Whalesbook
Profit Surge Fueled by Tax Savings
Adani Power's net profit attributable to owners leaped by 52.34% to ₹4,017 crore in the March quarter. This figure was heavily influenced by a dramatic reduction in its tax outgo, with tax expenses plummeting by over 80%, from ₹662.05 crore in the prior year to just ₹112.58 crore. This significant tax credit, which included deferred tax adjustments, masked a more modest increase in pre-tax earnings, which rose to ₹4,383.98 crore from ₹3,261.28 crore.
Operations Lagging Behind Profit Figures
In parallel, revenue from operations remained nearly flat at ₹14,223 crore, a marginal dip from ₹14,237 crore a year ago. Furthermore, EBITDA contracted by 1.7% to ₹4,732 crore, leading to a slight softening of EBITDA margins to 33.27% from 33.80% in the comparable period. The market reacted negatively to this mixed financial picture, with Adani Power shares closing 2.48% lower at ₹217.80 on Wednesday.
Market Headwinds Impact Performance
The subdued operational performance was attributed by the company to a challenging external environment. Unseasonal weather patterns impacted power demand, while a growing share of renewable energy in the mix and lower tariffs in the merchant power market constrained realisations. Despite a modest increase in power sale volumes to 27.2 billion units from 26.4 billion units, these pricing pressures capped revenue expansion. Management highlighted operational efficiencies, favorable forex movements, and improved plant availability as partial offsets, though these were insufficient to counter broader market pressures.
Debt and Valuation Concerns Rise
The company's expansion plans involve significant debt. Reports indicate outstanding debt levels exceeding ₹28,855 crore (US$3.3 billion) as of September 2024, with plans to borrow an additional 70% to fund capacity expansion. This higher leverage heightens financial stability concerns if operational performance weakens. While the debt-to-equity ratio has decreased over five years, it remains at 81.3%. Some analysts question the stock's valuation, with one estimate placing it 79.1% above its GF Value™. Concerns also exist about its valuation premium compared to peers like NTPC, which has a stronger Return on Capital Employed (ROCE) despite a lower P/E ratio. The average management tenure of 1.6 years was also noted.
Outlook on Expansion and Energy Security
CEO S.B. Khyalia expressed confidence in the company's long-term expansion strategy and its role in ensuring India's energy security amidst global volatility. He anticipates multi-fold earnings growth in the coming years driven by capacity expansion targets. Recent analyst sentiment, however, suggests caution, with a significant downside potential indicated by target prices. While the company is investing in expanding its capacity, the operational and financial risks associated with its debt levels and market challenges warrant close monitoring.