Adani Power Downgraded to Sell Amid Mixed Financials and Technical Signals

Quality Assessment: Financial Performance Under Pressure

Adani Power’s recent quarterly financials have raised concerns about its operational quality. The company reported a significant decline in profitability for Q3 FY25-26, with a Profit After Tax (PAT) of ₹2,479.58 crores, marking a 17.6% drop compared to the previous four-quarter average. This downturn is compounded by a Return on Capital Employed (ROCE) of 16.7% for the half-year, which is considered low relative to industry standards and the company’s historical performance.

Moreover, the company’s debt servicing capability is under strain, with a Debt to EBITDA ratio of 3.48 times and a Debt-Equity ratio of 0.83 times, the highest recorded in recent periods. These figures indicate a heightened financial risk profile, limiting the firm’s flexibility to manage liabilities effectively. The deteriorating financial trend has directly influenced the downgrade in the company’s quality grade, signalling caution for investors.

Valuation: Expensive Despite Discount to Peers

Adani Power’s valuation metrics present a mixed picture. The stock trades at an Enterprise Value to Capital Employed (EV/CE) ratio of 3.2, which is considered very expensive in the context of its current ROCE. While the stock is priced at a discount relative to its peers’ historical averages, this valuation premium is difficult to justify given the recent decline in profitability and elevated debt levels.

Despite the stock’s strong market capitalisation of ₹2,69,793 crores, making it the second largest in the power sector after NTPC, the valuation concerns have contributed to the downgrade. Investors are wary of paying a premium for a company whose earnings have contracted by 12.2% over the past year, even as the stock price has risen by 40.24% during the same period.

Financial Trend: Mixed Signals Amid Growth and Profitability Challenges

While the recent quarter’s results have been disappointing, Adani Power’s longer-term financial trends remain somewhat encouraging. The company has demonstrated healthy growth in net sales, expanding at an annualised rate of 15.83%, and operating profit has surged by 30.46% annually. This indicates that the core business is expanding, supported by increasing demand and operational scale.

However, the profitability metrics tell a different story. The decline in PAT and the elevated debt ratios suggest that the company is facing margin pressures and higher financing costs. This divergence between top-line growth and bottom-line contraction has created uncertainty around the sustainability of earnings growth, contributing to a cautious outlook on the financial trend parameter.

Technical Analysis: Shift from Bullish to Mildly Bullish

The technical indicators for Adani Power have shifted notably, influencing the downgrade in the technical grade. The overall technical trend has moved from bullish to mildly bullish, reflecting a more cautious market sentiment. Weekly MACD readings are mildly bearish, while monthly MACD remains bullish, indicating mixed momentum across different time frames.

Other technical signals such as Bollinger Bands show bearish tendencies on a weekly basis but bullish on a monthly scale. The Relative Strength Index (RSI) offers no clear signal, while the KST indicator is mildly bearish on both weekly and monthly charts. Moving averages on a daily basis remain mildly bullish, but the Dow Theory and On-Balance Volume (OBV) indicators suggest no clear weekly trend and only mild bullishness monthly.

This nuanced technical picture, combined with a 6.61% drop in the stock price on the latest trading day to ₹139.90 from a previous close of ₹149.80, has contributed to the downgrade in the technical grade. The stock’s 52-week high stands at ₹182.75, while the low is ₹93.23, indicating a wide trading range and volatility.

Market Performance and Institutional Interest

Despite the downgrade, Adani Power has delivered market-beating returns over the long term. The stock has generated a 40.24% return over the past year, significantly outperforming the Sensex’s 8.52% return and the BSE500’s 11.06% return. Over five and ten years, the stock’s returns have been extraordinary at 1,121.83% and 2,720.56% respectively, dwarfing benchmark indices.

Institutional investors have increased their stake by 0.83% in the previous quarter, now holding 15.06% of the company’s shares. This growing institutional participation suggests confidence in the company’s fundamentals despite recent setbacks, as these investors typically possess superior analytical resources.

Sector Position and Industry Context

Adani Power holds a commanding position in the power generation and distribution sector, with a market capitalisation representing 15.96% of the entire sector. Its annual sales of ₹54,254.83 crores account for nearly 10% of the industry’s total, underscoring its scale and influence. The company ranks second in the sector behind NTPC, India’s largest power producer.

However, the sector is highly competitive and capital intensive, with companies facing regulatory, fuel cost, and demand variability risks. Adani Power’s elevated debt levels and recent earnings decline highlight the challenges of maintaining profitability in this environment, especially when compared to peers with stronger balance sheets and more stable cash flows.

Conclusion: Downgrade Reflects Caution Amid Mixed Signals

The downgrade of Adani Power Ltd from Hold to Sell by MarketsMOJO reflects a comprehensive reassessment across four key parameters: quality, valuation, financial trend, and technicals. While the company boasts impressive long-term returns and growing institutional interest, recent quarterly results reveal profitability pressures and elevated leverage that undermine its financial quality.

Valuation remains expensive relative to earnings quality, and technical indicators have softened from bullish to mildly bullish, signalling increased market caution. Investors should weigh these factors carefully, considering the company’s strong sector position and growth prospects against the risks posed by its financial and technical profile.

For those seeking exposure to the power sector, it may be prudent to explore alternatives with more favourable fundamentals and technical momentum, as highlighted by recent multi-parameter analyses.

Unlock special upgrade rates for a limited period. Start Saving Now →