Rising Borrowing Costs And Grid Delays Will Erode Margins

Key Takeaways

• Rising borrowing costs and high leverage threaten net margins, while ongoing capital expenditure exposes the company to project delays and possible revenue leakage.
  
• Uncertain policy support, volatile merchant prices, and reliance on related-party transactions increase risks to revenue growth and heighten governance-related concerns.
  
• Robust capacity growth, long-term contracts, operational efficiency, and favorable industry trends position the company for sustained earnings, margin stability, and strong future cash flow visibility.

Catalysts

Generates and supplies renewable energy to central and state government entities and government backed corporations in India.

• Rising global interest rates are driving up borrowing costs, with Adani Green Energy stating that its gross debt is already substantial at 78,000 crore rupees and borrowing costs are around 9.1 to 9.2 percent. As the company continues aggressive capacity additions, higher interest expenses are likely to erode net margins and squeeze long-term earnings.
  
• There is significant risk that government support for renewables, such as the ISTS waiver, will be reduced or phased out. The company acknowledged that only 75 percent of the waiver remains and future changes could impact the economics of new projects, reducing returns and dampening revenue growth for assets coming online after incentives drop off.
  
• Adani Green Energy's high leverage and massive capital expenditure program exposes it to project execution delays, particularly due to grid integration and transmission evacuation challenges at new sites like Khavda. Even minor delays already cause revenue leakage and curtailment, and further grid constraints could leave new capacity underutilized and reduce both revenue and EBITDA over an extended period.
  
• Merchant power prices, especially in solar, have dropped sharply and remain volatile, with average realizations declining from over 3 rupees to just 2.2 rupees per unit in the last quarter. As more capacity is commissioned ahead of PPA tie-ups and is forced to sell into this oversupplied merchant market, overall revenue growth will become increasingly dependent on uncertain and potentially depressed spot prices.
  
• Reliance on related-party transactions and sales of equipment to group subsidiaries adds an additional layer of financial complexity, which could draw regulatory scrutiny or lead to governance concerns, potentially triggering earnings restatements and driving down future earnings visibility and the valuation multiple.

Adani Green Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Adani Green Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Adani Green Energy's revenue will grow by 21.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.9% today to 23.2% in 3 years time.
• The bearish analysts expect earnings to reach ₹51.5 billion (and earnings per share of ₹32.09) by about August 2028, up from ₹15.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 36.8x on those 2028 earnings, down from 94.8x today. This future PE is greater than the current PE for the IN Renewable Energy industry at 27.5x.
• Analysts expect the number of shares outstanding to decline by 1.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.8%, as per the Simply Wall St company report.

Adani Green Energy Future Earnings Per Share Growth

Risks

• Rapid and record-breaking capacity additions, a robust project pipeline, and a clear pathway to 50 gigawatts by 2030 all suggest sustained revenue and EBITDA growth as new assets are brought online and begin contributing to power sales.
  
• The company's ability to secure long-term power purchase agreements (PPAs) for the vast majority of its portfolio-combined with a strategic approach to merchant sales-provides strong visibility into future cash flows and reduces revenue and margin volatility.
  
• High capacity utilization factors (CUFs), especially at resource-rich sites like Khavda, alongside effective digital and operational efficiency measures, point to the potential for best-in-class EBITDA margins and stable long-term earnings.
  
• Strong relationships with global partners, diversified fundraising, and a disciplined capital management approach have enabled Adani Green Energy to maintain industry-leading credit discipline, helping secure project funding at manageable borrowing costs, which can positively impact net margins as the company refinances and scales.
  
• Growing demand from segments such as data centers, increasing renewable energy adoption across India, and government policy support for green energy all contribute to a favorable long-term demand environment, supporting growth in topline revenues and the potential for increased earnings over time.

Valuation

• The assumed bearish price target for Adani Green Energy is ₹792.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Adani Green Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1522.0, and the most bearish reporting a price target of just ₹792.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹221.6 billion, earnings will come to ₹51.5 billion, and it would be trading on a PE ratio of 36.8x, assuming you use a discount rate of 14.8%.
• Given the current share price of ₹917.5, the bearish analyst price target of ₹792.0 is 15.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.