"You're buying businesses, not just any stock.” - Warren Buffet

In my previous articles, Nalwa Sons & IAPICL, we tried to understand what value investing is and based on some parameters we tried to identify the unlocked potential of few stocks. This is extension of those two articles because ever since I have started looking out for investment, believe me this is the one such approach that has never failed to amaze.

Before we proceed further, I would like to share some words of wisdom that I got to hear from one of the world’s best investor, business tycoon & a philanthropist, none other than Mr. Warren Buffet. I always keep on looking out for his speeches or interviews. On a late Sunday afternoon, I came across this interview of Mr. Buffet on aired on CNBC. Let me present you with the crux of what I heard!

There are an infinite number of reasons you might decide to invest in a certain company. But Berkshire Hathaway CEO Warren Buffett says there's one you should always avoid: Buying a stock merely because you think it's going to increase in price. Instead, you should invest in companies that you both understand and believe will offer long-term value, according to Buffett.

No matter how much or how little you're buying, you should be able to get your reasoning down on paper without relying on outside resources.

Out of all, I personally loved was - "You're buying businesses, not just any stock.” That was the moment when I actually thought of writing this article.

So, let’s start with a little different today!

Weekly return of 14.81%, Monthly return of 81.24%, Quarterly return of 74.62% & Yearly result of 1113.49%!!!! I know you must be on your toes to know the script………….

Let me reveal this with a surprise! Here is another screenshot of my linked.in where I recently posted a short-term jackpot for you guys.

My target was 523 and today stock is trading at 665. Hope some of you could have minted an attractive return ??

ADANI GREEN ENERGY LIMITED (AGEL)

The Story

With the shift in electricity generation from clean energy sources, India eyes on having around 60 per cent of its installed electricity generation capacity from clean sources by 2030. In September last year at the United Nations Climate Action Summit, Prime Minister Narendra Modi had announced increasing the renewable energy target to 450 GW by 2030 from 175 GW by 2022.

India’s total installed renewable capacity as of Mar 2020 is only half this number and solar contributes a meagre 37 GW. That means we need another 63 GW in 2 years to achieve our intended target. So, it is very much clear that it is one of the most focused sectors as of now.

The Government of India (GOI) started to incentivize private players who wish to ban upon the opportunity and make the vision become reality. Several solar parks have been created for power generation projects. This is being done to make businesses get easy access to land & other resources. In return, they are expected to set up power plants and generate electricity so that state distribution companies (DISCOMs) can channel this energy and power millions of homes across India.

Generally, these businesses come into agreements formally known as power purchasing agreement (PPA). Under this agreement, the businesses are held responsible for design, procurement, installation of the power plant and management. And they are the ones who are obliged to make heavy upfront investments. But here’s an interesting fact, in order to generate returns on their investments these businesses can decide on a tariff rate and sell electricity at this fixed price to DISCOMs for a pre-specified number of years. Generally, PPAs have a tenure of 10–25 years and this is where Adani Green Energy Limited (AGEL) comes in.

AGEL

Incorporated on January 2015, Adani Green Energy Limited (AGEL) is one of the largest renewable companies in India, with a current project portfolio of ~5.29 GW and an operational capacity of ~2.32 GW. The electricity generated is supplied to central and state government entities and government-backed corporations.

On the back of long-term Power Purchase Agreements (PPAs) of 25 years with central and state government entities, AGEL has leveraged its capabilities and expanded its presence across 11 Indian states. The Company deploys the latest technologies in its projects. With a portfolio of 54 operational projects and 12 projects under construction, AGEL is driving India on its renewable energy journey.

Such a power pact statement isn’t it? But let’s keep digging!

Key Highlights

• The company operates Kamuthi Solar Power Project, one of the largest solar photovoltaic plants in the world.
• In March 2018, upon acquisition of 49 percent equity shares of Kodangal Solar Parks Private Limited, the latter became a joint venture of AGEL.[8] In 2019, AGEL acquired the rest 51 percent equity share as well.
• In late 2019, AGEL became the first Indian company to offer investment-grade US dollar green Bonds worth US$ 362.5 million to foreign investors.
• In mid-2019, AGEL acquired Essel Group's solar power portfolio of 205MW located in Punjab, Karnataka and Uttar Pradesh for US$ 185 million (approx. ?1,300 crores).[24] AGEL has also agreed to buy out the remaining 480MW solar energy portfolio of the former which are under construction.
• In May 2020, AGEL won the world's largest solar bid worth $6 billion by the Solar Energy Corporation of India (SECI).
• Adani ranked world's largest solar power generation asset owner.

Not enough points, right? Let’s dig in more! And this time into the financials………

From the above screenshot, let’s try to understand certain parameters.

High Debt

Adani Green Energy Limited (AGEL) is having high debt burden of Rs. 14,866 crores and the debt to equity ratio stands at 19.48. Before we make any judgement on the same, you’ll appreciate the fact that AGEL has been in the business for past 5 years & recently we discussed that the businesses operating under renewable energy sector are responsible for design, procurement, installation of the power plant and management. Since the company has most of its projects under development it is quite justified that why AGEL is under huge amount of debt. While they are under heavy debt burden, they managed to rope in TOTAL recently (one of the world’s largest Oil and Gas company) to acquire a 50% stake in operational projects worth 2.14 GW. Adani received Rs. 3,700 crores in return by which they can pay off some part of their debt. Now think in the next 5-10 years when all these projects become operational, how much revenue this giant can churn!

Altman Z Score

Talking about Altman Z Score right after declaring high debt is what makes you feel a little better. The Altman Z-score is the output of a credit-strength test that gauges a publicly-traded manufacturing company's likelihood of bankruptcy.

The Altman Z Score of Adani Green Energy Limited. is 4.45. Although the number is way above but not as impressive as we have seen in the last two articles. But you’ll appreciate the fact that despite of having high debt the company still has no chances of bankruptcy.

Promoter Holding

Promoter holding is an important factor while considering any investment opportunity. Promoter holding above 60% is considered as a good sign as it suggests that the owner have faith over his company and is not ready to sell his stake. Here in case of AGEL, promoter holds 74.92% shares which is a good sign. It is quite visible that 6.93% holdings have been pledged but I’ve been tracking this company for a long period and the promoters are buying their pledged shares frequently. Also, there has been constant increase in FII’s holding which means even the smart money is investing into this business.

Piotroski Score

The Piotroski score was named after Chicago Accounting Professor Joseph Piotroski, who devised the scale, according to specific aspects of company financial statements. The Piotroski score is a discrete score between 0-9 that reflects nine criteria used to determine the strength of a firm's financial position. The Piotroski score is used to determine the best value stocks, with nine being the best and zero being the worst. Aspects are focused on the company’s accounting results in recent time periods (years). For every criterion met (noted below), one point is awarded; otherwise, no points are awarded. The points are then added up to determine the best value stocks.

How Piotroski Score Works

The Piotroski score is broken down into profitability; leverage, liquidity, and source of funds; and operating efficiency categories.

If a company has a score of 8 or 9, it is considered a good value. If the score adds up to between 0-2 points, the stock is considered weak.

The Piotroski Score of AGEL comes out to be 7.00 which is considered to be a good score and it also means that the firm is financially strong and is a value stock for sure. Now you might have understood that why we shouldn’t always avoid companies with debts.

Quarterly Results

Since the company is new to the business, it is always better to have more data. So, we will take a close look at the quarterly results. Here are some key points:

• Sales – AGEL’s sales from last 3 years is growing at a CAGR of 71.91% and the trailing twelve-months (TTM) sales is growing at 18.68%.
• Operating Profit – Operating profit serves as a highly accurate indicator of the business’s potential profitability because it takes into consideration the net revenue & operating expenses. Operating profit of the company for last 3 years is growing at a CAGR of 40% and TTM is growing at 142.69%.

You might feel if AGEL was profitable then why the business was reporting net loss. The answer lies in the first point that we discussed. High Debt means high interest cost i.e. the business was profitable but they had to incur heavy interest payments due to which operating profit becomes net loss for the company. But as discussed, in the next coming years, company will start converting these losses into profits.

Cash Flow

A)    Operating Cash Flow

Operating cash flow is an important benchmark to determine the financial success of a company's core business activities. Here we can see the company is able to generate not only positive but constantly increasing cash flows which means company is operating efficiently.

B)    Investing Cash Flow

Investing cash flow shows the cash generated or spent relating to investment activities that a business undertakes. However negative cash flows might not be a good sign but as I look a little deeper. The negative cash flows are because the AGEL is aiming towards expansion and buying fixed assets and other investments which will be fruitful for the company in the coming years.

C)    Financing Cash Flows

Financing cash flow shows the proceeds from borrowings/shares and repayment of borrowings including interest paid. The cash flow is positive in this section as the company is borrowing in order to expand but the good thing is company is making constant repayment of loans as well. Also, from the last two years the business has not witnessed any proceeds from shares which means the promoters are not ready to sell their stake which is a positive sign from investors perspective.

Creditor & Debtor Days

Debtor days simply means the number of days it takes for a company to convert the trade receivables into cash. Ideally, this should be less than 90 days but can go upto maximum 120 days. As anything above 120 days would simply means that company’s debtors hold money for longer duration and making company a cash deficit company. AGEL is constantly decreasing debtors’ days and have been successful in doing that. As on today the number stands at 106 days which means now they are able to convert debtors into cash more easily. But here is another interesting point, Creditors Days. Creditors Days simply tells us the number of days a company takes to make payments towards their creditors. Looking at the numbers and comparing it with debtor days, AGEL is constantly settling their suppliers at earliest which could make some people feel that they have not much of the power to control the market but I feel that they are settling them in order to ensure adequate supplies. As the company is in its growth stage it is important for them to have strong supply. Here AGEL is not only building strong supply but constantly improving the debtor days to have more and more cash available with them.

Modified Montier C-Score

Montier's C-Score is made up of six red signals. These are scored in a simple way, with a 1 for yes and a 0 for no. These are then totaled to give a final C-score ranging from 0 (no evidence of earnings manipulation) to 6. But modified montier’s C-score is made of 9 signals which are as follows:

1.     Is there a growing divergence between net income and operating cash-flow? This is based on the simple observation that earnings can be inflated, but cash flows are hard to manipulate.

2.     Are Days Sales Outstanding (DSO) increasing? When a company stuffs the dealer pipeline, this number increases.

3.     Are days sales of inventory (DSI) increasing? This is a sign of slowing sales.

4.     Are other current assets increasing vs revenues? Since managements know that DSO and/or DSI can be closely watched, they may use this to hide something.

5.     Are there declines in depreciation relative to gross property plant and equipment? Companies may alter their estimate of useful asset life to enhance reported earnings.

6.     Is total asset growth high? It has often been observed that high asset growth firms underperform.

7.     Are debtors as per cent to revenue increasing? This means that the company is selling more on credit and realising not cash.

8.     Is asset quality improving or declining? Asset quality is measured as the ratio of non-current assets other than plant, property and equipment to total assets. Which means the company may have high non-productive assets.

9.     Is accrual ratio high or low? Total accruals calculated as the change in working capital accounts other than cash less depreciation. Accrual ratio gives the difference between the accrual accounting and cash actually made out of it. A high ratio means that there is a high difference between the cash realized and earnings reported.

AGEL’s modified C-score stands at 2 out 9 which means that there are least possible chances that creative accounting is being done to inflate the numbers.

Technical Analysis

In my opinion, AGEL has completed Elliot Impulse Wave cycle and stock can continue a further upmove and then a minor correction could be seen which will be Elliot Correction Wave. Once the correction is done we can expect some good returns from AGEL. MACD line shows a buying signal but RSI supports our view of expecting a correction as RSI is near it's overbought zone.

Conclusion

So today we analyzed Adani Green Energy Limited on certain parameters and in my opinion the stock was able to make me realize the unlocked potential that it has! In my opinion it’s a definite buy as this company looks good on the parameters discussed above and recently it has been reported that Indian Railways plans to set up solar plants on its vacant land along tracks and AGEL is eyeing on it. Lastly being the largest solar power generation company of world makes them a pioneer to bet on as we expect a rapid shift from thermal power generation to renewable energy.

This was my opinion on the stock. Would love to hear your comments! Kindly do share your feedback ??.