Investors bet big on Adani Green, but risk-reward outlook is open question

Share of AGEL, which is into solar and wind power, jumped over six times in 2020 versus a gain of 10% for the NSE's Nifty 100 Index - the first and only green energy company to do so in India

Port-to-power behemoth Adani Enterprises’ tryst with renewable energy started in 2009 with the Vibrant Gujarat Summit when it signed memorandums of understanding to develop renewable projects in the state. In 2011, it commissioned a 40-megawatt (Mw) solar power project in Bitta, Gujarat, marking its entry into the sector. A decade later, the group’s renewable capacity has exceeded 14 gigawatt (Gw) and it now has a separate entity for it — Adani Green Energy Ltd (AGEL).
 
Those watching the stock market closely would jump at the mention of AGEL, which listed in 2018. Share of AGEL, which is into solar and wind power, jumped over six times in 2020 versus a gain of 10 per cent for the National Stock Exchange’s Nifty 100 Index — the first and only green energy company to do so in India.
 
Recently, global energy major Total France announced it will pick up a 20 per cent stake in AGEL, by way of acquiring shares held by the promoter group. Along with the minority stake, the French firm will acquire 50 per cent portfolio in the 2.35 Gw operating solar assets owned by AGEL in a deal worth $2.5 billion, or about Rs 18,000 crore, implying that it will have a 50 per cent stake in the projects under implementation.
 
The rise of AGEL has been a wonder to many market watchers. With mega pipelines of projects with steady operations, coupled with the Bharatiya Janata Party-led government’s aggressive push for renewable energy growth, AGEL has placed itself as one of the premier players in the sector.

 
Bitta — the group’s first solar power project — was selling power at Rs 15 per unit. As it stands today over a heap of projects, AGEL’s average dispatch price is lower than the average procurement cost of power distribution companies (discoms) across the country. This implies that the price at which AGEL is selling renewable power is the lowest in India — lower than thermal as well.
 
The company said the average procurement price of discoms is Rs 3.60 per unit, whereas the AGEL portfolio aggregate dispatch price is Rs 3.26 per unit.

Renewable power has been given must-run status by the Central government, which means discoms/power procurers cannot back down or curtail RE power. While this is one of the reasons for the company’s revenue growth, the reduction in cost is on account of in-house back-end services and a strong vendor network in the domestic market.
 
Speaking to reporters during a media concall after their Q2 results in November, Vneet Jaain, MD & CEO, AGEL, said, “Across our portfolio companies, we have a centre of excellence called the Energy Nerve Operating Centre (ENOC) that helps us draw innovations and give advice on process improvement. Operations and Management (O&M) of all projects is completely in-house. There is also Adani Infrastructure Management, which provides certain basic O&M services to our infrastructure platform. All design and strategy is fully in-house with AGEL.”

 
Adani-ENOC is a cloud-based platform that adopts machine learning, uses drones for monitoring project progress and digital asset mapping, and geospatial technologies for surveys and others.
 
The leadership of AGEL is also in-house with Sagar Adani, nephew of Gautam Adani, at that helm of affairs as executive director. Jaain is also an old Adani hand; he has been with the company for over a decade and is associated with some of its flagship thermal power projects.

Along with in-house O&M, the company also has a strong vendor network. For its 322 sites in 20 states at group level, it has a support network of 20,000 vendors. In the same media concall, Sagar Adani said the company runs a vendor management and support programme across group portfolio companies.
 
Against this growth story, one major risk the company faces is its own debt levels. In two years, AGEL’s debt has doubled to Rs 19,747 crore by H1 2021. And while its net worth has improved during the same period, the growth in profit is slow (see table).
 
AGEL said the debt levels are high because it has more capacity under construction than it has commissioned. In 2020, AGEL won the country’s first solar manufacturing tender for setting up 2 Gw of solar cells and modules and 8 Gw of allied solar power plants. Including this mega capacity, AGEL has a contracted capacity of 12 Gw.
 
AGEL plans to raise $1.8 billion for the upcoming capacity. It will tie up with 10 international banks for construction greenfield funding. “Our under-construction assets are in a cluster and land risk has been identified upfront. Therefore, most of our development risk is in relation to our capacity to build projects. We have a consortium of banks that will provide an interim development facility. This will be replaced by capital market issue when the projects are operational,” Adani said during the call.

The company takes construction financing from banks and once projects are operational, refinances that portfolio with international bond funding. “This will allow us to recycle the same approval on the development facility… and to continue with the development plan till 2024-25,” Adani said on the concall.
 
Though Adani sounds confident, the downside is still deep. Recently, for instance, this paper reported that close to 39 Gw of RE projects are looking at delays and cancellations owing to Covid-19 and also lack of buyers for RE power. AGEL projects also feature in the list, including its 8 Gw mega solar project.
 
But AGEL’s management does not see this as a problem. “Currently, we are completing projects at a click rate of 8 Mw per day. We hope to increase it to 10-11 MW per day. Each construction period will see 3000-4000 Mw of projects being completed,” the management stated while announcing its last financial results.