Adani Green Energy: Adani Green Energy Limited (AGEL) seems to be stuck in a loop of controversy. Barely six months after facing a scathing report by Hindenburg Research, 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 Adani Green Energy Limited’s future? Come let’s get to know what had happened.

Who is Snowcap Research 

Snowcap Research is a London based activist investment and advisory firm. Unlike traditional investors seeking undervalued companies, Snowcap focuses on mispriced opportunities. They target companies they believe are overvalued or underperforming, particularly in relation to environmental, social and governance (ESG) factors. They publish critical research reports highlighting perceived shortcomings and advocate for change. 

Adani Green Energy Ltd (AGEL)

Adani Green Energy Limited is a renewable energy powerhouse and the largest producer of green energy in India. They were established as a part of the Adani Group conglomerate in 2015. AGEL has rapidly emerged as a Leader in the country’s transition towards clean and sustainable power generation.

With a diverse portfolio spanning solar, wind and hybrid renewable projects, Adani Green Energy Limited has an operational capacity of 10.9 GW as of March 2024. AGEL’s rise has been fueled by the Indian government’s strong policy push towards achieving its ambitious renewable energy targets, coupled with the Adani Group’s deep expertise in developing large scale infrastructure projects. 

Snowcap Research has published a report on Adani Green Energy Ltd (AGEL) based on their future lofty projections which might not be achievable by looking into the financial reports. The company raised several concerns about AGEL’s accounting practices, projected returns, funding requirements and operational performance. 

What was the entire report all about 

Let us decode what the report was all about.

Inflated run-rate EBITDA

The Snowcap report states that AGEL’s calculation of run-rate EBITDA appears to be inflated and obfuscated by investors. They identified that AGEL has included items such as interest income and non cash accounting gains in its run-rate EBITDA calculation.

By Looking at the FY 24 results of the company we can clearly see AGEL has made a revenue of 7,735 crores and EBITDA accounted for 7,222 crores with an EBITDA margin of 92%. 

 But by looking at the company’s run rate EBITDA it has mentioned it had 10,462 crore including other income, which they haven’t added while calculating EBITDA. Why should they do that? Run-rate EBITDA is used to measure the company’s core operational performance.

Snowcap Research by looking at Adani Green Energy Limited’s sector wise operational production made an estimate and found out that the actual run-rate EBITDA might be lower by 14-19% compared to 10,462 crore. But this might also not be completely true, the estimation might differ.

 Snowcap alleged this inflated run-rate EBITDA because they assume AGEL uses this metric to demonstrate its leverage and return on capital. To support its claims of being able to fund its ambitious growth targets without raising additional equity. 

Declining Project Returns 

In Adani Green Energy Limited’s presentation of December 2021 AGEL reported that they were able to achieve as high a return as 17% which is typically higher than the Indian renewable sector. But in reality Snowcap found that all the run rate EBITDA values are all being inflated, the company made its own analysis and found that AGEL was able to achieve an average return on capital of say 11-12% for the past three years. 

Snowcap also mentioned the estimated 11-12% return is much closer to the company’s cost of debt which stands at around 9.5%. By looking at the company’s report they also mentioned that AGEL’s development cost per MW have risen meaningfully by looking at its 2030 targets. 

Snowcaps claim on AGEL’s Operational Underperformance 

Snowcap report challenges AGEL’s claims that its operational assets have “consistently outperformed projections” by citing specific instances where key assets appear to have underperformed against their generation forecasts. The report noted that excluding interest income earned on loans and other non operational items, The RG1 bond portfolio would have struggled to meet its Debt Service Coverage Ratio (DSCR).

AGEL’s RG1 bond contains a coverage ratio lock up covenant which restricts distributions in the event its DSCR falls below 1.55x. By showing the Adjusted DSCR dipping below 1.55x after removing interest income, the report insinuates the RG1 portfolio may have breached covenants without this interest income contribution. 

AGEL’s 700MW Jaisalmer Four wind solar hybrid project is touted as a flagship asset for Adani Green Energy Limited. However Snowcap’s report cites official data from the Indian government’s Central Electricity Authority, which appears to show that this plant has not met its minimum capacity utilization factor (CUF)  of 50%.

It also claimed that the official data suggested its trailing 12 month CUF was only around 45-47% – failing to meet the 50% minimum threshold. But unfortunately, the report itself hasn’t provided any specific reference for the claim that AGEL’s Jaisalmer plant has achieved only 45-47% for its trailing 12 months CUF as of March 2024. 

Related Party Transactions

Snowcap reported AGEL’s growing reliance on merchant power sales, looks unusual for Indian renewable developers due to the inherent price uncertainty in merchant markets. The report alleges that AGEL is heavily dependent on related Adani entities for a significant portion of these merchant power sales. 

By looking at the annual report of FY 23, we can understand that a staggering 81% of AGEL’s infirm revenues were generated from selling of power to Adani Energy Solutions and Adani Enterprises. 

Funding Concerns 

Snowcap’s report states that Adani Green Energy Limited has generated limited free cash flow in recent periods due to its high debt servicing burden and falling project returns. As a reference, it cites AGEL’s FY 24 earnings call transcript, where the company’s own guidance for free cash flow to equity from its 8.1 GW operational portfolio was much lower than previous estimates.

Based on Snowcaps modeling, the report estimates that AGEL can meet only 50% of its 50GW target funding requirement by 2030, even after accounting for the announced equity injection from promoters. 

The report also highlighted AGEL’s history of claiming that its pipeline is “fully funded”, only to subsequently raise more equity capital. It cites several instances from company presentations in 2018, 2020 and 2022 where AGEL made such claims before securing additional funding.

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Conclusion

The report by Snowcap has raised a multitude of concerns that strike at the core of AGEL’s growth. As the company prospers, it becomes imperative for AGEL to address the issues raised by Snowcap in a transparent and comprehensive manner. Investors, analysts and industry observers will be closely scrutinizing the company’s response, seeking clarity on its accounting practice, project economies and most crucially, its ability to deliver on the ambitious 50 GW capacity target by 2030. 

AGEL must provide detailed explanations, backed by verifiable data and independent audits to avoid the concerns about the veracity of its financial reporting and operational claims. Failure to do so may erode investors confidence and cast a pall over the company’s ambitious growth plans. 

Written by Pavunkumar V M 

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