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REGISTER NOW OR LOGINAdani Power Ltd. (NSE:ADANIPOWER) is a subsidiary of the leading Indian infrastructure conglomerate Adani Group. Starting out as a power trading company in 1996, today Adani Power has become the largest private power producer in India. It has an installed capacity of 10,480 MW spread across four power plants in Gujarat, Maharashtra, Karnataka and Rajasthan. The company engages in the power generation and distribution business.
Though Adani Power is a part of one of the most influential business groups in India, the company is currently saddled with a lot of problems. The company kept on acquiring assets of distressed companies even with a stretched balance sheet. In addition, fuel shortages and under-utilization of power plants have led to losses for Adani Power over the last quarters. The stock performance has also been unimpressive over the last few years.
Though demand for power is poised to increase in India, the solar tariffs have become so cheap that it has become difficult for thermal power plants to remain competitive. Problems at Adani Power started with rising prices for Indonesian coal, importing Carmichael coal from Australia and the company’s failure to hike tariffs.
Let us look at what went wrong with this leading private power company in India.
Adani Power Challenges
i) Unimpressive Performance - Adani Power is one of the largest businesses of the Adani Group, growing not only organically but also through acquisitions. It enjoys a good credit rating from domestic rating agencies. However, given its current conditions, the credit ratings might suffer and it could get difficult for the company to borrow funds at cheap rates. Adani Power’s Q3 losses doubled y/y and revenues dropped as lower units were sold.
(All numbers in thousands) 31-03-2018 31-03-2017 31-03-2016 31-03-2015
Total revenue 20,61,10,400 22,78,38,200 25,53,21,700 18,82,37,300
Interest expense -5,57,02,300 -5,24,51,100 -5,17,21,900 -4,18,66,300
Net income -2,11,93,600 -6,17,41,000 55,08,000 -81,56,300
Extract of Income statement
Source: Yahoo Finance
Adani Power stopped operations at its 4,620 MW imported coal-based plant in Mundra, which has resulted in decreasing the company’s net losses to INR 67 crores in Q4’18 from INR 4,960 crore, a year earlier.
ii) Carmichael Coal Mine and Mundra Power plant are major bottlenecks – Adani Power has suffered as it failed to raise sufficient funds for its Cramichael coal mine project in Australia, which was originally intended to run Adani’s coal-fired plant at Mundra. The company might now have to sell its stake in this controversial project.
The Mundra power plant is Adani Power’s main power station but has not become its major bottleneck. The company approved a slump sale of the plant to its subsidiary company Adani Power (Mundra). The company has also offered to sell majority control in the Mundra power station to a government entity, but chances are bleak. The power plant has been suffering losses as a result of high prices of imported coal and inability to hike tariffs. In the absence of a bail out option, Adani Power (Mundra) might seek for bankruptcy protection. The company had to act owing to RBI’s new guidelines for identification of stressed assets in February this year. Indian government’s SHAKTI scheme (Scheme to Harness and Allocate Koyla Transparently in India), introduced in May 2017, might grant some respite to Adani Power’s Tiroda and Kawai plants in future.
iii) Huge Debt load - Adani Power has a net debt of about US$7 billion. The company has a high debt-equity ratio when compared to peers like Tata Power and Reliance Power. The troubled Mundra power plant accounts for almost 50% of Adani Power’s debts. Shares of Adani Power also suffered a major blow after a BJP MP called Gautam Adani the "biggest NPA trapeze artiste in PSUs". Adani Power has continued to add capacity aggressively despite its surmounting levels of debt and has failed to generate sufficient cash to fund acquisitions.
iv) Godda Power project is also facing criticism – Though Adani Power’s decision to sell power to Bangladesh from its proposed Godda Power project (using the Carmichael coal) has obtained all major statutory clearances and approvals, it is being widely criticized. A report from the Institute for Energy Economics and Financial Analysis (IEEFA) has concluded Godda Power Project as “Too expensive, Too late and Too risky for Bangladesh”.
‘Godda would lock Bangladesh into expensive electricity with high emissions at a time when cleaner, cheaper alternative sources of energy are rapidly being deployed across India,’ Mr Buckley said.
Source: Echo.net.au
Sooner or later the Bangladesh government would realize that Adanis are benefitting at the expense of Bangladesh. Instead, they should have opted for power generated from renewable sources of energy, which is not only cheap but would also pledge towards the country’s green commitment.
v) Problems at the other Plants too – Adani Power had sought compensatory tariff for its Tiroda and Kawai power plants. Both these plants have fuel linkages only for part of its total capacity and the company has been using e-auctions and imported coal to meet fuel shortfall at these plants. The company is depending upon the SHAKTI scheme, which would allow it to apply for fuel linkage for domestic coal supply. Adani Power had to write off entire receivables of more than INR 4,300 crore on account of the compensatory tariff of Mundra Power plant after its plea was rejected by the SC. The company will fall into a deep pit if its petitions for compensatory tariff are rejected by Maharashtra and Rajasthan electricity regulatory commissions.
Adani Power Upside
a) Largest Private Power player in India - Adani Power is the largest private thermal power producer in India with an installed capacity of 10,480 MW. It owns four power projects spread across the states of Gujarat, Maharashtra, Rajasthan and Karnataka. Adani Power also owns coal mining rights in India, Australia and Indonesia. Its Mundra thermal power plant is the largest coal-based power project of India and fifth largest in the world. The company has a target of having an installed base of 20,000 MW by 2020. The company’s integrated business model is one of its key competitive advantages.
Generation Capacity
Power Plants (in MW)
Mundra 4620
Tiroda 3300
Kawai 1320
Udupi 1200
Bitta (solar) 40
Total 10480
b) Supported by improving Dynamics in India - India’s increasing demand for power and government initiatives like ‘Make In India’, ‘Power for All’ etc. provide positive indications for Adani Power. Sustained economic growth is also pushing electricity demand. The company’s profitability could receive a boost from SHAKTI scheme which entitles Adani Power’s Tiroda and Kawai power plants to receive domestic coal. Though macroeconomics of India looks strong with the prevailing stable political and economic conditions in the country, the outlook for thermal power plants is “as dirty as the Coal”. India Rating and Research (Ind-Ra) has maintained a negative outlook on thermal power.
c) Increased Focus on Renewable Energy - Adani Power is at the forefront when it comes to investing in cleaner and greener technologies. Adani Group had entered solar manufacturing with much fanfare in 2015, promising to build an entire supply chain form polysilicon to solar panels. Currently, it has a 40 MW solar power plant at Bitta in Gujarat.
Valuation
Shares of Adani Power are currently trading near INR 18, after falling from near INR 50 levels in January this year. The company has a market capitalization value of INR 70 billion. The stock has lost almost two-third of its value from five years ago.
Source: Moneycontrol
Conclusion
Adani Power stands in a good position to benefit from government’s focus on energy security as the largest private sector power producer. However, the company faces threat from the diminishing coal in the world. Under-recovery of fuel costs for Mundra project has also impacted its financial viability. Its Godda Power project which is expected to go online by 2022 is also facing criticism from the industry. It looks like the company is in a lot of mess right now. Shareholders should, therefore, steer clear of this stock unless further clarity. They could instead look at investing in Adani Ports (NSE:ADANIPORTS) with better fundamentals and prospects.
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