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Business News/ Markets / Stock Markets/  Adani Green: Snowcap Research publishes critical report on Adani Group firm, says report
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Adani Green: Snowcap Research publishes critical report on Adani Group firm, says report

Adani Green: Snowcap Research's analysis reveals Adani Green Energy's inflated EBITDA metrics, declining project returns, and funding concerns. The stock price has dropped by 2%, with key resistance at 1,950 and support at 1,800. Adani Green aims to increase capacity five-fold by 2030.

On Thursday's session, Adani Green share price has been down over 2%. According to technical analysts, there is no major traction in the stock as prices remain in a range. Prices have a key hurdle around 1,950 and only above which momentum would trigger. (Photo: Reuters)Premium
On Thursday's session, Adani Green share price has been down over 2%. According to technical analysts, there is no major traction in the stock as prices remain in a range. Prices have a key hurdle around 1,950 and only above which momentum would trigger. (Photo: Reuters)

In a downbeat analysis on Adani Green Energy Ltd, the activist investment firm Snowcap Research has outlined five main conclusions. With 10.9 GW of operational capacity, Adani Green Energy is the largest owner of renewable electricity in India, according to the research. Adani Green claimed that it could generate extraordinary unlevered returns on its renewable projects, up to 17%, and that it will nearly five-fold its capacity by 2030 without having to raise equity.

The presentation of the London-based activist investment and advising firm focused on five significant findings: mixed operational performance, declining project returns, 50GW funding concerns, inflated run-rate EBITDA, and related party merchant power sales.

Also Read: Adani-Hindenburg case verdict: SC directs SEBI to complete probe in pending cases within 3 months | Top 5 points

In January 2023, US-based short seller Hindenburg Research accused the Adani Group of stock price manipulation and fraud. The stock market went into meltdown, and ultimately the Supreme Court and Parliament stepped in and established an inquiry to look into the claims.

On Thursday's session, Adani Green share price has been down over 2%. According to technical analysts, there is no major traction in the stock as prices remain in a range. Prices have a key hurdle around 1,950 and only above which momentum would trigger; on the flip side, 1,800 is a strong support. The stock prices have gained 17% this year, but the last few years have been very lackluster, with the next momentum moving only beyond the mentioned zone.

Also Read: Adani Green Energy Q4 Results Live : profit falls by 70.41% YOY

Let us look at the five most important findings drawn from the study.

Inflated Run-rate EBITDA

In its analysis, the advisory firm said that ambitious generation predictions and concealed accounting add-backs seemed to inflate Adani Green's crucial Run-rate EBITDA  metric, which was concealed from investors.

“This includes interest earned on loans, one-off late payment surcharge, and non-cash accounting gains. Not only is this seemingly inconsistent with Adani Green’s reporting of its headline EBITDA number, we believe it is nonsense to include one-off items and non-cash accounting gains in a “run-rate" metric," the report said. 

Adani Green's run-rate EBITDA also seems to have benefited from high short-term power costs and ambitious load factor predictions. The investment company estimates that Adani Green's Run-rate EBITDA as of March 2024 is as much as 14-19% lower than declared, based on revealed project tariffs for individual projects.

Also Read: Adani Green Energy promoters to infuse 9,350 crore via preferential issue, stock rises 4%

Declining Project Returns

According to Snowcap Research's study, after accounting for accounting gimmicks, Adani Green's projects have yielded an average unlevered return of just 11–12% over the last three years.

The Adani Group firm said that it could generate up to 17% in attractive returns on its projects, more than its competitors.

"Adjusting for accounting gimmicks, we estimate that Adani Green has achieved an average ~11-12% Return on Capital on projects completed in the past 3 years. For context, Adani Green's cost of debt is 9.5%," said Snowcap Research.

Adani Green's quick development, optimistic run-rate EBITDA estimates, and shaky sales accounting, which has inflated capex statistics, have largely hidden the company's poor Return on Capital.

50GW Funding Concerns

By 2030, Adani Green said, it will have roughly five times the capacity, or 50GW, and this increase is "fully funded." The research stated that Adani Green's high debt payment load and declining project returns have resulted in minimal free cash flow in recent months.

“By our own modelling, we estimate Adani Green can meet just 50% of its 50GW target funding requirement by 2030 – even with the announced equity injection from promoters," said Snowcap Research in its report. 

Adani Green has a track record of declaring that its pipeline is fully funded before going back and getting additional money. Less than half of the company's 2025 capacity objective has been built thus far.

Mixed Operational Performance

The research stated that Adani Green has "consistently outperformed" in all of its operational initiatives. According to the footnotes, Adani Green had to lower its initial generation predictions for its primary RG1 assets since they failed to meet even the most cautious expectations.

The primary driver of important bond subsidiaries' alleged EBITDA outperformance has been the growth in related party interest income.

Adani Green's flagship hybrid portfolio does not appear to have reached the minimum CUF objective of 50%, according to official electricity generating statistics from the Indian government.

Also Read: Adani Green Energy share price declines 4% despite strong FY24 business updates

Related Party Merchant Power Sales

According to Snowcap Research's study, Adani Green has begun to sell an increasing percentage of its electricity on the open market and informs investors that it anticipates this to play a significant role in its strategy in the years to come.

Due to low trading volumes and unpredictability in electricity prices, Indian renewable producers have traditionally shied away from merchant risk.

Adani Green has been able to obtain up to double its PPA prices for these merchant power sales, despite the high short-term power costs. They have thereby significantly increased Adani Green's cash flow generation and EBITDA.

“We think AGEL is less upfront about its dependence on related Adani entities for these sales. In FY23, disclosures in AGEL's annual report reveal that 81% of the Company’s infirm revenues (the bulk of its merchant power sales in the year) were to Adani Enterprises and Adani Energy Solutions," the report said. 

Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.

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Published: 30 May 2024, 11:45 AM IST
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