Adani Transmission Research Report By Edelweiss

We initiate coverage on Adani Transmission (ATL) with ‘BUY’ and NPV based TP of INR154. Our conviction is underpinned by: 1) whopping INR3tn domestic transmission opportunity over FY18-22; 2) aggressively growing ATL capturing 20% of TBCB projects; 3) debt restructuring & additional leveraging boosting IRR of existing/M&A projects by 300-400bps; and 4) scale & synergy benefits as O&M costs are spread across projects. Hence, we estimate the company to clock 19% and 36% EBITDA and PAT CAGR, respectively, over FY17-19. We expect ATL to generate robust FCF, though we do anticipate high growth and M&A appetite. Cost overruns in new projects, aggressive bidding in TBCB projects, unfavourable regulatory changes and delay in true-up orders are risks.

INR3tn domestic transmission opportunity over FY18-22E

Over FY18-22, investments in the transmission segment are estimated to jump 1.5x compared to FY12-17 to a whopping ~INR3tn. Of these, ~INR0.9tn projects are expected to be awarded on tariff based competitive bidding (TBCB) basis. We estimate ATL to garner 20% share of these projects by virtue of its lead position in the domestic market.

Robust credit profile: Leveraging USP to enhance value

ATL has successfully restructured debt by issuing Masala bonds and USD/INR denominated offshore bonds worth INR45bn at a blended cost of ~9%. This has led to 100bps interest cost savings, ultimately boosting project IRRs by 150bps. Additionally, the company enhances debt proportion to 85% from 65-70% leveraging its strong credit profile, thereby releasing equity and boosting IRRs by another ~250bps.

Aggressive growth to drive economies of scale and synergy benefits

ATL’s strategic bidding approach and capacity expansion (2x to 11,500cKm) are likely to improve project IRR by 40-50bps as O&M cost is spread across projects.

Outlook & valuations: Potent growth platform; initiate with ‘BUY’

With existing assets generating INR10bn FCF p.a., ATL is positioned to satiate its growth and M&A appetite. Moreover, potential to fund its aggressive growth plan at lower cost lends an edge. In our NPV-based TP of INR154, we assign 25% to growth value. Our valuations could be in INR154-185 range if we assign a higher market share provided the company maintains same economies in expansion. Initiate coverage with ‘BUY/SO’.