Adani Energy Rated 'Buy' By IDBI Capital On Coverage Initiation, Sees 17% Upside — Check Details

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IDBI Capital Report

We initiate coverage on Adani Energy Solutions Ltd. with a Buy rating and a target price of Rs 1,195/share.

The company, with presence in various facets of the energy domain is a leading energy solution provider in transmission and distribution segments.

Adani Energy is well-poised in the smart-metering business and chasing growth via the energy solutions business. With a strong order book in smart meters’ division and work-in-hand in the transmission divisions, we project an Ebitda CAGR of 33% over FY23-27E, we believe Adani Energy has a strong Ebitda visibility for the future.

Key Risks

• Project Execution and Operational Challenges

Execution delays and cost overruns: The company faces risk related to delayed execution of projects owing to regulatory clearances such as ROW. Projects under construction including both transmission and smart meter projects are vulnerable to input cost escalation.

Implementation Risk in Transmission: Delays in charging of line or acquisition of RoW asset, while the interest costs continue, could lead to cash flow mismatches. Another risk lies in bidding of projects, wherein Adani Energy is unable to bid for new projects at competitive rates.

Risks in the Distribution Sector: Pace and process of DISCOM privatization has been slow in the past years, with the last DISCOM getting privatized in 2021. While new tenders for privatization have been floated, they face political and legal risks. 

Implementation risk in Smart Meters: As the RDSS scheme was announced recently, we have a limited track record of implementation and operation of smart meters. Adani Energy may face site non-availability or other compliance related hurdles.

• Financial debt and Forex Exposure

Refinancing risk: A major refinancing requirement for $500 million bond issuance will be due in FY27 exposing the refinancing risk as company may not be able to issue new bond at previous coupon rate, increasing the downside risks.

Capital Intensive Growth: Expansion plans across transmission, distribution, smart metering and CaaS have a majority debt capital structure. Inability to raise capital could delay capital expenditure and subsequently revenue and profitability assumptions may get negatively impacted.

• Counterparty and Collection Risk

Credit Profile of State Utilities: Adani Energy is exposed to the counterparty risk from the state utilities involved in transmission projects. The credit profiles of these STU often remain moderate to weak due to inadequate tariffs and delays in issuing tariff orders.

Payment Reliability in Smart Meters: The transmission business has a long historical track record of payment received, however the counter party risk in the smart meter business is yet to be proven reliable owing to the poor payment history of DISCOMs in India. Any delay in PMPM payment will directly have a negative impact on the project IRRs.

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