Cantor predicts 130% surge in Adani Energy Solutions, touts it as a potential multibagger

Adani Energy Solutions, part of Adani Group, has had a volatile 2024, with the stock down over 6 percent YTD. In the last one year, it gained just 14.5 percent. Despite this lacklustre performance, brokerage firm Cantor sees potential multibagger returns for the stock.

It has initiated a call on the Adani Group stock with an 'overweight' recommendation and a target price of ₹2,251, implying a massive potential upside of 130 percent from its current market price of ₹979.

Adani Energy Solutions (AESL) boasts a diversified portfolio, including transmission assets, distribution assets, and a smart metering business. With an enterprise value of approximately $18.5 billion, AESL presents an attractive opportunity in India’s rapidly expanding energy markets, said the brokerage.

Cantor forecasts total revenue for AESL to grow at a compound annual growth rate (CAGR) of 20 percent from FY24 to FY27E, with adjusted EBITDA expected to grow at a CAGR of 28.8 percent. In contrast, peers are projected to grow revenue in the low single digits and EBITDA in the mid-single digits. While AESL may appear more expensive on a multiple basis, it is anticipated to grow significantly faster than its competitors.

Stock Price Trend

The stock rose as much as 3.6 percent to its intra-day high of ₹1,019.60. It is now over 24 percent away from its peak of ₹1,347.90, hit last month. Meanwhile, it has rallied over 48 percent from its 52-week low of ₹686.90, recorded in October last year.

Diversified Business Model

The brokerage noted that AESL's diversified business structure is expected to drive strong growth. The transmission segment is set to benefit from the completion of nine recently awarded projects within the next 18-24 months, with further contract wins anticipated. The distribution business is projected to grow at near double-digit rates, and the smart metering division is poised to begin generating substantial revenue from its backlog of 22.8 million smart meters.

Key Investment Considerations

AESL is the largest private-sector power transmission and distribution business in India. The company’s ability to supply power to major areas such as Mumbai and the Mundra SEZ positions it well for growth. Additionally, smart meters represent a significant locked-in demand, with a government target of deploying 250 million smart meters by 2030.

Competitive Valuation

Using a relative valuation approach, Cantor compared AESL to peers in developed markets, noting that while these peers are forecasted to grow revenue at a CAGR of 3.1 percent and EBITDA at 10.8 percent, AESL's growth potential warrants a premium. Currently trading at a 60 percent discount on a growth-adjusted basis, AESL deserves a higher valuation multiple given its superior growth prospects.

Risks and Challenges

Despite its strengths, AESL faces potential risks, including political changes that may affect private sector development and competition for new contracts. Specific challenges include the inability to secure additional smart meter contracts and foreign exchange risks related to USD-denominated debt.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.