Is Adani Green in trouble again? Is Snowcap’s study accurate?

adminJune 8, 2024

Adani Green Energy: Adani Green Energy Limited (AGEL) seems to be stuck in a circle of controversy. Just six months after Hindenburg Research’s scathing report, AGEL is back in the spotlight, this time under the microscope of Snowcap Research. This second report raises similar concerns about AGEL’s financial health and accounting practices.

Can AGEL weather this new storm and restore investor confidence? Or will these repeated accusations have a lasting impact on the future of Adani Green Energy Limited? Come and find out what happened.

Who is Snowcap Research?

Snowcap Research is an activist investment and advisory firm based in London. Unlike traditional investors who look for undervalued companies, Snowcap focuses on mispriced opportunities. It specifically targets companies that are considered overvalued or underperforming with regard to environmental, social and governance (ESG) factors. They publish important research reports that highlight perceived shortcomings and advocate for change.

Adani Green Energy Ltd (AGEL)

Adani Green Energy Limited It is a renewable energy powerhouse and India’s largest green energy producer. AGEL was founded in 2015 as part of the Adani group conglomerate. AGEL has quickly emerged as a leader in the country’s transition towards clean and sustainable development.

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With a diverse portfolio encompassing solar, wind and hybrid renewable projects, Adani Green Energy Limited has an operating capacity of 10.9 GW as of March 2024. AGEL’s growth has been driven by the Indian government’s strong policy push to achieve its ambitious goals. renewable energy Combined with Adani Group’s deep expertise in developing large-scale infrastructure projects, we achieve our goals.

Snowcap Research examined its financial reports and published a report on Adani Green Energy Ltd (AGEL) based on high predictions of the future that may not be achieved. The company raised a number of concerns about AGEL’s accounting practices, projected earnings, funding requirements and operating performance.

What was the full report about?

Let’s decipher what the report says.

Inflated run rate EBITDA

According to the Snowcap report, AGEL’s execution speed calculation is as follows: Evita It appears to be inflated and obfuscated by investors. They confirmed that AGEL included items such as interest income and non-cash accounting gains in its run-rate EBITDA calculations.

Looking at the company’s FY 24 results, we can clearly see that AGEL generated revenue of $773.5 billion and accounted for $722.2 billion in EBITDA with an EBITDA margin of 92%.

However, if we look at the company’s run rate EBITDA, we mentioned that it has $1046.2 billion including other income, which is not added while calculating EBITDA. Why should we do that? Run-rate EBITDA is used to measure a company’s core operating performance.

Snowcap Research, which examined Adani Green Energy Limited’s segment-wise operational production, has prepared estimates and found that the actual run-rate EBITDA may be 14-19% lower compared to $1,046.2 billion. However, this may not be completely true and the estimates may be different.

Snowcap claimed this inflated run-rate EBITDA because it assumes AGEL uses this metric to demonstrate leverage and return on capital. It supports the argument that ambitious growth targets can be financed without raising additional capital.

Reduced project profits

In Adani Green Energy Limited’s December 2021 presentation, AGEL reported that it has been able to achieve high returns of 17%, higher than the Indian renewable sector in general. But in reality, Snowcap found that all run-rate EBITDA values were all inflated, and through its own analysis, it found that AGEL had been able to achieve an average return on equity of 11-12% over the past three years.

Snowcap also noted that the expected 11-12% return is much closer to the company’s cost of debt (about 9.5%). Looking at the company’s report, they noted that looking at the 2030 target, AGEL’s development costs per MW have increased meaningfully.

Snowcaps’ claims regarding AGEL’s poor operating performance

The Snowcap report disputes AGEL’s claim that its operating assets have “consistently outperformed forecasts,” citing specific instances where key assets appear to have underperformed generation forecasts. The report noted that excluding interest income earned from loans and other non-operating items, the RG1 bond portfolio would have struggled to meet its debt service coverage ratio (DSCR).

AGEL’s RG1 bonds contain a coverage ratio locking covenant that limits distribution if DSCR falls below 1.55x. The report shows that after removing interest income, the adjusted DSCR falls below 1.55x, suggesting that the RG1 portfolio may have violated its covenants without this interest income contribution.

AGEL’s 700 MW Jaisalmer Four wind-solar hybrid project flagship Property of Adani Green Energy Limited. However, Snowcap’s report cited official data from the Indian government’s Central Electricity Authority, which showed that the plant failed to meet the minimum capacity utilization (CUF) of 50%.

It also claimed that according to official data, the trailing 12-month CUF was only around 45-47%, failing to meet the minimum threshold of 50%. However, unfortunately, the report itself did not provide any specific reference to the claim that AGEL’s Jaisalmer plant achieved only 45-47% CUF over the last 12 months as of March 2024.

Related Party Transactions

Snowcap reported AGEL’s increasing reliance on commercial power sales, which appears to be unusual for an Indian renewable developer due to the inherent price uncertainty in the commercial market. The report claims that AGEL relies heavily on related Adani companies for a significant portion of these commercial power sales.

Looking at the annual report for FY 23, we can understand that a whopping 81% of AGEL’s non-performing profits came from power sales to Adani Energy Solutions and Adani Enterprises.

funding problems

According to a report by Snowcap, Adani Green Energy Limited has generated limited free cash flow in recent periods due to high debt service burden and lower project revenues. For reference, I cited AGEL’s FY 24 earnings report, where the company’s own guidance for free cash flow to equity for its 8.1 GW operating portfolio was significantly lower than previous estimates.

Based on Snowcaps modeling, the report estimates that AGEL will be able to meet only 50% of its 50GW target funding requirement by 2030, even after taking into account the announced equity infusion from promoters.

The report also highlighted AGEL’s history of claiming the pipeline was “fully funded” and later raised more equity capital. It cites several instances in the company’s presentations in 2018, 2020 and 2022 in which AGEL made such claims before securing additional funding.