Huge Upside! Ventura expects almost 60% rise in this Adani group stock in 2 yrs

This bullish outlook is supported by favorable policy environments, substantial capacity enhancements, and growing opportunities for private sector participation through tariff-based competitive bidding (TBCB).

Ventura has initiated coverage on the stock with a buy rating and a target price of 1,600 in the next 24 months, indicating an upside potential of over 58 percent.

Adani Energy Solutions stands out as the premier private T&D entity, managing 20,422 circuit kilometers (ckm) of transmission lines and 54,600 MVA of power transformation capacity, it said in its report.

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“Adani Energy Solutions has set a goal to establish 30,000 ckm of transmission lines by 2030, capitalising on both organic & inorganic growth prospects. Strong industry tailwinds and a leading position in private tariff-based competitive bidding sector offer significant revenue growth,” noted the brokerage.

Stock Price Trend

The stock has been flat in the last 1 year, up just half a percent and has declined over 3 percent in 2024 YTD. It has lost over 5 percent in March so far after a 0.3 percent fall in February. However, the stock was up over 2 percent in January 2024. Before that, it gave double-digit returns in December and November 2023 each, gaining 20 percent and over 13 percent, respectively.

Currently trading at 1,011, the stock is over 19 percent away from its 52-week high of 1,250, hit at the beginning of this year on January 3, 2024. Meanwhile, it has advanced over 47 percent from its 52-week low of 686.90, hit on October 26, 2023.

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Investment Rationale

Market leadership: According to the brokerage, the firm is India’s leading private-sector power transmission company with over 35 percent market share in TBCB-based private power transmission assets. With its superior execution and O&M skills, AESL has demonstrated a high ‘total availability factor’ of 99.7 percent, best-in-class EBITDA margins of more than 91 percent, and capital management excellence. 

As of January 2024, the company had 37 transmission assets (28 operational and 9 under construction). These assets have a weighted average lifespan of 33 years and generate fixed/ROA-based annual tariffs, offering long-term visibility for revenue and cash flows, informed Ventura.

Industry tailwinds: The brokerage pointed out that the Government’s push to double the power generation & transmission infrastructure along with the replacement of older low KVA lines with higher KVA lines ensures strong growth visibility for AESL’s power transmission business. The Indian government is expected to open bidding for 10 lakh crore worth of power transmission lines in the next 10 years. 

Out of this, 50 percent is expected to be allocated to private companies through the TBCB route, it highlighted. As a result, over FY23-27E, Ventura expects the company’s power transmission revenues and EBITDA to grow at a CAGR of 18.7 percent and 19.7 percent to 7,822 crore and 6,649 crore, respectively.

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Strong financial performance: During FY19-23, AESL’s revenue/EBITDA/net earnings grew at a CAGR of 16.1 percent/19.1 percent/ 22.3 percent, respectively, while EBITDA and net margins improved by 397 bps to 41.8 percent and 177 bps to 9.4 percent, respectively, informed the brokerage. It also noted that the firm’s transmission revenue grew at a CAGR of 15.8 percent, while distribution revenue grew at a CAGR of 19.1 percent.

Moreover, in 9MFY24, the company’s revenue and EBITDA grew at a YoY rate of 19.8 percent to 11,901 crore and 2.6 percent to 4,090 crore respectively, however, net earnings declined at a YoY rate of 10.2 percent to 778 crore. EBITDA and net margins also declined by 574 bps to 34.4 percent and 219 bps to 6.5 percent, respectively. Higher operating expenses related to newly commissioned projects impacted profitability. Ventura believes that it’s a one-time impact and the profitability will normalize in the coming quarters.

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Over the foRECast period spanning FY23-27E, Ventura expects the firm will see robust growth across various financial metrics. Revenue, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and net earnings are projected to achieve a compounded annual growth rate (CAGR) of 20.8 percent, 25.8 percent, and 37.9 percent, respectively. Furthermore, significant enhancements in EBITDA and net margins are forecasted, with improvements of 727 basis points (bps) to 49 percent and 654 bps to 16 percent, respectively, it forecasted.

Within its revenue streams, transmission revenue is anticipated to grow at a CAGR of 18.7 percent, while distribution revenue is expected to achieve a CAGR of 15.4 percent by FY27E, added Ventura.

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Valuation and Outlook

According to Ventura, AESL has established itself as a key player in the power T&D sector. The government’s push for greater private sector participation in the rapidly expanding power T&D market places AESL in a favorable position, thanks to its unparalleled project execution capabilities, superior capital management, and robust engagement in the private bidding arena, it said.

Furthermore, the concern over growth funding is minimized, as the company’s total debt is less than the value of the critical assets acquired through government-led bidding processes, it noted. AESL has an asset base in the power T&D sector worth 63,600 crore, with its total consolidated debt standing at 35,963 crore, amounting to 56.6 percent of its asset base. This proportion significantly mitigates the risk of default and provides a margin of safety, argued the brokerage.

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Bull and Bear Case Scenarios

The brokerage has also prepared likely Bull and Bear case scenarios for FY27 price, based on revenue growth, EBITDA margins and EV/EBITDA multiples.

Bull Case: In this case, it has assumed revenue of 30,000 crore and an EBITDA margin of 50 percent at EV/EBITDA of 20X, which will result in a Bull Case price target of 2,169 per share (an upside of 114.5 percent from CMP).

Bear Case: In this, the brokerage has assumed revenue of 25,000 crore and an EBITDA margin of 45 percent at EV/EBITDA of 15X, which will result in a Bear Case price target of 993 per share (a downside of 1.7 percent from CMP).

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.

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Published: 21 Mar 2024, 03:31 PM IST

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