Fitch downgrades outlook on Adani Transmission to negative
Mumbai: International rating agency Fitch has downgraded the outlook on Adani Transmission from stable to negative, following the Gautam Adani-run company’s decision to acquire the power business of Reliance Infrastructure in Mumbai.
“We’ve revised down the outlook on Adani Transmission to negative from stable,” Fitch Ratings said in a statement on Wednesday, adding the revision follows the company’s planned acquisition of RInfra’s integrated power generation, transmission, distribution and retail business in Mumbai.
The agency said though the acquisition will not increase the company’s business risks, “the addition of retail customers will diversify its counterparty risks, which would counteract the negative impact of taking on RInfra’s relatively complex operations and the maintenance of its distribution wires, as well as the competition in the electricity supply business.”
But it was quick to add that “this though will be counteracted by a more diversified counterparty profile”. RInfra supplies to about 44% of commercial customers, around 42% of residential customers, and the balance to industrial customers.
The agency further said the transaction will mark Adani’ entry into power distribution from its transmission business, but its risks will rise due to the relatively intricate operations of distribution. It also said the negative outlook is premised on its expectations of a deterioration in the company’s financial profile due to the largely debt-funded nature of the transaction.
“We expect Adani’s financial metrics to deteriorate due to potentially large debt-funded nature of the acquisition. Its net leverage is expected to temporarily increase to 4.2 x for FY19 from 3.9 x estimates for FY18, before normalising to 3.4 x by FY20,” it said. The report observed that although its receivables position has improved after the state electricity regulator implemented changes to motivate utilities to pay discoms on time, the acquisition of RInfra’s distribution business, which has about 3 million retail customers, will diversify Adani’s counterparty exposure.
Further, the cash operating profit linked to retail clients will contribute about 40% to the group’s total over the next few years. Fitch also expects the share of the company’s operating profit from city to drop with the commissioning of new transmission projects in other states with considerable exposure to a central transmission utility.
Maharashtra’s state-owned power utility, which is financially weak, accounts for the majority of Adani’s operating cash profit. Adani has acquired 3,063 circuit km of transmission assets from RInfra last year. It also has about 2,369 circuit km of greenfield transmission assets in its pipeline. The combination of these assets and the 540 circuit km under RInfra’s Mumbai business will more than double its transmission operating capacity by FY20.
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