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Even as Adani Transmission Ltd completes the acquisition of power transmission line assets from Reliance Infrastructure Ltd, it has begun talks to buy the Mumbai city power distribution business from the latter. If agreed to, it will be the company’s third significant purchase in less than two years. Apart from acquisitions, Adani Transmission has also won bids to construct, own, operate and maintain three transmission projects in Rajasthan.
Cumulatively, the company now has a network of around 11,350 circuit kilometres, which includes operational assets, projects under construction and acquisition assets. Two years back, Adani Transmission had around 5,000 circuit kilometres of transmission lines. Clearly, Adani Transmission is on an expansion spree. One year back, when Adani Transmission announced the acquisition of Reliance Infrastructure’s transmission line assets, ratings agencies warned that the transaction can reduce financial headroom.
As recently as this week, Icra Ltd said that further project acquisitions can have a bearing on Adani Transmission’s ratings. “Any further significant project commitments or acquisitions that can impact the funding requirements and cash flows substantially will be a rating sensitivity,” Icra said in a note.
For a transmission line asset owner like Adani Transmission, whose single-biggest cost once the project is commissioned is finance cost, a ratings sensitivity warning should be taken seriously as it can raise costs and hit returns in the future. But that does not seem to be the case. Yet, Adani Transmission is attempting an even bigger acquisition. How does it do this? The answer perhaps lies in its financial acumen.
According to Edelweiss Securities Ltd, Adani Transmission is leveraging its regulated business model financial profile (which gives it a better credit rating) to lower the interest cost and increase the debt portion in the projects, especially the acquired ones. As a consequence, it is not only able to release a portion of the equity (from the acquired projects) but also increase project internal rate of returns (IRRs).
“Typically, during the bidding process, the debt:equity is 70:30. Later, Adani Transmission, by virtue of its strong credit profile, enhances the debt to ~85%, thereby increasing not only equity IRR, but also the overall project IRR by at least 200 basis points (bps). A case in point is GMR’s assets,” Edelweiss said in a note. According to the broking firm, Adani Transmission was able to release around Rs40 crore worth of equity from projects acquired from GMR and reduce the finance cost of these projects by 160bps, thanks to debt restructuring or new debt issuance. One basis point is one-hundredth of a percentage point.
The broking firm expects Adani Transmission to follow a similar strategy for all its projects. Further, as Adani Transmission integrates recent acquisitions, Edelweiss expects the company to generate strong cash flows, which should support acquisitions. “With existing assets generating Rs1,000 crore free cash flow per annum, Adani Transmission is positioned to satiate its growth and M&A appetite. Moreover, potential to fund its aggressive growth plan at lower cost lends an edge,” Edelweiss said in a note.
The projections should comfort investors. Also, the Mumbai distribution business works on a regulated business model. It offers a growth opportunity. If the company reduces transmission losses and expands its customer base, it stands to gain.
But it has to be seen if Adani Transmission is aiming for too big an asset. The Economic Times has reported that the Mumbai business is estimated to be valued at Rs13,000-14,000 crore inclusive of debt. Comparatively, Adani Transmission has a market capitalization of Rs22,287 crore. According to a Mint report, Adani Transmission is also looking to raise fresh equity, which should give it financial leeway. Much will depend on the equity infusion and deal structure.
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