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 gained a marginal 0.12 per cent.

Since the Mumbai power business is the key contributor to RInfra’s revenue and profitability, the Street’s reactions are understandable.

The power business, which contributed the most (88 per cent in Q1) to RInfra’s consolidated revenue (Rs 7,330 crore) and operating profit (Rs 1,422 crore), comprises the distribution circles of Mumbai and Delhi and a few more and also the generation capacity located in Dahanu (500 Mw) in Maharashtra, which feeds the Mumbai circle. 

The sale of the Mumbai power business 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, according to analysts, 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.

A deal at a good valuation can help RInfra not only pare debt, but also have an asset-light model.

For Adani Transmission, the outlook has been improving, given the growth visibility, and the transmission and distribution opportunities.

The company continues to reduce its 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 had been done by issuing masala bonds and dollar-rupee denominated offshore bonds worth Rs 4,500 crore at a blended cost of nine per cent, which led to a 100-basis-point (bp) savings in interest cost, boosting project internal rate of returns by 150 bps.

Analysts at Edelweiss had 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.

All eyes will be on the valuation at which Adani acquires RInfra’s business and how it plans to fund the acquisition. The company’s debt, though down, still remains elevated and can go up further.

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