India’s Net Zero target and Renewable energy yields to take a big hit after the Adani- Hindenburg Saga

This article presents my viewpoint of the Adani- Hindenburg episode. With the medium of the following text, I discuss the potential consequences of the whole narrative that could play out in the Indian renewable energy sector.

Please note that this is not a stock recommendation report to buy or sell any financial security or instrument that I may mention in the text.

India’s quest to become a Renewable energy giant might come to a slowdown or a complete standstill after the recent Adani- Hindenburg episode. One of Adani group companies, Adani Green Energy Ltd (AEGL), is India’s largest renewable energy company which supplies renewable energy to the central and state governments. Founded in the year 2015, the company builds, owns and operates power plants through renewable sources like wind, solar and hybrid. As of October FY2022, AEGL has a locked-in portfolio of 20.4 GW of renewable energy capacity. This portfolio comprises both operational and under-execution/near-construction power projects.

As per InvestIndia.gov, India’s aggregate installed capacity of renewable energy stands at 408.72 GW as of November 2022. Now you might be wondering that AEGL controls just under 5% of the entire renewable energy ecosystem in India. And out of this 5%, 2/3 capacity is still under pipeline. Yes, that’s true, but this isn’t just about numbers. Sometimes storytelling and context do overpower the art of numbers crunching in the world of business and finance!

My argument is not based on the notion that Adani is the Rockefeller of Modiji’s govt. or that Adani is the sole flagbearer of massive Indian infrastructure or renewable energy projects. I know for a fact that this narrative has been long and gone in the media industry. And I wouldn’t propagate this same old, boring narrative because that would be a waste of time for you!

Achieving Net Zero target is no joke

India’s Net zero target of 2070 isn’t just the government’s responsibility. Yes, for sure, the government must initiate and bootstrap such projects however, the responsibility must be passed onto the corporate and industrial houses of the nation. Any government's fundamental responsibility resides over upholding leadership, maintaining order, public services and protecting the national & economic security.

I believe that the government should not engage in the business of manufacturing green electricity or any avenues of renewable energy. Yes, it can initiate such green projects and lay out policies and subsidies for these new industries.

Talking about new industries, I cannot stress more about 'Green Hydrogen' and its exploration! It's going to be the next big thing after EVs, or generative AI.

If we are to achieve Net zero carbon emissions then finding an alternative fuel source becomes a pivotal point. And that’s where green hydrogen comes into the picture, which is produced by extracting hydrogen gas from water with the help of green electricity (electrolysis).

As per my knowledge, the Adani group is amongst the first and only companies in India which have been taking the issues of renewable energy and green hydrogen seriously. The group shares the vision to become the world’s largest producer of green hydrogen.

Also, the group’s chairperson Mr Gautam Adani promised to deploy a humongous $70 billion in the field of Green Investments over 8 years, starting in 2022 (Fortune India, 2022).

Adani Green Energy even sees itself as the world’s largest renewable energy company by 2030 (capacity-wise). {I hope that all these aspirations of the group are not carved on the moon (driven by emotions).}

Leverage Problem

I am not sure how all of the above-mentioned developments and aspirations of the Adani group would be able to manifest now. For the time being, the group suffers from a chronic solvency risk since they abruptly called off their fully subscribed FPO. The sole mission of the FPO was to raise funds (equity) to pay off the necessary debt obligations.

There is extreme fear among the investing communities around the world concerning the Adani group of stocks. With every passing trading day, the group is bleeding market cap like anything. The situation got even worse when they abruptly called off their fully subscribed FPO and Credit Suisse assigned a zero lending value against the companies’ bonds. This move caused havoc for the group’s bonds listed in the European markets. The group’s bonds listed in the European markets traded south which surged the yields as high as 40% (Yield to Maturity).

In my opinion, the group went a little overboard on its financial leverage and business expansion plans. Excess Financial leverage is the critical pain point which has been stressed in the Hindenburg report too. In the case of Adani Green, which employs the most amount of debt in the group's debt portfolio, the management could have waited a couple of years for free cash flows to manifest and then taken off for their XYZ growth plans.

Hindenburg Allegations

Other major allegations brought to light by the Hindenburg report include Adani using shell companies and stock price manipulation practices. These shell companies, based out of tax havens, are being used to route funds back into the company's stocks, thereby reducing the effective free float. This allegation has not been proven yet under a court of law or SEBI. Thus, it would be vague to conclude that the group used unethical measures to rig their own stock prices.

As a matter of fact, the news of Adani stock price manipulation is not brand-new to the investing community and there are numerous media articles mentioning this scandal even before the Hindenburg report. In June 2021, business journalist Suchita Dalal originally mentioned this infamous scandal on her Twitter handle. Since then this news has been discounted in the markets and ironically we have been witnessing unconvincingly sky-scraping valuations of the group companies with PE ratios racing beyond 800 times (check the image below). Thanks to SEBI, they couldn’t do anything about the issue back then, and I am sure this time it would be no different.?

In my opinion, there are no red flags in the Adani group’s vision concerning India's future and becoming a renewable energy giant or becoming the world's largest green hydrogen manufacturer. As a corporate house, their vision aligns well with the growth of the country with all the right ingredients that make them destined to succeed. Yes, I am too optimistic about the group's success and I am not hedging here! Concerning the allegations of stock price rigging, I wouldn't change my views until proven guilty by an Indian court of law or by SEBI.

But what about India’s Net Zero & renewable energy sector now?

Investing in renewable energy requires enormous funds as upfront costs in the form of R&D like the exploration of hydrogen gas, and how the energy/gas would be stored, transmitted and distributed. All of this requires huge investments with little to no returns during the initial 10-20 years of the business cycle. This justifies the low-interest coverage and an extremely high Debt/ EBITDA multiple prevailing in the industrial sector. However, this doesn’t mean that these businesses don’t command hefty earnings growth, they do but only after the long and painful initial years. All of these nuances combined make the business model of a renewable energy company an extremely risky one which requires implausible grit and great business acumen to pull off.

Having said all this, I believe there are only a handful of corporate houses in India that would really dare to promote such business propositions; Additionally, it is increasingly hard for investors to fund such businesses due to extremely high PE valuations of over 100 times (median), which technically translates into a 100 years to fully recover funds from such investments.

With this, I rest my case!