Adani Green Energy (AGEL), India’s largest renewable power owner, is under fire after a report from Snowcap Advisors has brought the focus back onto the Gautam Adani-led conglomerate more than a year after Hindenburg Research‘s accusation of financial fraud against the group.

What Happened: The London-based activist investment firm has claimed that the company is inflicted by inflated financial metrics, dubious accounting practices, and looming funding gaps.

Here is a breakdown of Snowcap’s main arguments against Adani Green:

Inflated Financial Metrics

AGEL, boasting an impressive 10.9 gigawatts of operational capacity, claims it will quintuple its capacity by 2030 without raising equity.

However, Snowcap claims that AGEL's self-reported “run-rate EBITDA” is heavily padded as it includes other income such as interest on loans, one-off late payment surcharges and non-cash accounting gains, allegedly inflating the EBITDA figures by up to 19%, if also adjusted for normalised power prices.

Misleading Project Returns

While AGEL promises returns on its renewable projects as high as 17% — far ahead of the renewables sector as a whole — Snowcap says that its capital expenditures have been spruced up by poor revenue accounting.

Adjusting for this, Snowcap claims the actual unlevered returns are closer to 11-12%, while AGEL's cost of debt stands at 9.5%. The company's rapid growth and aggressive EBITDA projections mask these lacklustre returns, Snowcap alleges.

The research firm also claims that the internal rate of return for recent projects may be even lower at around 9%.

Funding Shortfalls and Equity Needs

Snowcap says that despite AGEL’s confident claims of fully funded growth using high organic cashflows and even with an announced equity injection by the Adani family, the company can only cover half of its 50-gigawatt target funding requirement by 2030 without additional equity.

“AGEL has a history of claiming its pipeline is fully funded, only to raise more equity capital,” the research firm claimed. With high debt-servicing burdens and falling project returns, the company's free cash flow is significantly lower than management's optimistic projections.

Snowcap estimates that AGEL’s free cash flow to equity in FY24 was somewhere around ₹700 crore, far lower than what management had previously forecast.

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Underperforming Assets

AGEL’s operational assets are not living up to expectations, Snowcap claims. Key assets like the RG1 U.S. bond solar projects and the Jaisalmer Four hybrid power plant have underperformed their generation forecasts, the research firm says.

AGEL's reported EBITDA for these assets has been bolstered by interest income from related party loans, rather than core operational performance, Snowcap alleges.

“Were it not for this Interest Income, we think RG1 may have struggled to meet its debt service coverage covenants,” it claims.

It also says that government data shows that AGEL’s flagship hybrid plant has not met its minimum 50% capacity utilisation factor, the ratio of the actual output from a solar plant over the year to the maximum possible output from it for a year under ideal conditions.

Overvalued Stock

Snowcap's report points out that AGEL's stock trades at nearly 34 times its EV/EBITDA, compared to 8-10 times for its peers. This implies a potential 90% downside for AGEL's equity value, raising serious concerns about overvaluation.

Reliance on Related Party Transactions

Snowcap also questions AGEL's strategy of selling power on the open market at inflated prices due to short-term conditions is also questioned. It says the firm has also sold power from plants not yet commissioned on the open market.

“Indian renewable developers have historically avoided merchant exposure due to low trading volumes and power price uncertainty,” the research firm explains. “Amidst high short-term power prices, AGEL has achieved upwards of 2x PPA prices for these sales.”

It said that a significant portion of these sales is to related Adani entities, with 81% of FY23’s merchant sales going to Adani Enterprises and Adani Energy Solutions, suggesting a heavy reliance on transactions within the group itself.

Adani Green responded to Benzinga’s request for comment by stating that the report was “factually inaccurate and  containing analytical errors.”

“The report is a misleading and mischievous misrepresentation  of AGEL's comprehensive disclosures,” a company spokesperson said in a statement.

Price Action: Adani Green’s share price was down 0.63% at ₹1,867.75 around noon on Thursday.

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