Adani Energy Solutions valued at $18.5B; revenue to grow 20%

Adani Energy Solutions Ltd, the power transmission utility of the Adani Group, is valued at $18.5 billion at the enterprise level and strong business growth is likely to propel a 29% compounded growth in its pre-tax profits over the next three years, a report said.

AESL has a diversified portfolio that includes transmission assets, distribution assets, and a smart metering business.

"With an enterprise value of $18.5 billion, we believe AESL to be a very attractive way to play the rapidly expanding energy markets in India," global brokerage Cantor Fitzgerald said, initiating coverage of the company.

It believes AESL offers growth unlike any other publicly traded utility/energy company across the US, Europe, or Asia. "We forecast total revenue to grow at a CAGR of 20% from FY24 to FY27 and adjusted EBITDA to grow at a CAGR of 28.8%."

This compares to peers growing revenue at low single digits and EBITDA at mid-single digits.

Stating that it is growing meaningfully faster than its peers, the brokerage said it believes AESL is a more diversified business.

"We expect its transmission business will see strong growth as it completes the nine projects it has recently been awarded over the next 18-24 months (and we expect it to win more contracts over the coming years), its distribution business should be able to grow at/near double-digit rates as it continues to add to its regulatory asset base (RAB), and its smart metering business is just about to start generating meaningful revenue/profits as it works through its 22.8 million smart meter backlog (to generate $3.2 billion of income), and it could win another 40 million smart meters (which will add another $6 billion+ of income)," it said.

It saw robust growth over the next four years as AESL will continue to outgrow peers for at least the next decade.

This, it said, is a result of India being still underdeveloped relative to more mature markets, and as it develops and uses/needs more electricity, AESL's transmission and distribution businesses will stand to benefit.

"Following a recent capital raise (which was meaningfully oversubscribed by 3x), it is now well-funded to drive growth across all three major segments," Cantor said, adding AESL shares currently trade at a 60% discount to peers.

AESL was formed when Adani Enterprises demerged transmission assets into a new entity named Adani Transmissions in 2015. Adani Transmissions then acquired distribution assets from Reliance Infrastructure in 2018 and acquired distribution assets from MPSEZ Utilities in 2021.

It announced it was entering the smart metering industry in 2022 and formed a new cooling solutions business in 2023, which ultimately led the company to rename itself to Adani Energy Solutions, as it now has a much broader portfolio relative to being a pure play transmission/distribution company.

In AESL's most recent fiscal year FY24 (April 2023 to March 2024), its transmission business accounted for 28.4% of revenue and 52.6% of EBITDA, while its distribution business accounted for 71.6% of revenue and 36.3% of EBITDA.

Its business is linked to India needing more electrification infrastructure. India is home to 1.4 billion people and is the most populous country in the world. "We still believe India as a nation is only just beginning when it comes to energy demand," it said.

As more homes connect to the grid, incomes rise and those homes are filled with more products that use electricity (refrigerators, AC, etc.), the demand for electricity will only increase.

To meet this growing demand, India has heavily invested and promoted renewable energy. As more electricity is generated from renewables, infrastructure to transmit and distribute that electricity will only become more important, and that is entirely where AESL lies.