Adani group bets big as stressed power assets may add spark in long term

The Adani group last week injected over Rs 127 billion to add a new segment to its power value chain. The acquisition of Reliance Infrastructure Mumbai distribution business has made the conglomerate a coal mine to household power distribution chain at a time when the power industry is in distress.

Industry analysts do not expect direct synergies from the value chain but most see this as a long-term strategy. To begin with, the group plans to further strengthen the distribution link in its value chain. Anil Sardana, managing director and chief executive, Adani Transmission, told Business Standard, “Adani Transmission will pursue all possible opportunities in distribution franchises as well as public-private partnership (PPP) opportunities, as they arise.”

Kameswara Rao, partner, PwC, sees this as a conscious effort by conglomerates to reach out to the end-customer. “For the companies investing in distribution business, a key consideration is getting access to consumers,” he said.

The group is already present in city gas distribution, which can help it create a network for distribution franchisees.

At the other end of the spectrum is the group’s coal mining operations in India, Australia and Indonesia. These include two coal mining leases in Indonesia, five coal mines in India, including where it is a mine development operator, and one integrated coal mine project in Australia.

It has 10,480 Mw of thermal operational power generation capacity in India, besides 2,000 Mw of renewable energy generation capacity. In west and north India regions, it has transmission capacity, while the Reliance deal gives it a foothold in the power distribution business. The new Mumbai distribution business will be housed in Adani Transmission’s subsidiary, dubbed Adani Electricity Mumbai. 

Adani Transmission hosts the group’s power transmission assets, including two transmission assets acquired from GMR Energy for Rs 1 billion in 2016. The company also undertakes engineering, procurement and construction (EPC) jobs in the transmission sector. The gains from such an expansion may, however, be limited. “One should not over imagine the synergy of value chain integration in a highly regulated industry such as the power sector. From fuel to retail supply, most of the segments are individually benchmarked and regulated or auctioned. The scope for higher returns, therefore, comes from non-regulated services,” Rao said.

Of the multiple bets that the group made in the power sector, there were a couple of setbacks. Its plan for an integrated coal mine project in Australia has taken a long time to fructify. Closer home, Adani’s bet on the 4,620 Mw Mundra power plant caused a drain on it owing to a price rise in Indonesian coal.

“There may not be synergies, but such a presence helps balance risks in one segment, with gains from the other,” said an analyst, adding, “In the last decade, the group has spread across the value chain. However, it has also spent the past three years separating each of the sub-segments into different companies to either contain losses or maximise value.” The conglomerate carved out its transmission and renewable businesses into publicly listed firms — Adani Transmission and Adani Green  Energy — to unlock value. At the same time, it has separated the loss-making Mundra power plant into a subsidiary of Adani Power in 2017. The unit earlier was part of Adani Power as an asset and not a subsidiary.  

“In the total value chain, the stress is in the generation part, for which the firm is investing in distressed assets at the NCLT, which should help them negate the losses at Mundra,” said an analyst tracking the group.

Its average plant load factor, a reflection of how much generation capacity is utilised, was 38 per cent in April-June 2018, compared with 63 per cent in the same period last year, according to its June quarter results. The drop was on account of lower domestic coal availability at the Tiroda plant in Maharashtra and Kawai in Rajasthan, and commercial shutdowns due to high imported coal prices. Adani Power houses the thermal power generation assets for the group.

Adani Enterprises’ coal trading volumes in the June quarter decreased by 28 per cent to 11.52 million tonne on year-on-year basis. Earnings before interest, taxation, depreciation and ammortisation for this business was Rs 2.34 billion in the June quarter. As the country’s coal imports are expected to increase in this year, some expect it to help the trading business.

Rao says there is a long-term view to be taken. “The current state of the sector may look worrisome with distressed assets and low utilisation. But India is under served on energy and investors with a longer-term outlook will benefit from delivering growth and new energy services.”