ICICI Securities has initiated coverage on Adani Energy Solutions Limited (AESL) with a BUY recommendation and a target price of Rs 1,318, offering a 30% upside from the current market price of Rs 1,010. AESL is uniquely positioned in both regulated and unregulated businesses, including transmission, distribution, and smart meters. The company is expected to see significant earnings growth driven by new transmission opportunities, expansion in smart meters, and the steady performance of its Mumbai distribution business. ICICI expects AESL’s EBITDA to grow at a 32% CAGR between FY24 and FY27.

Transformation from Regulated to Unregulated Business

Initial focus on regulated transmission:
AESL began by building cost-plus transmission assets, focusing on regulated returns. Over time, it has expanded its portfolio to include four regulated transmission assets with a combined project cost of Rs 110 billion. This provided stable, predictable cash flows.

Unregulated business expansion:
AESL has strategically transitioned into the unregulated space, building competitively bid transmission projects and a sizeable smart meter business. With a 20% market share in unregulated transmission, AESL is now the largest private player in India’s transmission sector, having won Rs 170 billion in bids since FY16.

Sizeable Growth Opportunity in Smart Meters

India's push for smart meters:
The Indian government has targeted the installation of 250 million smart meters by 2025 to reduce AT&C losses. Of this, 120 million smart meters have been bid out, and AESL has secured a significant 20% share in this opportunity, translating to Rs 272 billion worth of projects.

Pipeline of smart meter opportunities:
Another 130 million smart meters are expected to be bid in the next 12-18 months, providing AESL with a continued growth runway. AESL is strategically positioned to capture a large share of these contracts.

Earnings Growth Outlook

Expected EBITDA growth of 32% CAGR:
AESL is expected to see robust earnings growth from multiple business lines. The company’s EBITDA is forecasted to grow at 32% CAGR from FY24 to FY27, driven by three major factors:

Transmission bids: An incremental Rs 30 billion in EBITDA from new transmission projects.
Smart meter segment: An additional Rs 40 billion from ongoing and upcoming smart meter projects.
Distribution business: Rs 5 billion in EBITDA growth from the Mumbai distribution area.

Valuation and Target Price

SoTP-based target price:
ICICI Securities has valued AESL using a sum-of-the-parts (SoTP) approach, assigning a target price of Rs 1,318 per share. This valuation includes contributions from AESL's core regulated transmission business, its smart meter business, and the distribution business, which is forecasted to grow steadily.

Key Catalysts for Future Growth

Transmission projects:
India has lined up Rs 1.5-2 trillion worth of new transmission projects, opening up significant bidding opportunities. AESL’s expertise and market share in competitive transmission bidding provide strong earnings visibility.

Smart meter implementation:
The Indian government’s push to reduce AT&C losses through smart meter installation is a major driver of future revenue for AESL. The company has already won a substantial portion of these contracts, with more to come.

ICICI Securities highlights AESL as a strong player poised to capitalize on growth in both regulated and unregulated sectors, with a solid earnings outlook. The BUY recommendation is supported by a robust valuation based on AESL’s ability to drive incremental earnings growth from its core businesses.