How India’s Heat Wave Turned Adani Power Into A Gold Mine For Investors

As a sweltering heat wave swept through the country in the summer of 2022, Adani Power, the country's largest private electricity producer, emerged as a clear winner. The surge in electricity demand led to the company’s stock soaring as much as 247 per cent so far this year, touching a record Rs 344 in May.

Just like the country in monsoon, the stock has cooled down after hitting a record high but it is surprisingly still up 172 per cent as of July 8, as per data from stock exchanges.

Fueling the growth of its stock is a solid financial performance, especially in Q4 FY22, even as geopolitical and trade upheavals due to the Russia-Ukraine war hit the globe, denting production across the board. So, how did Adani Power manage to sustain?

Beating The Heat

As per media reports, India witnessed its hottest April in 122 years this year. The heat wave conditions also led to a surge in the use of air conditioning, triggering the worst power crisis in more than six years, news agency Reuters reported.

Following the scorching summer and increased industrial activity in the post-Covid uptick, India’s power deficit peaked at 10.29 gigawatt in April. Power demand in those months grew 13.2 per cent to 135.4 billion kilowatt-hours as the electricity requirement in the north grew between 16 per cent and 75 per cent, a Reuters analysis of government data showed.

Adani Power, which has thermal power plants in Gujarat, Maharashtra, Karnataka, Rajasthan and Chhattisgarh, registered a growth of 6.7 per cent in power generation to reach a record level of 203 gigawatts in FY22 as compared to its numbers in FY21, Adani Power said in a press release in May.

The company had said that the electricity demand in India continued to grow strongly, driven both by economic growth and a heat wave in the northwestern parts of the country. Aggregate energy demand for FY22 across the nation was 1,380 billion units, registering a growth of 8.2 per cent over the energy demand for FY21, it added.

Riding on this increasing demand, Adani Power posted a consolidated net profit of a whopping Rs 4,645 crore in the March quarter as compared with Rs 13 crore in the same quarter last year. Its gross sales jumped 66 per cent to Rs 10,597 crore in the March quarter of FY22.

The company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) for Q4 FY22 stood higher at Rs 7,942 crore, 271 per cent higher as compared to Rs 2,143 crore in the same period last year. The EBITDA growth was aided by prior period income recognition, greater shortfall claims due to high import coal prices, and higher merchant and short-term tariffs and volumes, as compared to Q4 FY21, the company said.

Adani Power has been improving its EBITDA margin and achieved a margin of 75 per cent in March 2022 as compared with 33.62 per cent in the same period last year. In the December quarter, Adani Power recorded a margin of 37 per cent.

The Gautam Adani-led company had turned profitable in the December quarter of FY21, posting a profit of Rs 218 crore against a loss of Rs 289 crore.

Is It Powerful Enough?

The climatic and economic conditions and the Adani Group’s strategic business decisions might be in favour of Adani Power and its stock for a while now.

Due to high temperature and increasing demand for electricity, the shares of power companies are rallying, says Ravi Singh, vice president and head of research, Share India Securities.

Adani Power, he says, is getting a big advantage from the sudden increase in the demand for electricity which has increased the demand-supply gap as temperature has been rising across the country since mid-March.

“Also, it is expected that energy generation companies can give strong results in the forthcoming quarters of FY22 which is giving a big boost to the stock. It is a good opportunity to invest in the power sector now,” says Singh, who advises buying the Adani Power stock for target price of Rs 300 in the near term.

The Adani Group’s business strategy had also paid dividends. Adani Ports is a beneficiary of a captive coal mine, the Carmichael coal mine, in Queensland, Australia which it had acquired despite a lot of protests from environmental activists, analysts point out. The mine is coming to the rescue of Adani Power now as the group started exports from the mine in December last year.

"The Carmichael coal mine has become operational and after adding import costs, it is still cheap for Adani Power to use Carmichael coal…The company also opened a coal-based power plant in Goda in Jharkhand and started selling electricity to Bangladesh at around Rs 7 per unit while its production cost was around Rs 2 per unit," explains Vijay Chopra of Enoch Ventures, adding that the group has captive coal which brings down the cost significantly. Chopra advises buying the stock when it dips around Rs 160-170.

Agrees Manoj Dalmia, founder and director of Proficient Equities. Dalmia expects the stock to fall to Rs 205 per share and advises investors to avoid buying it at current levels.