Stock analysis Adani Green Energy Ltd: Worth a long-term bet?

Published: December 30, 2020 at 10:41 am

If a stock has defied the COVID-19 and its impact on stock markets, it has to be Adani Green Energy Ltd. The stock of the company Adani Green Energy Ltd [AGEL] has given phenomenal returns ever since it became listed on the stock exchanges. In this stock analysis, we consider if Adani Green can be considered as a worthy long-term bet.

About the author:  Ravi Kumar has a degree in Computer Engineering. He is interested in Behavioural Finance, Stock market, reading Indian History and Mythology. Disclaimer: No part of this article should be construed as investment advice. Also by the same author: (1) Is Tata Motors share a good buy? (2) Is IDFC First Bank share worth buying? (3) ITC Dividend Analysis (4) Should you sell ITC and book losses? (5) Stock analysis: Are Tata Consumer Products share worth a buy?  (6) Stock Analysis IRCTC: Is it overvalued?

The company Adani Green Energy Ltd [AGEL] came into existence after the demerger from Adani Enterprises Ltd. wherein shareholders of Adani Enterprises Ltd [AEL] received 716 shares of Adani Green Energy Ltd for every 1000 shares of AEL. The company AGEL will be the renewable energy arm of the parent AEL going ahead. Source: Adani Green Energy to list today, to open at Rs28.9 per share

The stock of AGEL listed at the price of Rs 28.9/- per share during the month of June 2018 took the company’s market capitalization to Rs 4457 Crores. The stock currently trades at Rs 1030/- per share, and the company is valued at Rs 1.60 Lakh Crores.

Before we could analyze the stock of the company, we need to take a look at a lot of aspects:


  1. Power Sector in India
  2. Renewable Energy Market and it’s potential in India
  3. Fundamentals of the company AGEL

Per capita power consumption

Per capita power consumption for different countries in 2016
Per capita power consumption for different countries in 2016. Source: www.adanigreenenergy.com

Key observations:

  • India stands at the lower end of the per capita power consumption rate as compared to the developed economies.
  • The world average per capita power consumption rate is more than 2X of India’s per capita power consumption rate.
  • BRICs nations [Brazil Russia China] also stand at higher per capita power consumption rate as compared to India
  • Power consumption is also directly linked to
    • Availability of power: 24/7 uninterrupted power supply even in the metro cities is still a distant dream.
    • Power distribution is in need of reforms at a massive scale owing to:
      • High Transmission & Distribution losses
      • Political Interference

Power demand & consumption trends in India

Per capita power consumption in Indian with and projected energy requirement
Per capita power consumption in Indian with and projected energy requirement. Source: www.ntpc.co.in

Key Observations:

  • Power requirement in India is poised to grow in line with the GDP growth of the country.
  • India has low per capita power consumption which is expected to grow to 3000 kWh/Year by 2040
  • Per capita power consumption and peak load demand are poised to grow at a healthy pace given.

Renewable power sector in India

Breakup of renewable power sector in India
A breakup of the renewable power sector in India. Source: www.adanigreenenergy.com

Key Observations:

  • Non-renewables still occupy the lion’s share among all the sources of power generated in India.
  • Out of the 79% contribution from the Thermal power, Coal has the major contribution; pegged at ~72% of all the power generated.
  • Hydropower has faced several concerns on the Environmental front esp from NGOs working for the upliftment of tribal population, due to displacement of the original inhabitants from the basin areas to nearby high altitude places.
  • Renewables including Wind, Solar, Bio-Power contribute only 8% to the power generation to date.
India's renewable road map
India’s renewable road map. Source: www.adanigreenenergy.com

Note:  Solar irradiation is the amount of electromagnetic radiation received from the sun per unit area (usually square meters).

Key Observations:

Source: Apple now globally powered by 100% renewable energy.

Adani Green Energy’s renewable footprints

Adani Green Energy Ltd financials

Financial performance of Adani Green Energy Ltd
Financial performance of Adani Green Energy Ltd. Source: Screener.in, ValueResearchOnline

Key Observations:

●       The company has been able to grab some of the biggest contracts for installation and commissioning of renewable energy/power plants throughout the country, which is responsible for healthy growth in revenue figures.

●       At the operational level, the company reports profits due to healthy growth figures in revenue terms

●       However, the presence of debt and leverage in the balance sheet impacts the company’s net profits.

o   “Interest and other borrowing costs increased to Rs 1,075 crore as compared to Rs 985 crore YoY.”

o   “As on 31 March 2020, gross debt was at Rs 13,943 crore (excludes inter-corporate deposits and lease liability), and net debt was Rs 11,470 crore.” Source: Adani Green Energy FY20 results: Net loss narrows to Rs 68 crore; revenue up 23%

Comparison of power sector company financials
Comparison of power sector company financials. Source: Screener.in, ValueResearchOnline

Key Observations:

    • Capital intensive nature of the business
    • Time to profit and survival during the expansion phase; both of these factors make it extremely tough for a company without a corporate house backing to remain viable in the business.
  • High reliance on the import of solar panels faces regulatory risk.
  • Reliance Power: one of the star performers of the IPO market during 2008 is struggling to survive in the business after a decade, investors who lined up for the IPO can recall those days when the first time investors turned IPO applicants scrambled to fill applications and even prayed for allotments.  Source: 10 years of Reliance Power listing: How Rs 10,000 turned Rs 1,600

Valuations comparison of Power Companies

Valuations comparison of the Power Companies
Valuations comparison of the Power Companies. Source: Screener.in

Key Observations:

  • AGEL commands valuations north of Rs 1.5 Lakh crores at the stock exchanges, and this parameter makes it the most valued power company in India.
  • Debt to equity ratio currently stands at 9.16, which is higher than even the biggest lenders and financial institutions listed in India.
    • Note: The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. The ratio is used to evaluate a company’s financial leverage.
  • Higher debt to equity ratio also implies that the company would need to service the debt with future earnings for a considerable period of time and would leave little on the table for the minority shareholders in terms of dividend payouts.
  • We would not like to believe that P/E is a good indicator of the valuation’s parameters for any corporate entity however 1 factor that should catch the attention of the investors is the P/B ratio which currently stands at 75. This parameter implies that most of the future earnings and growth potential of the company is already priced into the stock.
    • Note: The P/B ratio measures the market’s valuation of a company relative to its book value.

Conclusion: Power sector has been through immense pain in the past decades in India for the reasons highlighted earlier in this post however the favourable policy environment and regulatory standards point towards better days ahead for the sector. Additionally, given the GDP growth and rise in discretionary spending in the country brings in cheer for the power sector as a whole. Favourable policy environment towards renewable sources of energy and rise in awareness and adoption of solar power could be an icing on the cake for the company Adani Green Energy Ltd.

From a fundamental perspective, the company appears to be on a strong footing. The company has bagged some of the biggest renewable power projects in the country and has started work on the commissioning power plants as well.

However, as an investor, one needs to also look at a host of other factors before taking any call on the stock of the company.

Given the valuation parameters, the stock of the company prices in most of the positive news mentioned above and also discounts the future earnings and the growth potential of the company and the sector both. Investors looking to make an entry into the power stocks to ride the growth of the power sector in India can take a look at its listed peers as well. There are better opportunities in the listed space which have a proven track record of execution of the projects, pay regular dividends and don’t have leveraged balance sheets.

Existing investors in the stock need to be watchful of the valuation parameters mentioned earlier in the post as most of the future earnings of the company would be first utilized to service the debt before any dividends are paid out in the hands of the shareholders.

We would like to believe that the cash flows as a valuation parameter take precedence over anything else esp EPS or Earnings, and the best indicator for cash flows is ‘Dividends’. Dividends are paid out in the hands of investors net of interests, debt, taxes and any other retained earnings.

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