Adani Energy Solutions Limited (ADANIENSOL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Adani Energy Solutions Limited Q2 FY '25 Earnings Conference Call. We have with us on the call today Mr. Kandarp Patel, CEO, AESL; Mr. Kunjal Mehta, CFO, AESL; Mr. Anupam Misra, Head Group Corporate Finance; and Mr. Vijil Jain, Head IR, AESL. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kandarp Patel. Thank you, and over to you, sir.

Hello, good morning, and best wishes to all investors and analyst friends who has joined on the call. I hope all of you must have got an opportunity to go through the results that we have published and uploaded on our website. Having -- this was a very strong performance that we reported in quarter 2. And in fact, all the three existing business, which is Transmission, Distribution and Smart Meters are in a phase of massive growth. You must have seen those numbers. Another business that we were incubating so far, which was -- which is C&I Power Solution in business, I think from next quarter onwards, you will see contribution coming also from this vertical. During quarter, AESL raised the equity of INR 8,300 crores through QIA [indiscernible]. And in fact, that's very helpful to AESL for fueling this CapEx growth in Transmission and smart metering. In the current quarter, besides the project under execution, which was INR 17,000 crores we have secured four new transmission projects. And with that, our project under construction has reached to [ INR 31,700 crores ] from INR 17,000 crores. Once those projects are completed of the INR 31,000 crores equal contribute to EBITDA of about INR 4,200 crores, and the time line of these projects entire [ INR 31,700 crores ] CapEx would be around 2 years. So 24 months, you will see those assets getting commissioned in the current year, next year and some of them in the early part of next to next year. In the current quarter, in fact, we did exceedingly well as far as CapEx deployment is concerned, we deployed a CapEx of INR 3,000 crores in the last quarter. That was 2.5x of the CapEx that we deployed same quarter last year. And same is the case in total CapEx of first half of the current year, which is INR 4,400 crores. which was against INR 2,000 crores, which is again 1.7x of the CapEx that we deployed in the same period last year. So as I said, in fact, in our business, it is important to understand that whenever we deploy CapEx, we to that extend, lock-in profitability. So asset -- if asset is long gestation, it might reflect at a particular time. But as investors, if you have those numbers, and then you are secured that this kind of profitability or revenue has already been locked in. So in fact, as the AEML, AESL, we closely monitor CapEx number on a quarter-to-quarter and a 2-month basis. This CapEx number will also get accelerated for a simple reason that first half was also having a monsoon. Now we will have a clear season for next 6 months, and we think that we'll be able to close this year with a CapEx of about INR 10,000 crores at the end. Now this will probably bring the growth in EBITDA that we projected, which will be in excess of 15 percentage. As far as operational update is concerned, we continue to do excellent work as far as operation is concerned, we maintained that availability of 99.7 percentage. As a result, we also own INR 35 crores of incentive. We added 140 circuit kilometers to our network, and now we have reached 23,000 circuit kilometers plus. As far as distribution is concerned, the growth in electricity sale was to the tune of 7 percentage. And continuously with our endeavor, we have been able to reduce distribution losses further. Now it has reached to 4.85%. And with all this effort on operation and project side, the financial numbers also accordingly showed the results. So revenue increased by 23 percentage reaching to INR 4,200 crores, EBITDA as well increased to -- by 31 percentage. It has reached to INR 18,091 crores. Similarly, PAT also increased speed growth and reached to INR 773 crores. Similarly, cash profit has also shown very healthy growth and it has reached INR 1,026 crores. While we do this CapEx, but we make sure that we operate this business with a financial prudence and discipline. And that's how we have also maintained that net debt to EBITDA at the 3.1x. Now as far as the outlook is concerned, transmission remains major area where we will continue to focus. And India is a massive opportunity as far as transmission is concerned. Besides, we already got our four projects, but still the bidding, which is going to happen in the next 6 to 7 month time is of the order of INR 85,000 crores. And we expect that we will maintain our market share. There could be opportunity to increase the market share as well, but we will make sure that we follow the prudent investment decision. And even if we take the current market share, then we hope to get about INR 15,000 crores to INR 20,000 crores worth project more in the next 6 months' time. Distribution, the [ Rev ] currently is INR 8,400 crores and it will continue to grow as we continue to invest in distribution network in Mumbai. In fact, one of the projects which were supposed to commission in last to last quarter got delayed because of geographical surprise. But now that project is on a track, and we expect that to commission in next quarter, that will add about INR 1,000 crores of [ Rev ] into Mumbai asset base. As far as smart meter is concerned, now we have started progressing very well. In fact, in last quarter, we deployed about -- close to about 4 lakh meters at the rate of about 4,200 meters per day. In October so far, we are deploying about -- at the rate of about 7,000 meters per day. And now we expect to significantly step up the implementation plant because now we will have that clear season without any monsoon. And we expect to add about 30 to 35 lakh meters in next 6 months. So we'll close year by -- with the installation of about 40 to 42 lakh meters. So these are the basic details, and I will hand over to all of our friends, we will give further details during the question and answer.

[Operator Instructions] First question is from Mohit Kumar from ICICI Securities.

First question on the transmission. Can you just help us with the transition CapEx which you will do for the next 3 years based on the current pipeline. Is it possible to talk about the expected EBITDA of the lock-in portfolio?

So Mohit, as I said, the project and the perception is -- of the order of INR 32,000 crores. which is already secured. And this time line of all these projects are about 2 years or 24 months. And we also expect to add another INR 15,000 crores at least to this kitty. So it will reach to about INR 45,000 crores of projects under implementation. And with that, we will have EBITDA in excess of INR 5,000 crores. In fact, with this INR 32,000 crore project under construction, it will contribute about INR 4,200 crores and another 15,000 projects will contribute about INR 1,600 crores to INR 1,700 crores of EBITDA. And this will happen over the '24 and the new project that we will get will be in 30 months from now. So that's the outer limit.

Understood, sir. And given the fact that there is a huge bidding opportunity. I think first half has been great, and I think you have won your fair share. But also, I believe the H2 seems to be -- likely to be again, again, a very massive opportunity. How do you think about the -- can you just explain us the transmission bidding opportunity and the pipeline, if you're looking for the next 18 to 24 months?

So Mohit, we have a clarity as far as the next 6 months is concerned. So those projects are already identified for bidding approved for bidding, and the process has reached to a certain level. So in next 6 months, Mohit, we expect to see -- witness a bidding of about INR 85,000 crores CapEx of transmission project. In fact, this also includes two HVDC projects, which we were supposed to get bidded in last quarter, but it has spilled over and now it will go under the bidding. And on a long-term horizon, 1 to 1.5 years, there will be another at least INR 100,000 crore of CapEx that will come under the bidding.

Understood. The [indiscernible] that there are two HVDC bids, right? First one, I think already happened. And the second one is -- can it happen in the second half? Or do you think it will take maybe spill over to of F'26?

Yes. So certainly, it will happen in the second half. And another HVDC, which is the Rajasthan HVDC, which got rebidded, is likely to happen very soon.

We're expecting apart from one caught [ up ], which already happened, expecting other two HVDC bids, right? Am I correct?

Correct. Correct. Correct. One of Rajasthan and one of [ Khabra ].

Understood. And sir, on the -- second on this smart meter, of course you spoke about INR 30 Lakhs, INR 35 Lakhs in the next 6 months, you are trying to reach INR 42 lakh in the -- by the end of year F'25. How do you think about the F'26 and F'27 given the progress on all these areas? Is there something -- there's a number which you think you can guide us?

Mohit, come again, sorry? Number for the next year?

For the next year, F'26 numbers and F'27 numbers, given your portfolio?

So Mohit, what we have got right now is about 2.6 crores meter. We will complete about 45 in the current year. But now all those issues that we had, in fact, when you start implementation, there are a lot of integration issues and there are a lot of coordination, which is required to be done with the distribution because you are getting into their operations. So there processes are also need to be aligned and your processes are also need to align with the distribution companies processes. And every distribution company has a different processes for billing and meter installation and recollection. So we have gone through that entire phase, entire integration is done. Everything is working stable. And now we only have to go and deploy meters on the ground. So in fact, in the current month, we had seen it ramping up to 10,000 meters a day from 4,000, which was there in the last quarter. With that kind of work that we have done on the ground, at least we'll be able to add about crore meters next year, and balance one in the subsequent year. And meanwhile, we will also add further meter as and when the opportunity comes in. So about INR 10 crores bidding opportunities yet to be -- come on the -- come for the bidding.

I think a couple of bids are out there, right, sir. Tamil Nadu is one large one, which I think is supposed buzz but I think it got bid out last year, still to be closed. Am I right in that?

Yes, yes. So Tamil Nadu, we expect that it should get closed in a couple of months' time.

Understood. My last question on the C&I. Of course, you did touch on the topic, but the -- but we are trying to figure out, what are your targets? What is the business model? What are the revenue model? Can you just please help us with some kind of basic info?

Yes. So Mohit, this is a very exciting thing, especially, personally for me because I started my career with the power trading firm. That's my first love intact, and the C&I business. See, what we have done and what we have realized is that now with a growing economic activity in the country, there are many, many customers who has a very distinct requirement, which conventional distribution company are not able to meet like if you take a case of data centers, we would want a certain level of reliability. At the same time, they would want a certain percentage of green penetration. And they will also want power supply to commence and infrastructure to get ready in a particular time frame. Because then they will have to -- they will also have a similar back-to-back contract with other players. Now this offers us a huge opportunity because we have a presence in generation, renewables generation, transmission as well as distribution. And as a distribution of retail arm, we will be able to leverage our renewable capacity that we are creating in the group. And in case this concept, we started in-house. So last year, we commenced this kind of activity for cement business, port business and [indiscernible] business. In fact, today, we are managing power supplies for about 100 establishment of these three businesses across the country. And having tasted ourselves, now we have started getting into contract with a third party. In fact, currently, we already have a contract about 20 megawatts. We are into active discussion for contracts for 100 -- about 250 megawatts. So roughly, in fact by the year-end, we will be able to close or we will have a volume of about of 5,000 million units, and that will contribute on an annualized basis of about INR 150 crores of EBITDA, moving forward. And this, I'm talking without any major contracts with any data center player. There also, we are actively discussing with Googles and Microsoft of the world. And we hope that we'll be able to finalize contracts with them very, very soon. This is going to be a very exciting business for -- you'll see a lot of action happening in this side in next and next quarter. And largely, you will see a lot of activity in next financial year.

The next question is from Brett Knoblauch from Cantor Fitzgerald.

Maybe first, on the smart metering deployment. How difficult is it to ramp up from? I know you guys said you guys were at 4,000 a day, and now approaching 10,000 a day. What's the biggest bottleneck from you, why you're not doing more on a daily basis? Is it labor? Is it inventory of the meters itself? Maybe just help explain that a bit.

See, today, so far, we were constrained by two, three factors. Obviously, one, we have multiple geography. And so we have a contract with Assam, Andra, Bihar, Maharashtra and Uttarakhand and BEST, a distribution company in Mumbai. So when you start deploying meters in any geography, first, you have to get those integrations done with a distribution company that takes some time. So what we did, we started with one by one distribution company. So first, we started with Asam, then we started Bihar, then Maharashtra, then Andra, and now we have also started Uttarakhand. So as we were starting a geography one by one, the total rate of deployment was less. And also there were issues around getting a good labor. Now having integrated with all the distribution company and having arranged all those contractors and skilled labor. In fact, we have undertook a massive training program, and we trained about 10,000 people as far as metering is concerned, and that is helping us now. So with this kind of deflation now, we feel that we'll be able to significantly ramp up the rate. We have already reached to 10,000 from 4,000, and we expect it to take it up to 16,000 to 20,000. So we'll operate between 16,000 to 20,000 meters a day from next quarter onwards.

That's super helpful. And then on the CapEx guidance, I think you said some much around INR 10,000 crores for the year, which implies, I guess, just over INR 6,500 crores for the rest of the year. Could you just maybe break down how much of that is going to be between the three kind of segments of transmission, distribution and smart meter? And should we expect relative to the first half smart metering to have significant growth?

So out of this INR 10,000 crores, the transmission would be around -- sorry, distribution would be around INR 1,600 crores to INR 1,700 crores. The smart metering would be around INR 3,000 crores, and the rate will be from a transmission side. But the biggest advantage as AESL to us is that eventually, AESL's profitability is largely defined by the CapEx. Now since we operate in three segments, even if there is some slippage in CapEx in some business vertical, we have an option and opportunity of pushing the CapEx in another vertical of the business. In fact, that makes an AESL distinct from all other players in the market.

And then maybe just one more. I think you guys talked about how EBITDA has grown at a CAGR of, call it, 9% over the last 4 years. It was 15% on a trailing 12-month basis as of the end of the second quarter. Can you just maybe big picture, talk about where you expect EBITDA growth to go from here? Should we expect, call it, that 15% rate to accelerate? Or maybe just provide some framework for us.

So certainly, it will be in excess of 15 percentage, now if you see the already project under execution and those projects including smart meters will get concluded in next couple of years. So that itself is INR 50,000 crores of CapEx. And therefore, the growth is going to correspond to that kind of CapEx, which, in my view, it will be in excess of 20 percentage.

The next question is from Dhruv Muchhal from HDFC Asset Management.

Sir, the first question is on the C&I business. So under this business, can you target only the ISTS connected customers or you can even approach the intra DISCOM connected customers? I mean just trying to understand what's the landscape that you can address?

So Dhruv, we can connect. We can target both. In fact, ISTS as well as interest rate consumers. You must have noticed that open access regulation, which has come from -- for this green energy the earlier restriction of allowing open access for consumer up to 1 megawatt, has also been diluted for green energy. So therefore, in fact virtually all the customer in the country can become a target for you.

Got it. And what's the economic model here, you do a back-to-back with a generator, say, for example, any green developer, you have loaded group and a similar contract with the customer. And you earn the spread on it. So how does the model work, the economic model?

So what we do is we assume responsibility, end-to-end and up to the delivery of power and also maintaining those connected assets so that the reliability is ensured. So even last mile connectivity, if we need to invest, we invest and maintain that part. And from a sourcing side, we will have a bunch of assets that we will secure. And see, one of the biggest advantage that you can create is also from the diversity and aggregation of demand and supply. Now if you have a one side number of assets supplying power to you and on the other side, you have a number of customers, then you will also be able to create a lot of advantage because of diversity in demand and also in generation and also from aggregation side.

Got it. Got it. Perfect. That's helpful, sir. And sir, the second question is on the transmission, the outlook and bidding. So if I look at the overall landscape, it seems, one of the larger players in the system has got a very reasonable order book now because it seems has been more aggressive in the -- I mean you got a larger share in the bids in the past. So do you think -- and one of the concerns in the transmission sector earlier was that the IRR is not because of lack of bidding and also a number of players. But given the changing landscape, do you think IRRs would be better in future bids as some of the recent bids? Or there are -- still the intensity is very high?

So Dhruv, you must have seen the IRRs have increased in the same time in the bidding. So the level of aggression certainly has reduced. And we expect that if not, it will further allow us to increase IRR, but at least, we don't see any condition where there will be a lot of aggressive bidding. Forcing you to reduce our IRR. I don't see that is happening because already INR 85,000 crores notified for bidding and another INR 100,000 crores will come in next year and in those time frames. So there is a huge pipeline available for all the players.

And sir, lastly, is that when we look at the execution time period, which the system is allowing is about 24 months, I think now it's about 24 months, which still seems a bit tight given the overall execution cycle that we have seen historically. So when you bid for projects, do you consider that there could be a delay of 6, 9 months, as we have seen some of your projects and some of your peers also that typically execution happens in 2.5 years or 3 years. So do you consider that when you're looking for bids or when you're bidding for these IRRs? Or how is the framework that you think all 24 months you think is executable?

So we certainly make a detailed analysis before we take a call. And whenever we are sure, both in terms of supply and execution that we'll be able to complete in the time, then only we don't know it. And if there is a possibility of any delay, then we will certainly factor those kind of costs in our model. But see, Dhruv, most important for us is, and that is how we feel that we don't usually get into those kind of a situation because we do a lot of preparative work before we bid and even before we go on the ground for execution.

The next question is from Bharat Shah from ASK Investment Managers.

Yes. I lost out on the call in between. Plus, I couldn't fully comprehend your answer to the previous question. But on smart meter, I wanted to understand what is -- what are the constraints on the rollout? Because 4,000 or 10,000 still have very modest and very inconsequential kind of a rollout of smart meters.

So Bharat, what I was replying to the earlier question is, that we had about six different geographies. We started to implement in different geographies one by one. And when you -- when you start deploying meter in particular geography, you have to integrate with the distribution system and you also have to integrate and demonstrate your entire smart meters and architect and platform to the distribution company. Once they approve, then you start deploying on the ground with full resources. Now as we were starting geography one by one. Therefore, the implementation rate was lower, and there were also issues around manpower ability. So both the issues now we have sorted, we have started implementing and integrated with all the six distribution companies. And now having sort out that contractor and manpower issues as well. From 4,000 to 10,000 we have reached in a 1-month period, and we hope to take it to 15,000 plus, and we will continue to operate at that level.

But if you roll out 15,000 also a day, that will take you [indiscernible] max to about 5 million for the next year. That -- it sounds a very small number to my mind, unless I missed something. I thought you earlier mentioned that you expect to roll out about INR 1 crore meters next year. And if I heard it correctly, that's what I understood. So if you out 15,000 meters, then you will be...

I'm talking about the current geographies. If I add geography, then those numbers will get added.

Okay. So what exactly -- how many smart meters did we roll out last quarter? How much we expect in the [ quarter ]?

Yes. So last quarter, Bharat, we rolled out 3.6 lakh meter. We have reached a total of INR 6.73 lakh meters. And in the current year, the balance 6 months, we plan to add another 30 to 35 lakh meters.

So that means we'll reach about 40 Lakh meters by the end of the year.

Yes, 40 to 45 Lakh. And why we are confident is because now that season is good. So in fact, we also faced quite a good amount of constraint because of extended monsoon. But now that the season is lower. So we expect that our deployment rate will continue, and it will improve significantly.

So out of them, awarded contract so far, how much do we expect to roll out next year?

Next year, it would be around 70 lakh meter out of awarded contract.

And you expect to wait another 30 Lakhs from the new contracts that you may hope to win?

Correct. And this, again, I'm giving a conservative number about that. We will certainly try and boost those numbers at a higher level as well.

And are we facing any on-ground resistance of any kind, either from customers or others in terms of these rollout?

So there are resistance, not mainly from a customer, but all those motivated factors on the ground. And but that's a part of business. We have to deal with that and find your way in implementing it.

So that is -- and that's not the key reason why there is a delay?

No, no, no. It is -- it was -- it affected us to a certain extent to begin with. But now I don't see that is a reason which is going to stop us.

Okay. And the economics of the smart meter that we had originally understood, roughly about INR 11,000-odd cost. Roughly about INR 1,000 comes from the government is an upfront subsidy. So basis about INR 9,000 to INR 10,000 is what you earn over a period of 9 years roll out per meter is revenue, almost about 85% of which is the operating profit in the business. So that economics remains, right?

It remains unchanged. Bharat it is just one caveat. The subsidy that comes from government is not INR 1,000, it is INR 900.

Okay. No, I said ballpark numbers, I was just rounding off and making broad numbers. Also, there were tax write-backs in the current quarter. I could not fully figured it out. So net-net, there has been actually tax credit in the first half of the year. In the second half of the year, what is the expected tax liability we need to provide, we should count?

So this quarter itself, we had a onetime reversal of the MAT credit which AEML distribution business was accounted. Other than that, there is no expected -- any expected reversals in the future years. We are expecting an effective tax of around 20 percentage, which will continue as the [indiscernible].

So the second half of the current year, this should come 20% is the effective tax rate, right?

Correct. Correct.

Seperately for second half, I'm not talking of mixing with the first half. So the second half, currently, it will be 20%?

Correct.

And that is expected to stay the course, going ahead?

Yes.

Okay. And last question on Microsoft and Google transactions, I thought one of the transactions already happened in using the bag. Something to that, if I read the announcements in the papers. Maybe I'm mistaken, if you can highlight on that.

You're right. Bharat, you're right. There was an announcement that was for Google contract where they had a long-term power purchase contract with Adani Green, for their part requirement of existing data center or the data center, which is under construction, at Noida. What I'm talking is beyond that, that's only a power supply PPA between AGL and Microsoft -- sorry, Google. Now all those -- and that's only meeting a part requirements. Essentially, these data center companies wanted someone to handle their entire power supply management because they don't have that kind of knowledge or expertise of managing this complex regulatory system as well as managing supply on the around-the-clock basis. So that is where we see an opportunity. And in fact, we are discussing with Google, Microsoft and many other players where they wanted us to design an energy solution for them, which will define the extent of green energy that we will supply, the kind of reliability and time line. So those two transactions or these two are very distinct one.

Right. And broadly, is understood roughly for sticking together the entire solution that is arranging power design mix, ensuring safe, reliable supply arrangement remaining by stitching together that solution with the various sources. You can hope to make about INR 1 and INR 1.5 of fees per unit?

So Bharat, It will not only be a teaching, but sometimes you might also have to invest like last mile connectivity, with one of the players that wanted a power solution. We are also investing for them in last mile connectivity and a small transmission line needs to be created. So it will mostly a teaching, but you might also require to invest somewhere to make sure that whatever the agreed deliverable that you have signed up. That is delivered. And as far as margins are concerned, it obviously would depend on a lot many factors, including terms and conditions and risk profile of that particular contract. And that could range right from INR 1 to -- depending on the risk profile of the contract. If the -- all the solutioning or services to be provided like we do for our group companies where, they carry all the risk, those margins are around INR 0.10.

And these arrangements potentially can run into not hundreds of crores of units, but actually have thousands of crores of units to be supplied in a year, potentially, isn't it?

Yes, correct. So what we are getting is about 7,000 to 10,000 million units in a couple of years.

700 to 1,000 crore units in a couple of years?

No. 7,000 to 10,000 -- 700 crores to 1,000 crores unit.

Next question is from Ajay Sharma from Maybank.

I just want to check what's the IRR you are getting on the new transmission projects you just won?