Adani Transmission: Scarcity appeal
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Unlike group firms Adani Enterprises Ltd and Adani Power Ltd, transmission assets owner Adani Transmission Ltd has proved to be a good bet for investors. Despite the volatility, the stock gained 45% in the last one year. Last week it saw another bout of gains after the company said it agreed to buy three transmission line assets from Reliance Infrastructure Ltd, priced at around Rs1,900 crore.
The agreement comes on the back of two transmission line buys from GMR Energy Ltd for an equity value of around Rs100 crore. The latest acquisition from Reliance Infrastructure has an equity portion of Rs400-500 crore, with the rest Rs1,500 crore being debt that will be transferred to Adani Transmission. Last fiscal year, the company generated an Ebitda (earnings before interest, taxes, depreciation and amortization) of Rs1,863 crore. Roughly half of this was spent on finance costs, leaving the company with a net profit of Rs357 crore. Net cash flows from operations were at Rs1,581 crore.
So, given the cash flows, analysts expect Adani Transmission to comfortably close the deal. Further, the transmission revenue for all three assets are collected by a central government-owned utility as a part of a pooling mechanism. This reduces the counter-party risks and helps derive better ratings for its debt instruments, which is important as Adani Transmission is highly dependent on borrowed money.
Three global ratings agencies have said that the deal will not affect the company’s current rating. With the assets operational and generating revenue, they do not expect the acquisition to weaken the current financial position of Adani Transmission.
“Fitch estimates that EBITDA contribution from the assets will be sufficient to keep Adani Transmission’s financial leverage, as measured by gross debt to EBITDA, at less than 5x in the medium term,” Fitch Ratings Singapore Pte Ltd said in a note.
What ratings agencies are wary about is the financial leeway for the company. Post the acquisition, Adani Transmission will be left with little financial elbow room, be it for liquidity or for contingencies. While the company itself is in capex mode (building five new lines), it is lapping up assets from the market. “We believe the current rating level can accommodate the acquisition although it would leave no headroom for any further material cash outflow,” said S&P Global Ratings.
Another ratings agency warns that the acquisition is credit negative and leaves little scope for ratings improvement, which could have helped the company refinance or raise funds at even cheaper rates. Further it warned of a downgrade. “Adani Transmission’s rating could be downgraded if it undertakes aggressive expansion, or if revenues from non-transmission business rise consistently above 25% of total revenues,” said Moody’s Investors Service Singapore Pte Ltd. “On the other hand, the ratings are unlikely to be upgraded in the near term, based on the company’s business profile and financial strategy.”
That said, Adani Transmission’s finances are no reason for worry yet. But further loading of balance sheet with acquisitions can diminish the scarcity appeal the stock is enjoying right now—there are few listed stocks in the transmission sector, which is known to offer steady earnings.