­Acuité has considered consolidated financial and business risk profile of AEL. The entities consolidated include AEL (standalone) along-with all its subsidiaries & step-down subsidiaries as per the published results. The segments currently reported under AEL include IRM, mining services and other businesses mostly undertaken through subsidiaries (which includes Power trading, Shipping, Bunkering, Agro- edible oil and commodities trading, agro-storage, airports, roads, water treatment plants and Solar PV manufacturing). List of consolidated entities given in the annexures below.

­Vast experience of the promoters and established track record in diverse business segments of AEL
AEL is the flagship company of the Adani Group. The group is a large and diversified conglomerate with varied interests across resources (Coal trading and mining services), logistics (ports and logistics, shipping and rail), energy (power generation, transmission and distribution) and ancillary activities. The group has forayed in other segments such as data centre services, airport, roads and water treatment plants etc. The major listed companies of the group are Adani Enterprises Limited (engaged in IRM, power trading, mining service, agro- processing & storage and Bunkering & Shipping among others), Adani Ports and SEZ Limited (engaged in port operations and logistics) Adani Power Limited (holds Group’s thermal and solar power projects), Adani Transmission Limited (holds group’s transmission assets), Adani Total Gas limited (engaged in city gas distribution) and Adani Green Energy Limited (engaged in renewable energy generation). AEL is listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). AEL is promoted by Mr. Gautam Adani, the Chairman and Founder of the Adani Group. Under his leadership, the Group has emerged as a global integrated infrastructure player with interest across resources, logistics and energy verticals. The promoters are well supported by professionally qualified and experienced management team. The Group has consistently demonstrated the ability to incubate and nurture new businesses under the flagship company i.e. AEL and scale them to a level so that they can be spun off into separate entities to create value for the stakeholders. AEL has recently acquired stake in Mumbai International Airport Limited (MIAL) and Navi Mumbai International Airport Limited (NMIAL) and the airport business is currently being incubated in AEL.

Acuité believes AEL will continue to operate as Flagship Company of the group and play a leading role in incubating new businesses for the group. The Adani group entities have demonstrated their ability to raise short term and long term funding through various capital market instruments in Indian as well as in foreign currency. The diversified lender and investor profile augments the resource raising ability of the group. 

Improving revenue from established as well as developing businesses
AEL acts as an incubator for new businesses for the Adani Group. Its operations can broadly be classified into two segment- established business and developing business. Established segment include integrated resource management (IRM), mining services and solar manufacturing divisions and developing segment includes - roads, water projects, airports and data centres divisions. The established segment's revenue and profitability increased significantly in FY2022 . Established segment revenue stood at Rs. 65,345 Cr. in FY2022 against Rs. 39,370 Cr. in FY2021 while EBITDA stood at Rs. 3664 Cr. in FY2022 against Rs. 3244 Cr. in FY2021. The increase in revenue from established businesses is primarily due to a of sharp increase in the coal prices in the Q3 & Q4 of FY2022. Furthermore, the revenues of the company improved significantly and stood at Rs.79,000 Cr. with an EBITDA of Rs.4,100 Cr. during H1FY2023. The growth was majorly on account of strong performance from the IRM and airport business.  

AEL has been amongst the leading importer of non-coking coal catering to the requirements of both private clients and public-sector undertakings for over two decades. AEL imports coal from Indonesia, Australia and South Africa and sells across major power producers. Also, apart from the back to back supply contracts, AEL maintains around 20-30 days inventory to meet the spot demand from its customers. Hence, it is exposed to short-term variation in imported coal prices under its stock-and-sale coal trading business. This has helped the IRM revenue to increase to Rs. 49263 Cr. in FY2022 against Rs. 24280 Cr. in FY2021 and EBITDA to improve to Rs. 1842 Cr. and Rs. 911 Cr. respectively for the same period. Coal trading volumes also increased to 64.4 MMT in FY2022 from 63.4 MMT in FY2021.Going forward revenue from coal trading is further expected to improve as AEL completed its capex in Australia and coal dispatches started from March 2022. Mining services business involves mining, processing, acquisition, exploration and development of mining assets. AEL has been acting as a mine developer and operator on behalf of Rajasthan Rajya Vidyut Utpadan Nigam Limited (RRVUNL), NLC India Limited (NLCIL), Chhattisgarh State Power Generation Company Ltd. (CSPGCL) for its coal requirements. It currently has 11 projects in the works, 5 of which are operational, with one operational since April 2022 . Further it has 6 ongoing project which are expected to become operational over the next 2-4 years. Revenue for mining services stood at Rs. 2360 Cr. in FY2022 and Rs. 2058 Cr. in FY2021 against EBITDA of Rs. 1075 Cr. in FY2022 against Rs. 1143 Cr. in FY2021. Mining volumes increased to 27.7 MMT in FY2022 from 17.5 MMT in FY2021. The decline in profitability has been on account of higher stripping ratio and higher operational costs. The solar PV cell & module manufacturing division of AEL is operated through Mundra Solar PV Limited (MSPVL) which is located at Mundra. MSPVL is largest integrated cell and module manufacturer in India with an installed capacity of 1.5 GW each for solar cell and solar modules which further expected to increase to 3.5 GW by Q2 FY2023. Revenue from solar manufacturing declined to Rs. 2558 Cr. in FY2022 against Rs. 2972 Cr. in FY2021 on account of lower EPC sales with significant decline in profitability to Rs. 379 Cr against Rs.828 Cr. for the same period. Manufacturing volumes also declined to 1104 MW in FY2022 against 1158 MW in FY2021. The decline in EBITDA is primarily on account of sharp increase in the input costs. The revenue and EBITDA from developing business has ramped up in FY2022 on account of Airports business to Rs. 5,088 Cr. and Rs. 921 Cr. against Rs. 1,062 Cr. and Rs. 15 Cr. in FY2021 respectively. AEL has acquired 7 airports under its subsidiary Adani airport holdings limited. It operates the Mumbai, Ahmedabad, Lucknow, Mangaluru, Jaipur, Guwahati and Thiruananthapuram airports. Further, it also has acquired the Navi Mumbai International airport which is expected to be operational by FY2025. Airports had seen an adverse impact on their operations on account of disruptions caused by the Covid 19 induced lockdowns. However, passenger volumes and air traffic movement have gradually improved in FY2022. Road projects are being undertaken under Adani Road Transport Limited (ARTL). It currently has 14 ongoing projects with 5 under build operate transfer model, 8 under hybrid annuity model and a project under the toll operate transfer model out which 1 is operational, 1 is near completion and rest are at various stages of completion. AEL also undertaking water projects under Adani Water Limited under the HAM projects. It currently has two ongoing projects. AEL also currently developing data centres under Adani Connex which is a JV between AEL and Edge Connex. In the initial phase Adani Connex will develop data centres at Chennai, Navi Mumbai, Noida, Vizag and Hyderabad.  

Acuité expects AEL's operating performance to improve over the medium term on account of stable operating performance from established businesses along with increased contribution from its newer businesses. 

­Increase in debt levels due to huge capex plans partly mitigated by need based financial support from group companies
The total debt of the company as on March 31, 2022 stood at around Rs. 39052 Cr (against Rs.16001 Cr in P. Y.) which consists of Rs. 10780 Cr of long term debt, debt from promoter and promoter group of Rs. 12541 Cr and short term borrowings of Rs.15731Cr. This increase on account of acquisition of MIAL and 6 other airports in Q2 of FY2022 which led to addition of significant debt and also on account of increased capex in its Australian project and airport business increased to Rs. 15400 Cr. as on March 31, 2022 against Rs. 4200 Cr as on March 31 2021.Total debt for its Australian project increased to Rs. 11300 Cr. as on March 31, 2022 against Rs. 1500 Cr. for the previous year. Although going forward additional debt requirement is expected to remain low for established businesses AEL is developing new businesses such as data centres, green hydrogen and roads and airports for which significant capex is planned. Any new capex is expected to be funded in 70:30 ratio. The company has planned capex of ~Rs. 40000 Cr. in FY2023 and another ~Rs. 40000 Cr. in FY2024. Hence additional debt of around 40000-50000 Cr. is expected to be added over the next two years. However, the management has announced to raise funds via FPO to the tune of Rs.20,000 Cr. in FY23 out of which ~Rs.10.869 Cr. will be used towards capital expenditure. ~Rs.4,165 Cr. will be used towards repayment of certain borrowings from its group companies and the rest is for general corporate purposes.
Furthermore, the management has stated its goal to maintain its debt to EBITDA around 6 times. This is expected to achieve through two key streams. Continued profitability from the established IRM, Mining and Solar Businesses (Australia project has started commercial operations and ongoing capacity addition in mining and solar business) and increased contribution through the developing businesses especially the airport segment, where the performance has been subdued on account of spread of Vand disruptions to travel. AEL has followed an aggressive leverage policy, with its external debt to EBITDA increasing to 6.70 times for FY2022 (This includes promoters’ debt) as against 4.13 times for FY2021. This increase in debt to EBITDA is primarily on account of increase in debt for capex in its Australian subsidiary and airport business which have contributed significantly to the debt without corresponding contributions to the profitability. The debt to EBIDTA is expected to go down to around 6 times as profitability from these newly concluded capex starts reflecting from FY2023 onwards.  The above risk of high gearing due to upcoming capex plans is partially mitigated as AEL can receive need-based funding support being a part of Adani Group. The promoters of Adani group hold over 51 per cent of shares in the Group's listed companies as on March 31 2022 i.e. AEL (74.9 per cent), Adani Power Limited (APL – 74.9 per cent), Adani Ports and Special Economic Zone Limited (APSEZL – 63.7 per cent), Adani Transmission Limited (ATL - 74.9 per cent), Adani Total Gas Limited (AGL- 74.8 per cent) Adani Green Energy Limited (AGEL- 56.3 per cent) and Adani Wilmar Limited (44%) . The aggregate market cap of all these listed entities as on January 27, 2023 is ~Rs. 13.89 lakh Cr. The Adani group entities have demonstrated their ability to raise short term and long-term funding through various capital market instruments in Indian as well as in foreign currency. The diversified lender and investor profile augments the resource raising ability of the company/group.

Acuité believes any higher-than-expected debt funded capex and subsequently debt addition will lead to breach of debt to EBITDA above 6 times thus imparting a negative bias to the rating. AEL demonstrated propensity towards incubating businesses by significantly leveraging its balance sheet.