium: Model Portfolios, Premium Research, and a vibrant member community.
For any questions, tweet / DM us on twitter or email us at premium [at] capitalmind [dot] in.