adani power ltd Management discussions

Global economy overview

Fiscal policy measures taken by Central Banks to combat the downturn caused by COVID-19 lockdowns during 2020 had the downside of sparking spiraling inflation globally, which got exacerbated due to energy price shocks triggered by the conflagration in Europe in early 2022. The strong monetary policy response adopted by Central Banks as a countermeasure, in the form of successive interest rate increases and absorbing liquidity, in turn led to tightening of financial conditions. Ultimately, the combined impact of all these measures was a slowdown in global growth from 6.2% in 2021 to 3.4% in 2022, according to the International Monetary Fund. Emerging economies were also not immune from economic contagion, having to face currency depreciation and capital flight as investors expectedly turned to risk-off positions, causing portfolio outflows. However, concerns of global recession were alleviated after resilience in labour markets and consumer spending were noted across advanced and emerging economies, reviving investor sentiment in the second half of FY 2022-23. Measures taken by Governments to mitigate the impact of high energy prices have borne fruit to some extent, helped by a milder winter in Europe, which helped avert a crisis in millions of homes that need heating during periods of extreme cold. Global inflation seems to have peaked, while labour markets have remained resilient, thereby creating policy room for governments to stave recession off. Despite the arrival of good news, high inflation and a slowdown in global trade in face of continuing hostilities in Europe remain major worries for governments and policy makers.

Indian economy overview

The Indian economy has once again demonstrated its deeply rooted growth fundamentals and resilience in face of a global slowdown, by posting a Real GDP growth of 7.2% in FY 2022-23, according to provisional estimates of the National Statistical Office (NSO), following a solid growth of 9.1% in FY 2021-22 in the post-pandemic period. This strong growth is a testament to the depth of Indias economy, resilience and productivity of its people, entrepreneurial spirit of its businessmen, and last but not the least, prudent polices and bold decision-making of its government. The growth in national output is a result of a recovery in discretionary spending indicating restoration of consumer confidenceand the governments thrust on

CAPEX and infrastructure build-out, which powered economic growth despite the impact of inflation and a slowdown in exports in view of the global economic situation. On the positive side, inflation has moderated following successive increases in policy rates by the Reserve Bank, prudent measures taken by the government for supply-side management, initiatives like Digital Transformation, augmentation of capital in the banking system and successful efforts to improve asset quality, in addition to easing of strain on global supply chains, and softening of global commodity prices.

Outlook

The IMFs World Economic Outlook expects a slowdown in global growth to 2.8% in 2023, with only marginal improvement to 3% over the medium term. Global efforts to contain and reduce inflation may have limited success in view of stickiness of core inflationary pressures. The heightened uncertainty caused by the current geopolitical situation and after-effects of the pandemic will create a challenging trade-off for policymakers between restoring price stability and addressing growth slowdown. Further, the global banking system has recently shown signs of fragility with high-profile failures, while elevated levels of debt for many governments create a more structural risk that can threaten the global financial system if not contained prudentially and in a timely manner.

The insipid global conditions also pose a challenge for India, given strong global linkages especially concerning fuel imports and exports of finished products. However, the repetitively demonstrated resilience and depth of the domestic economy, deftly managed macroeconomic factors and improved health of the financial system, in combination with the long-term payoffs of various reforms and growth-boosting programs place India in an advantageous position to find opportunities in and benefit from global geo-economic shifts. The Reserve Bank projects real GDP growth for FY 2023-24 at 6.5%, taking into account softer global commodity prices, the governments continued thrust on CAPEX, higher capacity utilisation in manufacturing, robust credit growth, containment of high inflation and rising optimism among businesses and consumers.

Indian power sector review

Economic development of a nation cannot progress significantly without a strong and self-reliant power sector. Universal access to affordable power in a sustainable manner has been the guiding principle for the Indian power sector. The Government has taken various initiatives to transform India from a power deficit to power surplus nation which includes increasing overall capacity, connecting the whole nation into one grid, strengthening the distribution system and achieving universal household electrification

On the generation side, Government policies have borne fruit and India is today the third largest producer of electricity in the world, with installed generation capacity of over 4,16,059 MW as on March 31, 2023, with a highly diversified basket of generation.

There is vast headroom for India to achieve economic progress and growth in electricity consumption comparable to key developed economies. Indias installed power capacity has grown substantially over the last thirteen years, at a compounded annual growth rate (CAGR) of 7.7%. The nations electricity demand has registered strong growth over the past three years on the back of robust economic growth, spurred by the Governments drive to provide Power To All. Aggregate electricity demand attained 9.6% growth in FY 2022-23 at 1,512 BU over the demand in

FY 2021-22. Similarly, peak power demand registered a growth of 6.4% to scale a new peak of 215.9 GW in FY 2022-23, as compared to a peak of 203 GW in FY 2021-22.

India reported a slight increase in energy deficit 0.5% in FY2022-23 as compared to 0.4% in FY2021-22. However, the peak deficit for FY 2022-increased to 4.0% as compared to 1.2% in FY 2021-22, on account of growing power demand. As Indias economy continues to grow, electricity demand is set to rise further.

Thermal power continues to be the biggest source of power generated in India, given large coal reserves domestically, lack of natural gas reserves, and limited expansion in other conventional sources. Coal-fired power plants act as base-load power generators and are increasingly supporting operations of renewable energy plants by providing grid-stabilizing power generation. The increase in coal-fired power generation has resulted in the availability of reliable and affordable electricity across the country. Electricity demand in the country has increased rapidly and is expected to rise in the foreseeable future.

Indian power sector outlook

The Government of Indias focus to attain ‘Power for all has accelerated capacity addition in the country along with expansion and strengthening of power transmission and distribution networks. The nation still has a long way to go, as per capita annual consumption in the country was 1,255 kWh in FY22, which is significantly lower than world average and that of other developing countries like South Africa and Brazil. However, as Indias GDP is expected to grow significantly over next two decades on the back of demographic strength, per capita consumption of electricity is expected to rise to approximately 3000 kWh by 2040. Demand for electricity in India is expected to grow at a sustained pace given the governments massive push towards ‘Make-In-India,

PLI (Production Linked Incentive) Scheme, increasing industrialization, improving incomes and standards of living, and push for increasing the penetration of electric vehicles in the transportation sector, among others. The 20th Electric Power Survey of India, published in November 2022 by the Ministry of Power projects total electric energy consumption at 1,610 BU in 2026-27 and 2,133 BU in 2031-32. The corresponding peak demand is projected at 277 GW and 366 GW by the two years respectively. For comparison, the total electricity demand in 2022-23 was 1,511 BU and peak demand was 216 GW.

Over the longer term, power demand is projected to reach 3,423 BU by 2041-42 while peak demand is projected at 575 GW. The Central Electricity Authority (CEA) also projects that Indias likely Installed

Capacity by the end of FY 30 will be around 817 GW, up by around 400 GW as compared to the present Installed Capacity.

The Government of India has set a target of achieving 50% of the total installed capacity by the year 2030 from non-fossil fuels. The Optimal Generation Mix report published by CEA in April 2022 estimates that by 2029-30, installed capacity of coal and lignite-based power plants (net of retirements) will reach 252

GW. The likely share of thermal installed capacity will reduce to nearly 32% of the total installed capacity in 2029-30 as compared to 57% as of March 2023. However, in terms of energy generation, thermal power will continue to contribute the largest share at 57%, as compared to more than 70% at present.

Coal demand and supply

Coal continues to be the most important source of fuel for power plants in India. It represents 51% of the installed capacity and nearly 72% of power generation as of FY 2022-23. Total coal consumption has witnessed consistent growth over the years as coal-based generation capacity continues to rise. According to the Indian Ministry of Coal, Indias coal demand will rise from 1,029 million tonnes (MT) in FY

2022-23 to 1,448 MT by 2029-30. Of this, the demand of the power sector for coal will increase from 735 MT to 1,034 MT during the same period.

In FY 2022-23, Indias coal production registered a formidable growth of 14.7% to 893 MT compared to 778 MT in FY 2021-22. Coal dispatch to the power sector by domestic producers increased by 9.1% to 738 MT from 676 MT in this period. On the other hand, imports of non-coking coal increased to 166 MT in FY 2022-23 (Upto Feb23) from 152 MT in FY 2021-22, mainly due to high surge in power demand. However, even as the Government targets increasing domestic coal production to 1,304 MT in FY 2024-25, coal imports are set to rise due to a surge in power demand.

Adani Power Limited (APL): Delivering growth responsibly

APL is Indias largest private thermal power producer with a power generation capacity of 15,250 MW, consisting of 15,210 MW thermal power capacity and 40 MW solar power capacity. Of this, 1600 MW capacity (of which 800 MW is already commissioned) caters to power supply to Bangladesh, while the balance 13,650 MW is being supplied within India. Out of the current and under-construction capacity, 10,840 MW of thermal power capacity, comprising a 4,620 MW plant at Mundra, Kutch in Gujarat, a 3,300 MW plant at Tiroda, Gondia in Maharashtra, a 1,320 MW plant at Kawai, Baran in Rajasthan, and 1,600 MW (under its subsidiary Adani Power (Jharkhand) Limited, at Godda in Jharkhand, have been established by the

Company.

APL has also acquired four thermal power plants with a combined capacity of 4,370 MW, including a 1,370 MW plant at Raipur in Chhattisgarh, a 600 MW plant at Raigarh in Chhattisgarh, a 1,200 MW plant at Udupi in Karnataka, and a 1,200 MW plant (under subsidiary Mahan Energen Limited) at Bandhaura, Singrauli in

Madhya Pradesh.

The Company is also developing a 2x800 MW Ultra-supercritical power plant in Madhya Pradesh, which will supply power to the State under a 1,230 MW

(net), 25-year Power Supply Agreement (PSA) with the Madhya Pradesh Power Management Company Ltd. The power plants of APL and its subsidiaries have specific locational advantages and strengths, which allow them easy access to fuel and connectivity to key markets. The Company enjoys a substantial competitive advantage due to its ability to conduct sourcing and logistics of 54 million tonnes per annum (MPTA) coal within India and from abroad along with 12 MTPA fly ash, which is a complex, multi-point operation involving co-ordination of complete movement of up to 13,000 railway rakes a year.

APL has overcome numerous challenges to emerge as a financially stronger and profitablecompany. Various regulatory / judicial orders have vindicated its stand in terms of adequate recovery of alternate coal costs on account of domestic coal shortfall.

SWOT analysis

Strengths

• Proven capability to execute large and complex projects within cost and time budgets

• Proven capabilities of turning around stressed power plant acquisitions

• Dedicated teams with domain expertise in O&M, fuel management, power sector regulation, project management and business development

• Deep backward integration experience with mine-to-plant logistics capability

• Combination of coastal, pithead and hinterland projects proximate to fuel sources and demand centres

• Competitive tariffs permitting a secured Merit Order Dispatch position and increased offtake along with regulatory approvals for recovery of alternate coal cost in case of shortfall in domestic fuel availability

85% of installed and upcoming greenfield capacities tied up through long-term / medium-term PPAs, enabling revenue visibility

• Fuel cost pass-through included in imported coal-based PPAs, enhancing cash flow stability

• Around 85% domestic coal requirements tied up in long-term / medium-term Fuel Supply Agreements

(FSAs)

• Regulatory approvals for carrying cost as well as a late payment surcharge mechanism, protecting against delays in the award of regulatory claims and payment from power procurers

Weakness

• Reliance on monopolistic state-owned coal suppliers for domestic coal could lead to disruptions in fuel availability

• Non-availability of escalation in tariffs for coal price growth in some domestic coal-based PPAs and partial tariff escalation in other cases

• Complex and time-consuming regulatory processes for claiming compensation for events of change in law; interim cash flow mismatch

• 15% capacity exposed to short-term market risks without firm domestic fuel supplies

Opportunities

• Stressed power assets with locational advantage available in superior valuations, an opportunity to enhance capacity while avoiding execution risks

• Better price recovery due to increase in demand through Implementation of government reforms like Ujwal DISCOM Assurance Yojana (UDAY),

Pradhan Mantri Sahaj Bijli Har Ghar Yojana (SAUBHAGYA) and Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY)

Sale of power to Commercial and Industrial (C&I) customers due to Increased industrial tariffs borne by big industrial consumers dependent on State DISCOMs, impacting their profitability and competitiveness.

• Limited new thermal power capacity installations, even as baseload demand is expected to grow, creating opportunities for merchant power and long-term / medium-term tie-ups.

• Greater availability of domestic fuel and softening of import coal prices could result in higher PLFs

• Auctions of coal linkages under SHAKTI policy for plants without PPAs

• Coal availability from commercial coal mine licensees under liberalized regime

• Capacity tie-ups under Medium-term PPAs and

Round-the-clock (RTC) arrangements

Threats

• Growing preference for renewable power could limit thermal power demand

• Hesitation of state DISCOMs to tie power demand through long-term PPAs

• Volatile international coal prices could hamper the Merit Order Position of PPAs with coal price pass-through

• Inability of domestic coal miners to enhance production

• Funding constraints for coal-based new projects

Performance update

Operating performance

During FY 2022-23, APLs operating performance was affected by shortage of domestic coal and high prices of imported coal. The PLF of Kawai and Tiroda plants were higher due to improved grid demand and better domestic coal availability under Fuel Supply Agreements. On the other hand, the PLF at Mundra was impacted due to continuing high imported coal prices, which affected the merit order position of power supplied by it. The PLF of Udupi was affected due to merit order position deterioration owing to high imported coal price and high penetration of renewable energy in Karnataka. The PLF of Raipur and Mahan was affected mainly due to less availability of domestic coal from open market for merchant sale.

The aggregate Plant Load Factor (PLF) during FY

2022-23 was 47.9%, down from 51.5% in FY 2021-

22. In FY 2022-23, units sold were 53.4 Billion Units (BUs) with installed capacity of 13,650 MW compared to 52.3 BUs in FY 2021-22 with installed capacity of 12,450 MW. The figures for FY 2022-23 include the performance of Mahan Energen Ltd. (erstwhile Essar Power M.P. Ltd.), which was acquired on 16th March

2022 under an insolvency resolution process under the aegis of the Insolvency and Bankruptcy Code.

Financial performance

Consolidated Total Income for FY 2022-23 grew by 36% at H 43,041 crore, as compared to the revenue of H 31,686 crore in FY 2021-22. This growth was the result of improved tariff realization, high import coal price, and higher one-time revenue recognition on account of regulatory claims. The revenue for FY 2022-23 includes recognition of prior period revenue from operations of H 2,377 crore as well as Rs.695 crore on account of gain on sale of investment, and prior period Other Income of H 3,395 crore, mainly on account of regulatory orders for change in law, carrying costs, and Late Payment Surcharge ["LPS"]. In comparison, revenue for FY 2021-22 includes prior period revenue of H 2,970 crore and prior period other income of H 2,830 crore.

• In FY 2022-23, the Near-Pithead segment revenue grew because of higher grid demand and higher one-time regulatory income recognition in case of Tiroda, as well as higher merchant / short-term tariffs in case of Raipur and Raigarh. Also, FY 2022-23 includes revenue from newly acquired 1200 MW plant of Mahan Energen Ltd..

• Within the Hinterland segment, Kawai registered higher recurring revenues because of higher tariff realization and higher volumes in FY 2022-23. However, the total revenues of Kawai decreased because of lower recognition of prior period revenue compared to FY 2021-22. The Godda power plant, which commissioned its first 800 MW Unit in early April 2023, has not reported operating revenues in FY 2022-23.

• The operating revenues of the Coastal segment increased in FY2022-23 due to higher import coal prices. However, the increase was partially offset by lower volumes on account of grid backdowns.

2021-22. This increase in EBITDA was due to higher prior period revenue and better tariff realization, including higher merchant tariffs. The Companys strategically located open capacity near major coal mining regions was able to benefit from the growth in demand and increase in merchant tariffs in the short-term market due to its proximity to the fuel source, which creates a competitive advantage in terms of logistics cost of fuel.

The largest contribution to EBITDA growth was from the near-pithead segment, due to higher prior period revenue recognition on account of regulatory orders and payments from customers in Tiroda. EBITDA from hinterland plant reduced due to lower prior period revenue recognition in Kawai, partially offset by revenue inclusion of newly acquired Mahan plant. Coastal segment EBITDA increased mainly due to prior period revenue recognition in Udupi and higher coal trading margin in Mundra, partially offset by lower volumes and margins in Mundra on account of high imported coal prices.

For FY 2022-23, the Profit Before Tax and exceptional items was H 7,675 crore, as compared to H 6,577 crore in FY 2021-22. The Total Comprehensive Income for FY 2022-23 was H 10,760 crore, as compared to the Total Comprehensive Income of H 4,955 crore for FY 2021-22.

The total external borrowings as of 31st March 2023 were H 35,462 crore compared to H 42,294 crore as of 31st March 2022. The total equity at the consolidated level, including Unsecured Perpetual Securities [UPS], stood at H 29,876 crore as of 31st March 2023 compared to H 18,703 crore as of 31st March 2022.

Key Ratios
APL Consolidated Ratios	FY 2022-23	FY 2021-22
Debtor Turnover (Days)	96	109
Total Trade Receivables to Total Revenue (360 days)
Inventory Turnover (Days)	36	43
Fuel Inventory to Fuel Cost (360 days)
Senior Debt Interest Coverage Ratio (x)	4.13	3.38
EBIT to Interest on Term Debt and Working Capital Borrowings
Current Ratio (x)	1.10	0.95
Current Assets to Current Liabilities
External Debt to Net Worth (x)	1.19	2.26
Senior external debt (Total Borrowings less Loans from relatedparties) to
Total Equity
External Debt to EBITDA (x)	2.48	3.07
Senior external debt (Total Borrowings less Loans from relatedparties) to
EBITDA (PBT + Finance Cost + Depreciation)
EBITDA margin (%)	33%	44%
EBITDA to Total Revenue
PAT Margin (%)	25%	16%
PAT to Total Revenue
Return on Net Worth (%)	36%	26%
PAT to Total Equity

APLs PAT Margin and Return on Net Worth improved to 25% and 36% respectively in FY 2022-23 from 16% and 26% respectively in FY 2021-22 because of improvement in profitability of the Company on account of improved tariff realization, higher prior period revenue recognition and cost reversals consequent to the implementation of the scheme for amalgamation of six operating subsidiaries of APL with APL with effect from 1st October 2021 following the order of Honble National Company Law Tribunal,

Ahmedabad ("NCLT"). Consolidated Profit After Tax improved from H 4,912 crore for FY 2021-22 to H 10,727 crore for FY 2022-23. Moreover, APLs External Debt to Net Worth ratio also improved due to prepayment of external term debt and improved profitability as mentioned above.

APLs consolidated total equity increased from H 18,703 crore as of 31st March 2022 to H 29,876 crore as of 31st March 2023 mainly due to increase in profit after tax.

Key Developments during FY 2022-23

SCHEME OF AMALGAMATION

Consequent to approval of the Scheme of

Amalgamation by Honble NCLT and fulfilment of the conditions precedent thereto, six operating subsidiaries of APL, viz. Adani Power Maharashtra Limited ["APML"], Adani Power Rajasthan Limited

["APRL"], Adani Power (Mundra) Limited ["APMuL"], Udupi Power Corporation Limited ["UPCL"], Raipur

Energen Limited ["REL"], and Raigarh Energy Generation Limited ["REGL"] have been amalgamated with the Holding Company, i.e. APL with effect from 1st October 2021. Following this, CRISIL Ratings

Limited and India Ratings Limited have affirmed credit rating of "CRISIL A/Stable" and "Ind A/Positive" respectively assigned to APL.

The amalgamation is intended to achieve size, scalability, integration, greater financial strength and flexibility thereby building a more resilient and robust organization that can address dynamic business situations and volatility in various economic factors in a focused manner, in order to achieve improved long term financial returns.

OTHER DEVELOPMENTS

Mundra:

In February 2023, APL entered into Supplemental

PPAs (SPPAs) with Haryana DISCOMs, wherein the net contracted capacity under the original PPAs has been reduced from 1424 MW to 1200 MW. This will allow efficient recovery of alternate fuel costs in case power demand from Haryana DISCOMs exceeds domestic coal availability under the FSA.

Further, subsequent to the financial year closing date, in April 2023, the Company has entered into long term PPA of 360 MW (Net) with MPSEZ Utilities Limited ("MUL") for supplying power from third unit of Mundra Phase-IV plant which got freed-up due to amendment in Haryana PPA capacity. This will ultimately help in maximum utilization of Mundras Phase-IV units.

Tiroda:

Honble Supreme Court passed orders in March 2023 and April 2023 in the matters related to domestic coal shortfall suffered by erstwhile APML under the periods governed by New Coal Distribution Policy (NCDP) and SHAKTI policies. The Honble Courts orders confirm earlier orders of the Honble Maharashtra Electricity Regulatory Commission (MERC) and the Honble Appellate Tribunal of Electricity (APTEL).

Similar to the above, the Honble Supreme Court also passed another order related to de-allocation of Lohara coal block as part of change-in-law, confirming earlier orders of MERC and APTEL. These orders will allow the Tiroda plant to recover alternate coal costs, along with carrying cost and late payment surcharge, arising due to shortfall in domestic coal, under change-in-law clauses of the respective PPAs.

Human Resource Practices

At APL, we consider employees as our biggest asset. It is our constant endeavour to upgrade knowledge and skills, enhancing productivity of our employees. The average employee age of the company stood at 37 years, a complement of positive energy, enthusiasm and experience. We offer significant importance to employee safety and wellbeing through various safety initiatives like Chetna that sharpen our employees skills to create a safe workplace. The Company has created a valuable workplace revolving around the principles of capability building, employee engagement, governance and digitalisation. To ensure employee life cycle management, the company implemented Oracle Fusion Digital HR Tool. Learning modules and performance appraisal helped standardise systems on a real-time basis. Competence evaluation and development were focused on all major functions and services.

Focused action plans were emphasized on increased engagement based on the outcome of a Gallup employee engagement survey.

The company invested in young talents (GETs & MTs) and sharpened the skills of talented professionals to prepare them for bigger responsibilities rather hiring laterals. APL undertook focused approach to develop and train successors for all critical positions through high potential professionals and young managers. The Company had launched capability building initiatives under Transition Leadership Programs like Fulcrum, Takshashila and North Star in alliance with leading management institutes.

Internal control system

The Company has robust internal control procedures in place that are commensurate with its size and operations. The Board of Directors, responsible for the internal control system, sets the guidelines and verifies its adequacy, effectiveness and application.

The Companys internal control system is designed to ensure management efficiency, measurability and verifiability, reliability of accounting and management information, compliance with all applicable laws and regulations, and the protection of the Companys assets. This is to timely identify and manage the Companys risks (operational, compliance-related, economic and financial).

Cautionary statement

This statement made in this section describes the Companys objectives, projections, expectations and estimations which may be ‘forward-looking statements within the meaning of applicable securities laws and regulations.

Our risk mitigation matrix
Scenario	Risks	Mitigation Measures
Mergers and	• Incorrect target selection	• Creation of established criteria for target co. selection based on key parameters such as project status, PPA tie-up, technology with each team to focus on its core area for due diligence.
acquisitions	• Inadequate due diligence
	• Incorrect assessment of future synergies, potential benefits from the transaction,• Formation of inter-departmental teams, or fund infusion requirements.
		• Ensuring that all information that is sought is promptly provided by counterparties.
		• Ensuring that necessary safeguards are built into the resolution plans and final transaction documents to protect from risks / liabilities that could not be identified during due diligence stage.
		• Every assumption having impact on
		valuation to be vetted by the responsible department.
		Conservative approach in financial projections for valuation.
		• Periodic post-acquisition analysis of assumptions and deviations, and incorporation of learnings into procedures for future acquisitions.
Regulatory	• Favourable regulatory orders being overturned upon appeal	• Building strong case with effective arguments, using facts, precedence, and already decided legal principles.
	• Customers reneging on contractual terms due to unfavourable situations	• Enforcement of contractual terms through representation and regulatory/judicial intervention.
	• Non-compliance of regulatory / judicial orders by customers	• Contempt proceedings seeking early redressal of claim/appeal.
Commodity price	• Sharp increases in imported coal price	• Representations to CEA/regulators for precise matching of escalation indices with actual coal price increase.
risk	• Domestic coal shortage	• Recovery of increase in coal price though revision in tariffs and escalation indices.
	• High prices of alternate coal	• Ramping up pre-monsoon domestic coal procurement to stock the coal during lean production periods.
Reputation risk	• Risk of reputation loss from operational issues such as safety, environment or litigation	• Strengthening of communication with Stakeholders in case of any such event