RInfra deal to boost Adani Transmission's earnings

Forward integration into power distribution biz via RInfra assets at reasonable valuation is positive

Adani Transmission’s (ATL’s) announcement of signing a binding agreement with Reliance Infrastructure (RInfra) for buying the latter’s 100 per cent stake in the Mumbai power business lifted Street sentiment. The ATL stock was locked in the upper circuit (no sellers) in the last half hour of trade, and closed with a gain of 10 per cent at Rs 225.25 on Thursday.

The Street enthusiasm seems justifiable. The acquisition gives ATL an entry into the more profitable power distribution business and in a large and enviable market. Although growth rates are not high, the Mumbai power distribution business offers stable revenue and profit. Once complete, ATL will emerge as a diversified player, with presence across the power value chain—generation, transmission and distribution. R-Infra also has power generation capacity at Dahanu (500 Mw) in Maharashtra, feeding the Mumbai circle, part of the deal.

Analysts say while distribution is more profitable compared to the transmission business, it is also cash-generating and offers slightly higher growth rates. ATL, meanwhile, has been growing its transmission capacities aggressively. In 2016, it bought GMR Infra’s transmission assets. Last month, it completed the acquisition of operational assets of WRSSS Transmission Undertakings, of R-Infra, which helped its power-wheeling network cross 8,500 circuit km. As ATL is in the process of acquiring another 458 circuit km of transmission assets, 2,350 circuit km are under various stages of construction. Analysts have been bullish on the transmission segment growth too, given the opportunities available. Analysts at Edelweiss had recently said there were Rs 3 lakh crore in domestic transmission opportunities over FY18-22, and they saw ATL capturing 20 per cent of tariff-based competitive bidding projects. 

Prior to the RInfra deal, Edelweiss had been building in an 18 per cent compounded annual growth in transmission revenue and 36 per cent in profit for ATL over FY17-19. These should get revised upward, as the RInfra’s Mumbai-circle distribution business had revenue of Rs 7,532 crore in FY17. Analysts estimated its earnings before interest and tax at Rs 2,000 crore during this period. They believe the deal is valued at a reasonable six to seven times the enterprise value to Ebitda. 

The total deal value of Rs 13,251 crore includes regulatory assets (dues recoverable from customers) approved so far of Rs 1,150 crore. Since ATL had reduced debt considerably though issue of masala bonds earlier, analysts say its debt-equity ratio will cross 2x levels if the deal is fully funded through debt. This, however, is not a worry, given the profits generated by the acquired business. Analysts feel APL might have got the RInfra assets at slightly more than 1x the book value, a reason for the Street’s exuberance.