India Finance
Is Adani Green over-leveraged?
Jan 07, 2021
Adani's green-energy company is exposed to market pressure and volatility.

India’s biggest renewable-energy company has run up huge debts. Given that it is operating in a price-sensitive, intensely competitive, volatile and uncertain market, a pertinent question is whether Adani Green Energy Limited will be able to service its loans. The company faces high costs of servicing its debt while market pressure is forcing it to lower tariffs. Institutional shareholders and banks appear to have given AGEL a wide berth, with three quarters of its stock owned by entities related to the Adani Group. From New Delhi, Ravi Nair outlines the company's difficulties.

Adani Green Energy Limited (AGEL) is one of the world’s largest renewable-energy companies. With wind, solar and hybrid in 80 locations across 11 states in India, it has been the Adani Group’s fastest-growing corporate entity in recent times.

If the Adani Group’s Australian assets in renewable energy (RE) are included, Adani can be considered to be the ‘world’s leading solar power generation asset owner in terms of operating and off-taker contracted solar projects,’ claimed a report published in Renew Economy quoting figures published by the firm of analysts Mercom Capital Group. It should be noted that this includes solar power projects that AGEL has secured contracts for that are not yet operational.

Adani group chairman Gautam Adani seized on the data to say it reflected his company’s commitment to a ‘clean-powered’ future.

In a statement, Adani said: ‘While we are pleased to be ranked the largest solar player in the world, we recognize that there is a lot more that remains for us to do as the world transitions into an increasingly decarbonized energy landscape… We anticipate that over the next decade several existing business models will be impacted as a result of the disruption caused by the intersection of plummeting cost of renewable energy and the ability of technology to rescale industries.’

Kamuthi solar-power installation, Tamil Nadu. Wikipedia

AGEL says its aim is to create a RE portfolio of 25 GW by 2025.

The company’s aims are ambitious and the performance of its share price has been stellar. But some commentators are seeing warning signs. AGEL has a high debt-to-equity ratio. The cost of servicing its debt is rising while competition in the marketplace is reducing the tariffs it can charge to customers. AGEL has yet to turn a profit. And the company has not attracted significant investment from institutional investors or banks, with 75% of its stock held by entities of the Adani Group, the Adani family, or related tax-haven funds. AGEL’s biggest prize is its contract with a company owned by the government of India, but even this does not guarantee buyers for the electricity generated.

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Surge in share prices of Adani Green Energy

On 18 June 2018, AGEL was listed on the Bombay Stock Exchange, India’s oldest and one of its biggest bourses. The company’s shares, traded at Rs 166.45 at the closing hour on the last working day of 2019, hit a peak of Rs 1205.15 on 24 November 2020, a whopping 624% jump in around eleven months.

Bloomberg-Quint reported that the surge in AGEL’s share price is really surprising considering the complete lack of analyst coverage of the company. (Without such analysis, future growth predictions and the prospects of profitability are difficult to determine.)

Share-price surge due to huge contract with company owned by government of India

The surge in AGEL’s share price started when the company announced that it had won a contract with the Solar Energy Corporation of India (SECI), a public-sector entity, to build a colossal eight-gigawatt solar-power project linked to the manufacture of photovoltaic solar cells.

The contract, said to be the single largest RE contract in the world, is estimated to be worth US$ six billion and has to be executed by 2025 with the following schedule: Production of two GW to commence from 2022 and two GW to be added each year for the next three years. AGEL won the contract with a bid of Rs 2.93/kwh (kilowatt-hour) that was promoted as a very good deal for the company.

Adani said: ‘The fact that renewable power will transition into becoming the world’s cleanest and most economical fuel is a foregone conclusion and Adani Group intends to play a leading role in this journey. This award is yet another step in our nation’s climate-change promise to the world as well as enabling our nation’s AtmaNirbhar Bharat Abhiyan (Self-Reliant India Program). It is another step towards fulfilling our Group’s nation-building vision.’

Image courtesy Renewables Watch

Adani Solar, the group’s solar-panel manufacturing business, claims it is the largest solar photovoltaic (PV) cell manufacturer in India. It has an existing production capacity of 1.3GW/annum and for the implementation of the SECI contract, it said it will add another 2GW/annum worth of manufacturing capacity.

On 18 November 2020, after reviewing the SECI contract documents, Reuters reported that SECI has no ‘legal or financial obligation’ to support the project if it fails to find buyers. This means that AGEL’s contract, the single largest RE contract given by a company owned by the government of India, lacks a firm state-backed power-purchase agreement (PPA).

The news agency quoted an official of the SECI saying: ‘SECI thought the final price agreed was on the higher side, and that’s why there was no purchase assurance.’ However, the Reuters report said this arrangement ‘may expose the company to higher financial risk’.

This comment could be seen as an understatement when seen in the context of AGEL’s financials. Those financials, together with the current realities of the Indian market for RE, indicate that the situation for the company is far from hunky-dory.

The company’s fundamentals

AGEL was incorporated on 23 January 2015. According to its last published annual report, it had 74 direct and indirect subsidiaries and one joint venture on 31 March 2020. These included entities located not only in India, but also in Singapore, Vietnam and the United States. Of these 75 linked companies, 44 have not commenced any sort of commercial operations. Out of the 32 companies which have commenced operations, only 11 companies have shown a profit while all the other companies have booked losses. Interestingly, the group’s RE business in Australia is not a part of AGEL and a report published last year suggests that Adani is uncertain about expanding the group’s RE business in Australia.

About 80% percent of AGEL’s 14,195-GW capacity is under construction (11,395 MW). It has an operational solar-power capacity of 2353 MW with a further 8425 MW under construction. The company is already producing 397 MW of wind energy with a further 1280 MW being built. In AGEL’s hybrid vertical (that is, a mix of solar and wind energy farms), 1530 MW capacity is under construction in the western Indian state of Rajasthan.

The price-to-earnings (PE) ratio of AGEL was negative at (-)392.15% on 11 December 2020. The PE ratio is a measure that investors use to assess the market value of a stock and to predict potential future earnings.

While the average return-on-equity (RoE) for the RE industry is 7.6%, a report published in the Economic Times shows that AGEL has posted an RoE of negative 16.53% in the last three years. The RoE is a company’s net income divided by shareholders’ equity capital. The shareholders’ equity is equal to a company’s net assets. Net assets comprise a company’s total assets minus its debt and its RoE is the return on net assets. RoE figures help investors assess how efficiently a company is handling money given by its shareholders.

Interestingly AGEL now accounts for over 41% of the Adani group’s total market valuation of six listed companies in India.

Intense competition lowers tariffs

A glance at the tariffs in various power-purchase agreements (PPAs) signed by AGEL in recent years shows that the tariffs for solar energy are being drastically lowered because of the intensification of competition.

In September 2014, Adani Green Energy (Tamil Nadu) Limited, a subsidiary of AGEL, signed five PPAs with Tamil Nadu Generation and Distribution Corporation Limited – a company owned by the government of Tamil Nadu, a state in southern India. The AGEL subsidiary got the contracts offering tariffs of Rs 7.01/kwh with a key provision that the projects would have to be commissioned within the stipulated time. In case it failed to commission the projects within the pre-decided period, the tariffs would come down significantly to Rs 5.10/kwh. The average tariffs of the five PPAs now stand at Rs 5.856/kwh.

(There is a legal dispute going between the Adani group and the Tamil Nadu State Electricity Board. Adani claims the projects were ready on time but the board did not develop power evacuation and transmission facilities as per the agreed-on schedule. The dispute is current sub judice.)

For another PPA that an Adani group company had signed with the Gujarat Urja Vikas Nigam Limited (GUVNL) in 2018 for a project to be commissioned in August 2020, the AGEL subsidiary Gaya Solar (Bihar) Private Limited quoted a tariff of Rs 2.44/kwh.

The point to note is that by 2018, if a four-year period is considered, AGEL had started to quote tariffs that were lower by more than 65% from its highest quote of Rs 7.01 in 2014.

Whether electricity-distribution companies (discoms) would agree to purchase power at a tariff of Rs 2.93/kwh (the amount contracted between SECI and AGEL) appears doubtful because the latest PPAs with RE suppliers have been, and are being, signed at significantly lower tariffs. A report published in Mint on 23 November 2020 argues that state-government discoms are unwilling to sign PPAs with intermediaries such as SECI because the tariffs they quote are much higher.

Four companies – the government-owned National Thermal Power Corporation (NTPC), Torrent Power, the Saudi Arabian Aljomaih Energy and Water Company and Aditya Birla Renewables – each quoted a tariff of Rs 1.99 pr kwh for 200 MW, 100 MW, 80 MW and 120 MW, respectively.

Another major Indian government-owned company, the National Thermal Power Corporation (NTPC) – the largest producer of electricity in the country – that has decided not to build any more new thermal power plants and is planning to create substantial RE capacities to replace its aging thermal power plants, won the rest of the contract (for the remaining 470 MW capacity) by quoting a price of Rs 2.01/kwh. This tariff is 31.4% lower than what AGEL had quoted for winning the eight-GW contract of the SECI mentioned earlier.

AGEL itself acknowledges this situation. In its presentation of results for the third quarter of the financial year 2019-20 (that is, the October to December 2019 three-month period), AGEL mentions that the average tariff in PPAs for the company’s operational solar projects is Rs 4.82/kwh and for wind projects the figure is Rs 3.49/kwh, the average working out to Rs 4.64/kwh.

However, the average PPA tariff for the projects under construction by AGEL is Rs 2.76/kwh – solar Rs 2.77/kwh, wind Rs 2.6/kwh and hybrid Rs 2.92/kwh. What these figures indicate is that the average tariff for the company in its more recent contracts has fallen by over 40%.

These figures indicate that AGEL has been under significant market pressure to lower the price of the electricity generated and that the plants currently under construction will bring in much less revenue per unit of energy than those already operational.

Image Wikimedia Commons

High debt burden

AGEL has a net worth of around Rs 2100 crore (about $375 million AUD) and the company’s market capitalisation stood at Rs 166,481.5 crore (about $29.5 billion AUD) at the close of trading on 1 January 2021.

Like most other Adani group companies, AGEL has borrowed heavily. According to AGEL’s latest balance sheet, the company had a debt of around Rs 19,800 crore (about $3.6 billion AUD) and its debt-to-equity ratio stood at 843% as at 30 September 2020. (A company’s debt-to-equity ratio is calculated by dividing its total debt liabilities by its shareholders’ equity capital. Shareholders’ equity represents the amount the promoters or owners of the company have invested and in this particular instance, the Adani group’s investments in AGEL is far less than the industry average.)

According to regulatory filings by the company, on 30 September 2020, the book value of AGEL’s share stood at Rs 15.07. At the close of trading on 1 January 2021, AGEL shares were trading at Rs 1,064.45 in the National Stock Exchange (NSE) thus making its market-price-to-book (PB) value ratio 70.63.

If AGEL is removed from the list of 29 Indian RE companies whose shares are listed on stock exchanges, the average PB ratio is 0.48. The average PB ratio of 3,449 companies whose shares are traded on Indian stock exchanges is 0.95. (The book value of a company’s share is the value it carries on its balance sheet; its PB ratio is calculated by dividing the market price of a share with its book value.)

Over the last five years, the earnings of AGEL’s shares have been negative: (–) 3.97%. According to the company’s half-yearly unaudited consolidated financial results for the financial year 2020-21 (that is, the April-September period of 2020), it has short-term assets of Rs 4833 crore (about $860 million AUD) and short-term liabilities (that is, for periods  within twelve months) of Rs 3867 crore. The company’s long-term assets are Rs 19,891 crore and its long-term (more than twelve months) liabilities are Rs 18,772 crore (about $3.4 billion AUD).

What this means is that AGEL’s long-term liabilities are 3.9 times its short-term assets. This appears to be a tricky proposition as its debt-servicing costs are rising. The company’s latest half-yearly results for the April-September period in 2020 show that AGEL incurred ‘interest and borrowing costs’ of Rs 1074.72 crore (about $200 million AUD) for the twelve-month period that ended on 31 March 2019. For the first six months of the current financial year (that is, April-September 2020), this figure was Rs 776.6 crore, 38.19% higher than the figure for the corresponding period of the previous year, which was Rs 562 crore (see chart below).

Chart of AGEL's revenue and net income

According to AGEL’s 2019-20 balance sheet, its net debt to earnings-before-interest-tax-depreciation-and-amortization (EBITDA) ratio stood at 8.7. This clearly shows that the company has a substantial debt burden. Its earnings before interest and tax (EBIT) appear pretty good at 57%. But to service its debt, the company needs good cash flows, not just profit on its books. In the last three years, the company’s cash flows have been negative. 

Shareholders in tax havens

Another interesting aspect of AGEL is its shareholding pattern. The company’s website shows that it has issued 1,564,014,280 equity shares. Though the prices of its shares are currently booming, institutional investors appear to be avoiding the scrip. Mutual funds are holding only 0.133% of the total shares while financial institutions and banks currently hold 0.18%. It could be argued that this indicates a lack of confidence in AGEL’s shares by institutional investors and mutual funds.

At the end of September 2019, the company’s promoters held 74.92% of its shares: Rahi Rajesh Kumar Adani and Vanshi Rajesh Adani held 0.01%; Adani Trading Service LLP (limited liability partnership) held 33.92%; on behalf of the S B Adani Family Trust, Gautam Adani and Rajesh Adani held 24.58%; and four Mauritius-based entities, namely, Universal Trade And Investments Limited, Afro Asia Trade And Investments Limited, Worldwide Emerging Market Holding Limited and Flourishing Trade and Investment Limited held 13.28%, 1.47%, 1.47% and 0.18%, respectively.

Foreign Portfolio Investors (FPIs) together held 22.42% in AGEL. The Economic Times report mentioned earlier details an interesting pattern in the FPI holdings in the company. ‘Most of the 10 foreign institutions that own more than 1% of the company have more than 80% of their India investments in Adani Group stocks, based on disclosures,’ says the report.

For example, Vespera Fund, a Mauritius-based ‘Category II FPI’ has more than 99% of its portfolio holding in India in Adani group companies. According to the financial markets regulator, the Securities and Exchange Board of India (SEBI), a Category II FPI 1 includes ‘non-appropriately regulated broad-based funds whose investment manager is appropriately regulated.’

Most of the entities that have the bulk of their investments in Adani group companies are based out of tax havens such as Mauritius and Hong Kong. Details are given in the following chart:

Foreign Portfolio Investors in AGEL and their exposure to the Adani Group generally

Without specific reference to the Adani group, there is a view that concentration of investments by FPIs in one particular corporate group creates doubts about how these entities registered in tax havens operate, who their beneficial owners are, and why they were set up in the first place.

Critics of the Adani Group have often argued that favourable government regulations have contributed greatly to the phenomenal rise in its fortunes. Analysts point to the introduction of the model of ‘manufacturing-linked solar-power plant construction’ as one such example.

AGEL’s investor presentation for November 2020 shows that all its current PPAs are for 25 years and have a strong counter-party profile: 78% of its sales are to companies owned by the government of India such as SECI and the NTPC, while only 15% are sold to state-government-owned electricity discoms.

The company’s biggest-ever contract to date, of building 6 GW worth of RE capacity, is more than twice its current operational capacity. AGEL does not have a definitive buyer for the power it will generate under this contract. In a volatile, price-sensitive and intensely competitive market for renewable energy, how AGEL will service its huge debts remains to be seen.

The writer is an independent journalist.