Extensive Smart Meter Rollout Will Reduce T&D Losses Next Year

Key Takeaways

• Strategic CapEx expansion and efficient deployment aim to boost revenue growth, improve EBITDA margins, and enhance operational efficiency.
  
• Aggressive smart meter expansion and strategic bidding participation could significantly increase revenue while maintaining healthy net margins.
  
• Regulatory factors and project execution risks could negatively impact Adani Energy Solutions' income, revenue recognition, and net margins.

Catalysts

Generates, transmits, and distributes power in India.

• The significant increase in the CapEx pipeline, from ₹17,000 crores to ₹55,000 crores, suggests future revenue growth potential through the completion of these transmission projects.
  
• The continued focus on efficient CapEx deployment and timely project completion is expected to improve EBITDA margins by minimizing cost overruns and enhancing operational efficiency.
  
• The commissioning of transmission projects with a combined CapEx of ₹3,100 crores by year-end is anticipated to generate annual revenue of ₹375 crores, positively impacting revenue growth.
  
• An aggressive expansion in the smart meter sector, with a targeted installation of up to 70 lakh meters next year, is projected to not only increase revenue but also enhance net margins due to improved energy consumption tracking and reduced T&D losses.
  
• The strategic participation in upcoming ₹60,000 crore bidding opportunities, with a targeted market share of 20%, is expected to drive revenue growth while ensuring that net margins and returns remain intact.

Adani Energy Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Adani Energy Solutions's revenue will grow by 16.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 14.2% in 3 years time.
• Analysts expect earnings to reach ₹49.0 billion (and earnings per share of ₹35.89) by about January 2028, up from ₹7.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 55.6x on those 2028 earnings, down from 115.5x today. This future PE is greater than the current PE for the IN Electric Utilities industry at 34.8x.
• Analysts expect the number of shares outstanding to grow by 4.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Adani Energy Solutions Future Earnings Per Share Growth

Risks

• The large negative movement in deferred regulatory in the profit and loss statement, driven by regulatory timing differences, could result in a future reduction of income and impact net margins as the surplus is adjusted against future tariffs.
  
• The continuation of pursuing new projects while maintaining current commitments might challenge the company's implementation capabilities, potentially leading to cost overruns and impacting net margins negatively.
  
• The dependency on regulatory approvals, such as for the Mumbai HVDC project, suggests possible delays that could hinder revenue recognition and impact earnings forecasts.
  
• The expectation of reduced tariffs due to regulatory surpluses could lead to decreased revenue in the distribution segment, affecting the company's overall income and net margins.
  
• Uncertainty in the power demand growth trajectory and project commissioning delays in key markets may create fluctuations in anticipated revenue streams and impact future earnings.

Valuation

• The analysts have a consensus price target of ₹1415.25 for Adani Energy Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1978.0, and the most bearish reporting a price target of just ₹1101.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹345.3 billion, earnings will come to ₹49.0 billion, and it would be trading on a PE ratio of 55.6x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹744.7, the analyst's price target of ₹1415.25 is 47.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.