Adani Power may be India's biggest power player, but its problems are far from over

Close on the heels of the acquisition of Lanco’s 1,200 megawatt (MW) power plant in Udipi for about Rs 6,000 crore, Gautam Adani-controlled Adani Poweron Mondayannounced it would buy Avantha Group’s Korba West Power Company, which has an installed capacity of 600 MW, for Rs 4,200 crore.

After both acquisitions, Adani’s total power capacity is slated to reach 11,040 MW and the company has made it clear it is focused on achieving its stated target of reaching 20,000 MW by 2020.

But a closer look at its financials throws up a worrying picture. As on September 2014, over 91 percent (Rs 55,485 crore) of Adani Power’s consolidated assets (of Rs 60,926) have been financed by debt with shareholder equity providing only for the remaining Rs 5,441 crore.

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This implies a debt-equity ratio of about 10:1. Comparatively, the debt-equity ratio for peers like Tata Powerand Reliance Powerstands at 1.1:1 and 1.9:1, respectively.

And Adani’s numbers do not include debt it would have to take on to fund its recent acquisitions.

While analysts say that the acquisitions per se are valued decently, the increasing amount of debt on Adani’s books could become a point of concern. This given the fact that the power sector continues to suffer from lack of clarity over power tariffs, demand environment remains weak and issues related to fuel supply persist.

“The capacity additions would not have been a bother if Adani Power was generating sufficient money to fund the acquisitions. But that is not the case,” wrote Mint’s R Sree Ram in a pieceanalysing the company’s recent moves. “The company’s major power plants are facing issues related to tariffs or purchase agreements, leading to losses at the consolidated level.”

At the consolidated level, Adani Power has worked up losses in four out of past five quarters, Moneycontrol data shows. The loss has been driven by high fuel and interest costs.

From hereon, much would depend on whether Adani is able to obtain a higher sale price for power that it produces for state distribution companies. This would increase cash flows for the company, help it come back to profitability and make debt servicing easier.

“It will have to ensure that the central electricity regulator’s compensatory tariff for the Mundra units as well as the Maharashtra regulator’s compensatory tariff for Tiroda unit are implemented in totality and that too retrospectively,” IIFL’s VP - Institutional Equities Harshvardhan Dole told CNBC-TV18 yesterday.

Adani, along with Tata Power, had been granted a retrospective compensatory order by the electricity regulator to increase the regulated price for sale of power to discoms, a move that would have helped it recover losses of Rs 1,843 crore in 2013-14 and about Rs 260 crore in June quarter, but the decision was stayed by the Supreme Courtafter discoms appealed against it.

Power companies claim costs for imported coal have increased steeply over the years after Indonesia, from where many of them source a significant amount of coal, passed an order a few years back making exports of the fuel costlier.

“Adani Power may be adding capacities to attain greater economies of scale,” an analyst told the Mint. “It can bid for a large coal mine and feed its fuel-starved plants. The strategy may be well thought out. But how the company plans to overcome the tariff and fund constraints in the meantime is not yet known.”

Meanwhile, analysts at Emkay Global maintain Adani Power remains the most expensive private power utility, with a valuation of 3.3 times the FY15 estimated book value, pointed out a recent Business Standard piece. Analysts at JM Financial, too, said their optimistic estimate of 17 percent return on equity in FY17 (including the rate rise benefit) factored in current valuations (2.7 times the FY15 estimated book), it added.