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Adani Green Energy Limited (AGEL), founded in 2015, is one of the largest renewable companies in India. It is the largest listed renewable company in India.
Company bids in renewable energy auctions and then constructs renewable energy plant at the identified resource plant.
It has in-house execution capability and most of the renewable power it generates is sold to the procurer through a fixed tariff for 25 years.
The company’s operating and maintenance costs are low and hence it has higher margins
Subsidiaries and Joint Ventures
The company has 74 subsidiaries and one Joint Venture as of Sep’20.
Joint Venture – Adani green entered into a JV with a French oil major Total having a presence across 130+ countries. Total owns 50% stake in Adani green energy for the consideration of INR 3,707 Crore. Initially TOTAL owned 2,148 MW of solar operating assets till June’20. In Q2FY21, company added 205 MW of solar assets, taking the total solar operating assets to 2353 MW. The portfolio of these assets is as follows –
Tamil Nadu solar plants with a capacity of 648MW, Kamuthi Solar Project.
Restricted Group I with a capacity of 930MW
Restricted Group II with a capacity of 570MW
Solar assets acquired from Essel group in Sep’20 located in the states of Uttar Pradesh, Karnataka and Punjab with a capacity of 205 MW · The total portfolio of AGEL is 14,195 MW in which 6195 MW in operation and ramp up and 8000 MW Awarded Pipeline. The company is a pure-play into solar and wind assets.
Wind power
Ÿ Company owns 4 wind farms in Madhya Pradesh and one in Gujarat.
Ÿ Operational capacity is 247 MW.
Ÿ Increase in wind plant availability from 85.4% in Q2FY20 to 94.4% in Q2FY21.
Ÿ CUF: Capacity Utilization Factor is the ratio of actual electricity output from the plant to the maximum possible output during the year. The CUF was 30.3% during Q2 FY 21.
Solar Power
Company owns 42 solar power projects spread across various states of India.
Operational capacity is 2403 MW
Robust solar plant availability of 99.6% and CUF of 20.7% in Q2FY21.
Customer Profile:
Adani Green Energy’s customers currently include state owned distribution companies and Sovereign off takers like NTPC and SECI. However, once the capacity expansion is completed, company also expects some of the private off takers as its customers.
Agreement with Solar Energy Corporation of India (SECI)
Adani Green won a largest of its type manufacturing contract from SECI to install 8 GW solar projects by FY25. Along with this, company has bagged an additional deal to install 2 GW solar cells and module. This deal was sealed at INR 45,000 crore.
This deal will be completed in different phases. Phase 1 will be to install 2 GW of capacity by 2022 and remaining 6 GW by 2025.
Impact of COVID-19
Since company’s business comes under essential services, it does not face any disruptions in operations.
However there were minor disruptions in its under-construction projects due to the country wide lockdown which will cause some delay in commissioning of new capacities.
Road Ahead for Adani Green Energy Limited
Company aims to become largest solar power company by 2025 and largest renewable power company by 2030. Company has aimed to install 25GW of capacity by 2025.
Out of this, company already has operational, contracted and under construction capacity of ~14GW currently.
Strengths
Company is present in a very lucrative sector with an expected CAGR of ~18% for the next 10 years.
Company is in a sweet spot to take advantage of Government’s trust to increase the contribution of solar energy in India’s current energy mix.
Largest solar power developer in India. ESG focus.
Strong brand parentage of Adani group.
Wide presence across 11 states in India.
Backed with O&M backed analytics and continuous monitoring resulting in 100% solar plant availability and better CUFs.
100% PPA contracts give revenue visibility for at least next 20-25 years
Strong customer profile= consisting of state DISCOMS and sovereign off- takers– thus improving receivables ageing of the company.
No significant impact of COVID-19 since company’s business (electricity generation) comes under essential services
Weaknesses
Asset heavy business.
Huge capex plans in the pipeline. If not materialised in near future can lead to huge losses.
Contract from SECI does not involve power purchase agreement. The risk of finding buyers remains with Adani Green once the project is completed.
Majority of raw materials imported from China (crystalline silicon modules). Import dependency and risk of exchange rate fluctuations.
Supply chain disruptions
The energy industry faces policy uncertainty – Minimizing uncertainty by diversification of fuels and purchase/sell agreement.
Wind and solar power heavily dependent on weather conditions. Worsened weather conditions for a prolonged time can impact company’s business.
Value chain in India’s power sector consists of generation, transmission , distribution and consumption. Among these, generation of electricity is delicensed by the Electricity Act of 2003.
Since then, private sector has gradually increased its stake in installed capacity of electricity generation and currently accounts for 47% of the total capacity installed.
Electricity in India is majorly generated from thermal resources. Renewable resources currently account for 24% of the total electricity generation mix.
Among the renewable energy mix, wind energy currently contributes the most followed by solar energy at and others. Installed capacity of solar power has recorded a highest CAGR of 54% in the last 6 years.
Covid-19 Impact - Power demand from industrial segment declined ~17.5% in Q1FY21 which resulted in a revenue loss of ~ INR 360 bn.
Growth drivers : Renewable energy sector in India is pegged to grow at a CAGR of ~18-20% in the next decade on the back of following parameters:
o Lower cost than conventional power generation because of economies of scale and supply chain efficiencies. This provides incentives to DISCOMs to purchase power from renewable energy sources.
o Government support -
§ Various initiatives by government like national wind-solar hybrid policy, national biofuel policy, etc to promote the use of renewable power. Also compulsory renewable purchase obligations for industrial players , issuing Energy saving certificates, etc to increase the adoption of renewable power.
§ 48% increase in budgetary allocation to MNRE , 1000 crore to PM-KUSUM scheme that will aid farmers in adopting solar power for agricultural purposes and utilise barren lands for generating solar power.
o Diversifying the energy mix from conventional power sources like coal. Thus reducing dependency on coal and generating power from renewable resources like solar, wind, etc to augur well from environment perspective. Besides that coal accounts for top 5 imported commodities, which adds to India’s trade deficit. Decreasing dependence on fossil fuels will help in managing the trade deficit as well as reduce the exchange rate risk.
o Strategic location of India – India receives considerable solar irradiation throughout the year on most of it’s geographical area. Also, the extensive coastline provides high wind velocity in many areas. This makes India a suitable location for setting up land based renewable power generation plants like solar and wind . This is also one of the main reasons that India’s renewable energy sector has become an attractive investment option for FDIs with an inflow of more than US $ 9.22 billion till Mar’20.
Key Risks : Some of the major key risks faced by renewables sector in India are –
o Distribution Companies (DISCOMs) form the important part of electricity value chain in India. Currently, DISCOMs in India are in quite bad shape financially. Thus, if they default on payment to the power generation companies (GENCOs), financial health of GENCOs too shall deteriorate This would result in delay in capacity expansion of renewables.
o Capital intensive nature of business.
o Majority of raw materials required for installing solar energy modules is imported from China and Malaysia. This leads to increasing the import dependency causing supply chain issues and foreign currency risk.
o Hydro power has also faced challenges in India mainly from NGOs due to displacement of original tribal inhabitants from the river basin areas.
o Power generation from solar and wind are highly dependent on weather conditions. Adverse weather conditions/ natural calamities can severely impact the power generation.
The quarterly financials are as mentioned below :
Overall the company has registered muted revenue growth on QoQ basis.
Let us take a look at the annual financials -
Company turned net cash positive in FY 20 on standalone basis, however that is mainly attributable to the reduced depreciation expense. This is mainly as the company changed its depreciation reporting method from Written down value (WDV) to straight line method (SLM).
Other financial ratios are as follows:
D/E of the company has been on rise continuously since FY17. It dropped in FY17 mainly as company went public and issued equity shares.
As of FY20, company has high D/E of 21.6x and a comparatively lower interest coverage ratio of 0.96x.
Company has foreign currency debt as well, thus exposing it to exchange rate fluctuations.
Comparison
Let us compare Adani green Energy with its peers -NTPC , Power grid and Tata Power.
Positives
o Robust growth in revenues and operating profit. Revenue visibility due to long term PPA contracts for ~25 years.
o Healthy EBITDA margins
o Healthy RoCE as compared to its peers.
Negatives
o Very high debt to equity , foreign currency risk; low interest coverage ratio
o Losses till FY20
o Company’s majority of raw materials are imported from China. Supply chain disruptions or foreign currency fluctuations can impact company’s margins to a larger extent.
o No free cashflow generation
o No dividend paid till date, looking at the capex planned looks like it will take long time for the company to break even.
SENSEX returns over last 1 year are 14.9% as against Adani Green rallied ~560% in one year.
Company’s 52 week high and low was at INR 1220/INR 113.
Relative Valuation based on EV/EBITDA and P/B as compared to its peers :
As seen, company trades at very high valuations( EV/EBITDA ~95.2x and P/B ~75x) as compared to its peers.
Although, company operates in a very lucrative space of renewable energy and has secured good contracts over the years, it seems overvalued as the most of the future growth potential is already incorporated in stock price.
Corporate Governance
Shareholding Pattern - Company has pledged ~ 6% shares as of Sep’20.
Top Shareholders in the company are as follows:
Shareholding of FIIs –
The FIIs, which hold shares of Adani Energy has a unusual portfolio. Majority of their investment portfolio holding is in Adani Group.
Elara India Opportunity, which holds 3.92% shares of Adani, have 92% of their portfolio in this single group.
Similarly with APMS Investments, Cresta, Albula Investments, Asia Investments and LTS Investments, all the mentioned investment entities have more than 75%-96% of their investments in this single group.
Vespera have 99% of their portfolio in Adani Group companies.
Company’s board of director comprises of directors from varied fields and have rich experience over the years.
Positives
o High promoter holding
o Diverse and experienced board of directors
Negatives
o Pledged shareholding
o Low domestic institutional investor’s shareholding
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