“Risk comes from not knowing what you are doing.”
Warren Buffett
It’s every investor's dream to reap high and quick returns from their investments, but with huge returns come huge risks. Adani Green Energy Ltd is one such company that is luring every investor with its soaring share prices. The company’s shares are currently trading at Rs. 1400 per share, reporting a 600% growth in share price within a span of just one year. Though multiple factors contributed to this growth, an in-depth analysis will reveal some surprising facts.
Adani’s agreement with SECI :
Adani Green Energy ltd. majorly focuses on manufacturing solar and wind power plants, and selling the energy generated out of these plants. The company bagged its golden ticket in June 2020 when it entered into a contract with Solar Energy Corporation of India (SECI) to develop 8GW solar projects. This Rs. 45000 crores deal made the company the world’s largest solar developer by capacity, causing the shares of the company to surge by three times. However, there was no power purchase agreement in the contract with SECI, until December 2021. As of today SECI agreed to purchase only 6 GW of energy generated out of the 8 GW produced by the company, keeping the company at risk if it fails to find a buyer for the excess energy it generates.
Shareholdings of Adani Green:
The public shareholding of the company stands as low as 21.7%, leaving scope for high fluctuations in the market price with changing demand. The majority of foreign institutional investors of the company are from Mauritius and Cyprus, which hugely impacts the credibility of the company. Though the investors are moving forward with an optimistic approach towards the company, one must not forget the major competitors such as TATA Power who are implementing an aggressive strategy to gain the major market share.
Sudden profits:
Though the company reported losses till the year 2019, it reported huge profits of Rs 134 crores and Rs 364 crores for the years 2020 and 2021 respectively. So, what exactly resulted in this drastic change?
The company changed its accounting policy of depreciation from its traditional WDV method to the SLM method, reducing its depreciation cost by one-third and increasing its profits multiple folds. The company is highly levered and paid Rs 258 crores of interest for the year 2021. The borrowings have drastically increased from Rs 430 crores to Rs 5934 crores within a span of five years and are overvalued with a market capitalization of Rs 217225 crores. The company needs to bring down its debt amount and interest cost to function smoothly in the long run.
To invest or not to invest:
All these factors put together are overvaluing the company multiple folds than its actual worth. As a prudent investor, one must understand that the prices are being rigged by window dressing the balance sheet and bringing in huge debts for operations. We must carefully analyze what led to this sudden surge in prices and profits, and invest accordingly, as one never knows when this bubble might burst. A cautious investment with continuous monitoring is necessary to reap maximum benefits as the share prices of the company are already trading at an all-time high and it’s hard to predict when the downfall might begin. If you are planning to invest, wait for the prices to stabilize and then invest accordingly, if already invested, now might be a good time to sell some of the shares and diversify the risk.
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