Event update: Adani Transmission (Underperformer) - Deal to sell 25% stake to QIA
We present key takeaways from Adani Transmission (ATL) analyst day, which we attended at their corporate office in Ahmedabad:
Key Highlights
- 25% stake sale in Mumbai DISCOM to QIA: ATL has entered into an agreement with Qatar Investment Authority (QIA) to sell 25% stake in AEML (SPV operating Mumbai DISCOM) at Rs12bn (equity valued at Rs48bn). Additionally, QIA will invest Rs20bn in the entity as sub debt (payable after the 10th year). AEML total debt of Rs100bn would translate into an enterprise value of Rs168bn in the deal.
- High capital expenditure (capex) of Rs95bn in Mumbai DISCOM: ATL expects to incur a capex of Rs95bn over FY20-FY25E (Rs18-20bn over FY16-FY19), 4.5x compared with the earlier tariff period due to under investment in earlier tariff period. Note the regulator is yet to approve the estimated renewed capital expenditure trajectory.
- Additional Rs62bn opportunity in Mumbai License Area: ATL has approached the regulator for approval of an HVDC underground cable system of 80km, at a cost of Rs62bn. The HVDC system will meet future power demand growth in Mumbai city
- Strong win in TBCB projects in YTDFY20: ATL has won 5 tariff based competitive bids projects (TBCB) projects (4 interstate and one intrastate bid) out of 11 bids in YTDFY20. In revenue terms, these projects command 42% market share. We believe ATL is well placed to reap the benefits from the mandatory bidding of all future interstate transmission projects and new intrastate transmission bids
- Increased availability of cash flow from operating assets: ATL is refinancing its existing debt on operating assets by increased tenor of repayment and higher debt levels releasing cash for funding new assets thereby improving project’s IRR to >50% (<21% expected earlier).
Valuations & view
We estimate ATL’s FY19-21E EBITDA and earnings CAGR to be at 37% and 34%, respectively, led by commissioning of new assets, Mumbai distribution business and refinancing-led interest cost savings. However, we reiterate our Underperformer rating on the stock, given its rich valuation at 33x FY20E earnings and 5.5x FY20E book value. Our revised target price of Rs142/share factors in higher capex in Mumbai DISCOM and HVDC Mumbai. Increase in pipeline of bid projects and rise in ATL’s market share from new bids pose key risks to our rating.
Adani Transmission Limited. Adani Transmission Limited is a holding company. The Company operates as a power transmission company. It is engaged in transmission of electric energy and trading of castor oil. It owns, operates and maintains approximately 5,050 circuit kilometers of transmission lines, ranging from 400 kilovolts to 765 kilovolts, with a total transformation capacity of over 12,000 megavolt ampere (MVA). The Company has four operational Transmission Systems that primarily serve the Northern and Western regions of India, and additional projects of approximately 1,700 circuit kilometers in Rajasthan, Chhattisgarh, Madhya Pradesh and Maharashtra under construction. Its projects under utilities include Mundra-Mohindergarh Transmission Line, Mundra-Dehgam Transmission Line and Tiroda-Warora Transmission Line. Its engineering, procurement and construction projects include Mundra-Zerda Transmission Line, Nalia-Bitta Transmission Line, Kawai-Chhabra Transmission Line and Shantigram-Transmission Network.
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