- Wealth PMS
For such a high-profile set of stocks, not many investors understand what Adani Group Companies do. In this explainer series, we simplify the businesses of the Adani Group. The objective of this series is to demystify Adani Group businesses in simple, easy-to-understand language. We won’t be diving deep to make investment recommendations. Also, we’ll leave the sensationalist hot takes for others and stick to an objective look at the businesses.
The ubiquitous Adani Group Companies
India’s largest private generator of electricity, transmitters of electricity, coal miner, port and airport operator, and city gas distributor – all these titles are linked to one group – The Adani Group of Companies.
The Ahmedabad-headquartered multinational corporation has become ubiquitous within India’s infrastructure value chain. From logistics, airports, roads, and railways to energy, mining, defence, and aerospace, Adani boasts a very diverse business portfolio, also including real estate, agri, financial services, and now even data centers.
With operations spread across 70 locations in 50 countries, the six Adani Group listed companies generate annual revenue of roughly ₹ 1.5 lakh crore (~USD 13.5 Billion). While the coronavirus brought most business aspirations to a grinding halt, Adani Group businesses have gone from strength to strength.
The combined market capitalisation of six listed Adani Group companies now stands at close to ₹ 7 lakh crore (USD 93 Billion), which is 5 times their value just a year ago. Courtesy this rise, Gautam Adani is now India’s second-richest person.
Commodity trading to Infrastructure
It all started with one commodity trading company – Adani Enterprises Ltd. – in 1988. The company built around 5 infrastructure businesses. Post multiple restructurings to streamline these businesses and unlock their potential, led to the listing of five new companies – Adani Ports and SEZ Ltd., Adani Power Ltd., Adani Transmission Ltd., Adani Green Energy Ltd., and Adani Total Gas Ltd.
Adani Green is India’s largest renewable energy company and the world’s largest solar power producer.
The company develops, builds, owns, operates, and maintains utility-scale solar and wind projects. It sells the power it generates to central and state government entities and government-backed corporations.
The company submits bids in renewable energy auctions conducted by SECI and other entities that award projects based on the lowest tariff. It sells the generated energy to the procurer through the fixed tariff power purchase agreement for 25 years.
The company currently has an installed capacity of 3.5 GW – 3 solar and 0.5 wind, with a pan India presence across 11 states. Most of these assets have been built by the company earlier when it was a part of Adani Enterprises and some of it via acquisitions. Recently, the company acquired 20 MW of solar assets from Hindustan Power Projects, 75 MW from Sterling & Wilson, and 50 MW from SkyPower Global.
Within the operational portfolio, 2.3GW of capacity is housed under a 50:50 strategic partnership with Total SA which invested ₹ 4,000 crore in two phases for a 50% stake.
It currently has 2.9 GW of projects under construction, a letter of award for 8.9 GW, and is L1 on 4.8 GW. This adds up to 20 GW and management’s target is 25 GW installed capacity by FY25. This means that the company needs to incrementally win only 5 GW LOAs.
Adani Green aims to nearly double its current capacity by the end of the next financial year and increase it by seven times over the next four years.
Its current visible capacity is at fixed tariffs for 25 years and 78% is tied up with sovereign counterparties while remaining with state governments and private players.
Once a solar or wind plant is commissioned, the ongoing O&M cost is very low, and the fuel is free. Thus, the EBITDA margin of solar/wind plants stands at ~90%. Adani Green also engages in some EPC activities and in trading of goods which are a low margin business.
Land acquisition is a critical part of any renewable energy company’s growth plan. A company requires 3-5 acres to produce per MW of solar and wind energy. The government has allotted 70,000 acres to Adani Green in Gujarat, which can house 15 GW of projects. This prepares the company for the next stage of growth as the existing planned 25 GW has the needed land bank. Management believes economies of scale on overheads and O&M expenses with 15 GW at one site will make it competitive vs industry peers.
The company has total debt of ₹ 19,700 crore which is pretty high. However, the payment period is fairly stretched out over 12 years. Nearly three-fifths of the debt is in Indian currency while the remaining is foreign.
Risks to Adani Green’s Plan
The key risk to Adani Green’s ambitious growth plans is competition and reducing renewable tariffs as a result. A host of private players like Tata Power, Acme, Azure, Renew Power, Greenko, and PSU giant NTPC are trying to make their mark in the renewable space.
Because of the rising competitive intensity, in the past three to four years, renewable energy tariffs discovered during competitive bidding have declined by nearly 28%. The most recently discovered tariffs have ranged between ₹ 2-2.3/kWh, well below Adani Green’s current portfolio average tariff of ₹ 3.24/kWh. Higher competitive intensity might thus affect return ratios and/or bid success rate for Adani Green in the coming years.
The Government aims to set up nearly 450 GW of renewable capacity by 2030. This bodes well for Adani Green’s target of operationalizing 25 GW by 2025 by bidding for new projects. Watch out for the impact of competition and their impact on renewable energy tariffs.
In the next post in this series on Adani Group Companies, we look at Adani Ports, a NIFTY 50 company.
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