RInfra-Adani deal: Valuations remain crucial

It will decide debt reduction benefits for Reliance Infrastructure and gains for Adani unit

Reliance Infrastructure’s (RInfra’s) announcement that it has entered into an exclusivity period with Adani Transmission to discuss the proposed sale of its integrated business of generation, transmission and distribution of power for Mumbai, has enthused the Street.

The Adani Transmission stock rose 10 per cent to hit the upper circuit (no sellers) on Tuesday, looking at the benefits on cash flows and growth opportunities the Mumbai city distribution business brings in. The RInfra stock, however, gained a marginal 0.12 per cent.

Since the Mumbai power business is a key contributor to RInfra’s revenue and profitability, the Street’s reactions are understandable. The power business contributed the most (over 85 per cent in FY17, according to segmental information) to RInfra’s consolidated revenue (Rs 25,881 crore) and profit before interest and tax, or PBIT, (Rs 4,608 crore). The sale would mean a large chunk of RInfra’s revenue and profits would get shaved off.

But, as the Mumbai business is expected to garner healthy valuations, analysts said it would significantly reduce RInfra’s consolidated debt. Its consolidated debt-equity ratio stood at 1.27, while net debt stood at Rs 25,679 crore. 

For Adani Transmission, the outlook has been improving, given the growth visibility, and the transmission and distribution opportunities. It continues to reduce debt and improve cash flows. The debt-equity ratio, 8.96 times at the end of FY15, was 3.13 times in FY17. The interest coverage ratio stood at 1.59 in FY17, against 0.93 in FY15. 

Analysts said the restructuring of debt done by issuing masala bonds and dollar-rupee denominated offshore bonds worth Rs 4,500 crore at a blended cost of nine per cent led to a 100-basis-point (bp) savings in interest cost, boosting project internal rate of returns by 150 bps.

Analysts at Edelweiss had recently initiated coverage of the stock, estimating Adani Transmission to clock 19 per cent and 36 per cent compounded annual growth in Ebitda (earnings before interest, tax, depreciation and amortisation) and PAT (profit after tax), respectively, over FY17-19. Their confidence stemmed from the Rs 3-lakh-crore opportunity in the domestic transmission business over FY18-22, as they see the aggressively-growing Adani Transmission capturing 20 per cent of tariff-based competitive bidding projects.

The deal with RInfra will boost Adani Transmission’s revenue, profits, balance sheet and business profile, placing it among the top transmission and distribution players, given that the company reported revenue of Rs 2,880 crore and PAT of Rs 416 crore in FY17. The Mumbai circle has three million customers and a valid licence to operate till 2036.

But, there are two key issues which the Street will watch for — the valuation at which Adani acquires RInfra’s business and how it plans to fund the acquisition. Since the Mumbai circle business earns fixed returns approved by the regulator, a higher purchase cost is likely to hurt.

Analysts at Edelweiss said with existing (RInfra’s) assets generating Rs 1,000-crore-per-annum free cash flows, Adani was positioned to satiate its growth and M&A (mergers and acquisitions) appetite.