May 5th, 2015—Adani Enterprises’ corporate restructuring is a positive strategic move that enhances overall shareholder wealth by better aligning the Adani Group with minority shareholders and with the new strategic opportunities emerging in the Indian electricity sector transformation, according to a new report by the Institute for Energy Economics and Financial Analysis (IEEFA).

“India’s energy sector is rapidly transforming and Adani’s restructure is enabling the company to change with it,” said Tim Buckley, IEEFA’s Director for Energy Finance Studies, Australasia. “Gautam Adani has his finger on the pulse, aligning his company to benefit from the opportunities created by a long-term economic growth transition strategy for India underpinned by lower carbon, less pollution- intensive development.”

Buckley said that over the next five years, the Indian energy sector must undergo an enormous transformation, with the electricity sector slated to deliver in the order of a fifty percent expansion in net supply by the end of this decade.

He said IEEFA is optimistic that as momentum builds, the Indian electricity market will rapidly shift towards a significantly higher reliance on renewable energy and energy efficiency. This is predicated on the fact that once built, renewable energy plants and energy efficiency initiatives have an almost zero marginal cost of production, hence immediately work to undermine coal-fired power plants that have a high marginal cost of production.

Indian Energy Minister Piyush Goyal has set extremely ambitious targets with regards to increasing Indian energy supply, including 175 gigawatts (GW) of additional renewable energy installation by 2022, a US$50 billion (bn) modernisation and expansion of the electricity grid and a possible trebling of India’s domestic coal production to 1,500 million tonnes per annum.

Many obstacles remain, particularly given India’s history of bureaucracy, excessive financial leverage and loss-making, subsidised discoms, but Adani in particular is buying in to the transformation.

Key elements of Adani’s strategic pivot include:

  • A demerger of Adani Ports and Adani Power from Adani Enterprises to simplify the Adani Group structure and improve the transparency and free float of three of the listed entities;
  • Adani Enterprises’ plan to move into upstream solar module manufacturing and into downstream solar project development. These include a proposed US$4bn solar manufacturing joint venture with Sun Edison and a 10GW solar park in Rajasthan in joint venture with the Rajasthan government;
  • Adani Enterprises’ aim to separately list Adani Transmissions after several years of heavy capital investment; and
  • Adani Ports’ continued heavy investment in its strongly performing Indian ports operation, undertaking a series of acquisitions and greenfield terminal developments to position the group to best advantage it for the expected acceleration in economic activity across India.

While Adani Enterprise’s bidding in the current Indian coal deposit auctions marks Adani’s move into domestic Indian coal mining, Minister Goyal’s plan to cease thermal coal imports and diversify the electricity sector away from coal in total raises significant questions over any remaining strategic rationale to invest US$10bn in the company’s Carmichael coal project in the Galilee Basin of Australia.

“Overall, the restructure increases free float, transparency and simplicity,” said Buckley. “This is a positive in terms of enhancing the equity market value and has been reflected in the significant outperformance of Adani Enterprises relative to the Indian equity market in the first three months of 2015.”

“However, driven by structural changes in both the Indian electricity market and the global seaborne thermal coal sector, Carmichael is already a stranded asset in the making. With Adani Enterprise’s post-restructure market capitalisation of US$2.5bn – equating to an 80% reduction – attracting finance for the Australian mine proposal looks increasingly remote,” Buckley said.

“Furthermore, post-restructure, Adani Enterprises does not own or control any coal-fired power plants and as such will no longer be a vertically integrated coal-to-electricity company. As a consequence, the board of each company has a fiduciary duty to represent their own unique shareholders and will require arms length transactions by the separate and independent listed companies.”

“In addition, with Adani Enterprises also focusing on two major new solar proposals costing US$9bn, Adani Enterprises financing will be constrained and hence Carmichael will likely be collateral damage.”

Full report is available at: http://ieefa.org/wp-content/uploads/2015/05/Adani-Restructuring-2015-May.pdf