Adani Green and the bet on India’s solar future

Adani Green Energy Limited is worth 1 Lakh Crores right now.

Adani Green Enery, it’s the most valuable company in the Adani Group stable. What’s even more fascinating is that the company’s prospects blossomed only recently after its share price rallied by an eye-popping 500% in just 6 months. So in this week’s edition, we try and figure out what’s fuelling this frenzy.

The Story

Renewable energy is the next big thing. And the government has outlined some massive ambitions for the country. They’ve planned to install 175 gigawatts (GWs) of renewable capacity, including 100 GW of solar capacity by the year 2022.

To put that into perspective — India’s total installed renewable capacity as of Mar 2020 is only half this number and solar contributes a meagre 37 GW. That means we need another 63 GW in 2 years to achieve our intended target

So it’s no surprise that solar projects are getting a lot of love.

In fact, back in 2016, the government made a concerted push to incentivize private players to participate in realising this vision. They created solar parks — concentrated zones of developmental area for power generation projects. Here, prospective developers get easy access to land, roads, water transmission and evacuation lines. In return, they are expected to set up power plants and generate electricity so that state distribution companies (DISCOMs) can channel this energy and power millions of homes across India.

This is facilitated through a power purchasing agreement (PPA). Under the PPA, the developer arranges for the design, procurement, installation of the power plant and manages it on a day to day basis. They also have to finance these projects themselves and make sizeable investments upfront. However, in a bid to extract a return on their investment, the developer can decide on a tariff rate and sell electricity at this fixed price to DISCOMs for a set number of years. Generally, PPAs have a tenure of 10–25 years and this is where Adani Green Energy Limited (AGEL) comes in.

Incorporated in 2015, they’ve been investing massive amounts of money, to set up renewable capacity. This includes both wind and solar. However, it’s safe to say Adani is largely focused on the solar bit. They have ~2.1 GW of operating assets to their name right now and ~10 GW worth of assets under construction. And since Adani enters into binding contracts with central and state-owned DISCOMs over a 25-year tenure, there is a fair amount of visibility in terms of revenues as well. If you put all of this together you can see why the company’s prospects look good.

But why is the company gaining so much interest right now? What’s changed over this past year or so?

For starters, the company was awarded a $6 billion contract in June 2020 for building a massive solar power plant (8GW), alongside augmenting capacity to produce solar cells and modules. And while this is an important development in its own right, it also speaks of Adani’s growing influence. Remember, not everybody can bid for these contracts. You have to have a proven track record and decent financial and operational metrics to back your claims. As Adani keeps growing and delivering on its promises it improves its odds of claiming new multibillion-dollar projects. Also, the company was profitable these past couple quarters. This bottom-line figure says a lot about business viability considering these infrastructure projects require significant amounts of capital investments upfront.

And while they have been binging on ridiculous amounts of debt to finance these initiatives, they managed to rope in TOTAL recently (one of the world’s largest Oil and Gas company) to acquire a 50% stake in operational projects worth 2.14 GW. In return, Adani received ₹3,700 crores — money they could use to pay off the ₹14,800 crore debt burden sitting on their balance sheet right now. And once some of these big projects turn operational, Adani can borrow at really affordable interest rates on the back of all the future cash flows they’ll be generating. So clearly, things are looking up.

But does this mean the whole solar power-play thing is going to be a walk in the park?

Of course not.

State-owned DISCOMs are notorious for renegotiating existing contracts and you can’t rely on them to always honour their financial obligations. Then there is Adani’s cost leadership. Indian companies, including Adani, can produce solar energy at dirt cheap rates because they have access to affordable labour, large amounts of land, and inexpensive imports from China. While labour and land regulations have a fair bit of uncertainty tied to them, it’s the Chinese dependency that is the big concern here.

For instance, prices of crystalline silicon modules (panels on which the solar cells are assembled) have been on the decline. And you could largely attribute this development to China. But then there were supply disruptions that changed this equation altogether. First, there was an explosion at GCL Poly — a Chinese company responsible for 30% of the world’s poly-silicon module production. Then floods ravaged parts of Southeast China forcing the temporary closure of another big producer. Add it to the effects of COVID induced lockdowns, and you can see how things can get out of control rather quickly. And while Adani claims that its reducing dependence on the Red Dragon, it’s very hard to make the end-to-end transition without spending a lot of money.

But hey, right now, it seems as if the company is riding a purple patch and while you could argue that the stock price might not necessarily reflect the company’s business prospects, it’s still early days for Adani. Maybe they’ll prove us all wrong.

What do you think?

Where do you figure Adani Green is headed?

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