Event update: Adani Transmission (Underperformer) - Enters into Distribution Business
Event update
Adani Transmission (ATL) enters into power distribution business with acquisition of Reliance Infrastructure (RInfra) Generation, Distribution and Transmission assets of Mumbai License Area at an Enterprise Value of Rs138bn (includes regulatory assets).
Details of the proposed deal
- ATL has acquired Reliance Infra Mumbai distribution business. RInfra’s Mumbai distribution (which includes generation, transmission and distribution assets). The acquired entity will be housed in a wholly owned subsidiary, Adani Electricity Mumbai Ltd
- Of the total value of Rs138bn, core business is valued at Rs121bn and balance is regulatory assets (which will be available to ATL as of end March 2018). Excluding regulatory debt of Rs35bn, the deal implies a value of 2.5x of the regulated equity.
- Details of RInfra’s Mumbai license area assets: a) Distribution licensee in Mumbai Suburbs (sale of ~10BU), b) Generation assets of 500MW at Dahanu, and c) Transmission assets of 538ckms of 220v and 8EHV substations
- With the acquisition of RInfra assets, ATL has forayed into the distribution business – a new avenue for growth. We expect the acquisition to be funded by Rs10bn of equity, Rs26bn of sponsor debt and Rs85bn of bank loans (Rs121bn).
- Historically, the license area has earned 17-18% return on equity on equity from the business through superior operating metrics. Reduction in AT&C losses for FY16 and FY17 at 8.4% and 8.3% (normative loss of 9.3 and 9.1%), respectively.
Valuations & view
We believe the acquisition is expensive at 2.5x regulated equity (an asset which will earn 18%). Besides, the acquisition is likely to be funded primarily by debt, leading to increase in gearing to 5x (vs 2.8x end FY18). Given the rich valuations (28x FY20E earnings) and resultant high gearing post acquisition, we maintain Underperformer rating with 12-month TP of Rs113/share (our price factors in Rs40-50bn of new projects per annum and all bid assets under pipeline). The key risk to our call is ATL winning new bids of large sizes or lower interest rate on acquisition debt
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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