Adani Power Analysis: Gautam Adani’s Trump Card?

With a total PAT growth and EBITDA growth of 82% & 36%, respectively, from FY22, Adani Power Ltd. (APL) has shown immense growth. This occurred despite the Adani Group facing multiple allegations and huge losses from the revelation of Hindenburg’s Report.  

Representing a critical 75% stake, APL forms a vital piece within the Adani Group's diverse portfolio. This holding of Gautam Adani's conglomerate has played an essential role in helping the multinational group cover losses and also paid investors handsome returns in 2023.
This headline from The Economic Times is a good representation of the profit APL has bestowed investors with.👇

This news brief had me open a screener (I used Ticker) and went through the recent movement of the APL stock in the market. As you can see below, Adani Power portrayed a whopping CAGR return of 72.1% from January to November 2023.

While a quick glance at certain numbers may seem tempting, wise investors know there's more to the story (as is consistently preached by Insider by Finology).

With that in mind, let's delve deeper into Adani Group's subsidiary to uncover its true strengths and weaknesses, separating facts from fleeting impressions.

Hindenburg's Strike & Adani Power's Stronghold

2023 started with drastic news for the Adani Group as the Hindenburg Research Report came out. A 2-year long research on the group revealed allegations of stock manipulation, accounting fraud, and insider trading from decades back. This resulted in Adani Group and its subsidiaries stock prices tumbling like a stone from the mountain peak.

Once known among the richest in the nation and the world, Gautam Adani saw a  rapid tumbling of his wealth. The situation was so bad that almost half of Adani's wealth was wiped out in the first week of the Hindenburg report's release.

Just like all the other subsidiaries, Adani Power also suffered tremendous losses, showcasing a major 45% decline within 30 days of report release.  ⤵️

Investors started selling APL’s stocks left and right, but the conglomerate was not one to give up. Along with fighting a legal battle against Hindenburg’s allegations (which was cleared by the Supreme Court later in the year), Adani Power started regaining its lost value.
This happened by reducing debt, decreasing pledged shares, and increasing focus on renewable energy investments.

This strategy worked like a charm, as is visible from the more than 17% upward movement of the APL stock from January 2023 to December 2023.  

Let’s see how the power industry was faring when one of the biggest companies was pivoting on uneven grounds.

Power Sector Overview

The Indian power sector is the third largest in the world, with an installed generation capacity of 423.35 GW as of July 2023. The industry is undergoing a structural shift towards renewable energy sources. This turnaround is driven by government policies and declining costs, which promote energy efficiency and conservation measures.

As of December 2023, fossil fuels, especially coal, still drive 75% of India’s power generation capacity despite continuous investment in renewable energy sources like hydro, thermal, and solar energy.

Companies in the power sector are working religiously to turn the tide and squeeze as much power production from unlimited resources like the sun and wind as possible. But, this vision is hard to achieve as the renewable energy resources aren’t exactly reliable.

But, regardless of this complication, the power sector is boosting, for which one of the main reasons is an inflow of Foreign Direct Investment (FDI).

Government policies allow the power sector a 100% FDI without any blockage, which other sectors face. The industry is rapidly boosting with many possibilities and growth space for the upcoming years.    

Adani Power Company Analysis

Adani Power is a leading private sector player in the Indian power industry, with a market share of 8.2% (as of March 2023). The company is strategically positioned to capitalise on India's projected rise as the third-largest economy by 2030.

Expansion Plans: Adani Power is actively expanding its capacity with the goal of reaching 16.85 GW by June 2027. This includes commissioning 1.6 GW by June 2023 and 1.6 GW by June 2027. This expansion aligns well with the anticipated growth in India's power needs.

Adani Power Fundamental Analysis

Let’s analyse where the company stands in terms of finances:

Revenue Breakdown: Adani Power Ltd. is one of the most essential subsidiaries of the Adani Group, contributing around ₹43,040.52 crore in revenue in 2023. Check out the revenue breakdown of Adani Group for further clarification.

The contributions of APL can be further explained by the following infographics:

As per the data shown above, the consolidated revenue shows a rise of 35.84%, whereas Profit After Tax (PAT) witnessed a staggering increase of 50.8%.  

On the other hand, the Debt to Equity (D/E) Ratio reached 1.41, which could be a cause for concern. However, it is essential to note that the power sector is one of those sectors where debt is considered to be nothing out of the ordinary due to the requirement for heavy investments.

Recent credit rating upgrades from India Ratings (Ind A/Positive) and CRISIL (CRISIL A/Stable) reinforce the company's financial stability.

Key Trends Followed by Adani Power

In such time, the companies following the below trends are more likely to come out on top of the food chain:

• Focus on renewable energy: The Indian government has set ambitious targets for the addition of renewable energy capacity. This is driving growth in the renewable power segments like solar and wind. ☀️🍃
• Decarbonisation: The government is committed to reducing greenhouse gas emissions and is promoting clean energy sources. This is leading to the closure of old and inefficient thermal power plants.  🏭
• Electrification: The government is promoting the electrification of transport and other sectors, which is expected to increase power demand.  EV automobiles are the best example of this restructuring. 🚗
• Digitalisation: The power sector is undergoing digital transformation, with the adoption of smart grid technologies and other digital solutions.  💻
• Regulatory environment: The regulatory environment in the power sector is complex and evolving. This can create challenges for companies operating in the sector.

The Bottom Line

Given its focus on renewable energy and operational efficiency, Adani Power is well-positioned to benefit from these trends. However, the company faces challenges such as competition, fuel price volatility, and regulatory uncertainty. And let’s not forget the consequences of being a part of a major conglomerate like the Adani Group.

APL has already wobbled hither-thither in the market and may continue to see change by adapting new energy sources. I would advise keeping an eye on the market ongoing and others on the financials instead of relying entirely on a brand name such as “Adani”.

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.