The current section of the “Analysis” series covers Advait Energy Transitions Ltd previously known as Advait Infratech Ltd, focusing on providing products and services for power transmission and telecommunication fields. Recently, the company has also expanded into Green Hydrogen Electrolysers, fuel cells; engineering, procurement & construction (EPC) for solar power plants etc.
Please note that to get maximum benefit from this article; an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of diverse types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.
Advait Energy Transitions Ltd (Advait Infratech Ltd): Detailed Fundamental Analysis
Advait Energy Transitions Ltd has investments in various child entities, such as joint ventures and subsidiaries. As a result, it reports both standalone as well as consolidated financials.
On September 30, 2024, the company had child entities that are included in its consolidated results. (Q2-FY2025 results announcement, page 3).
- Joint Venture: TG Advait India Private Limited
- Subsidiaries: Advait GreEnergy Private Limited, A&G Hydrogen Technologies Private Limited and Advait Energy Holding AS
We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of a company present such a picture. Therefore, if a company reports both standalone as well as consolidated financials, then the investor should prefer the analysis of the consolidated financials of the company.
As a result, while analysing the past financial performance of Advait Energy Transitions Ltd, we have analysed its standalone financials until FY2018 and consolidated financials from FY2019 onwards from when it started reporting consolidated financials.
Further recommended reading: Standalone vs Consolidated Financials: A Complete Guide
With this background, let us analyse the financial performance of Advait Energy Transitions Ltd.
Financial and Business Analysis of Advait Energy Transitions Ltd:
In the last 10 years (FY2015-FY2024), the sales of Advait Energy Transitions Ltd have increased at 39% year on year, from ₹11 cr in FY2015 to ₹209 cr in FY2024. Moreover, in the 12 months ended September 30, 2024 (i.e. Oct. 2023-Sept 2024), the company reported a further growth of its sales to ₹238 cr.
However, over the years, the operating profit margin (OPM) of Advait Energy Transitions Ltd has seen large fluctuations between operating losses to 21%. The company reported operating loss in FY2015 and improved its OPM significantly to 21% in FY2017. Thereafter, the OPM declined sharply to 7% in FY2021. From then, the OPM of Advait Energy Transitions Ltd has consistently improved to 17% in FY2024.
The net profit margin (NPM) of Advait Energy Transitions Ltd has also shown large fluctuations from 1% to 15% during the last 10 years (FY2015-FY2024). The company reported its highest NPM of 15% in FY2018. However, it reduced to 1% in FY2020. Thereafter, the NPM has improved to 10% in FY2024. In the 12 months ended September 30, 2024 (i.e. Oct. 2023-Sept 2024), the company reported an NPM of 10%.
To understand the reasons for the business growth of Advait Energy Transitions Ltd (formerly, Advait Infratech Ltd) along with fluctuations in its profit margins, an investor needs to read the publicly available documents of the company like its annual reports, red herring prospectus (RHP) for its initial public offer (IPO) in 2020, credit rating reports by CRISIL and its corporate announcements submitted to stock exchanges.
In addition, an investor should also read the following articles on conducting business analysis of EPC players and solar power producers:
The above-mentioned documents show that the following key factors have influenced the business of Advait Energy Transitions Ltd, which are critical to understand for any investor.
1) Intense competition and low pricing power of Advait Energy Transitions Ltd:
The company faces severe competition as its business activities have low barriers to entry. Whether it is manufacturing products for power transmission or telecommunication industries or working as an EPC contractor for power transmission or solar power fields. In all these segments, a large number of organized as well as unorganized players are present and compete intensely for business.
RHP for IPO, Sept 2020, page 20:
Competition emerges not only from the organized sector but also from the unorganized sector and from both small and big players. … Our inability to compete with this intense competition
Credit rating report by CRISIL, Nov 7, 2020, page 2:
The EPC industry is intensely competitive due to a low entry barrier.
Due to low entry barriers, many small and medium enterprises (SMEs) are present in the business, which has led to excess manufacturing capacity than demand leading to intense price-based competition.
FY2022 annual report, page 66:
Transmission and Distribution (T&D) Equipment Sector…There are also a large number of SME level players in this sector… excess manufacturing capacity of electrical equipment industry in India.
Most of the business of Advait Energy Transitions Ltd is order/tender based. As a result, the company has to bid for tenders floated by customers where lowest bidder gets a priority in the award of orders. Therefore, the company faces strong price-based competition from other players.
RHP for IPO, Sept 2020, page 19:
our business is not of continuous standardized revenue generating business. Our business is carried out on an order to order basis.
Credit rating report by CRISIL, Nov 7, 2020, page 2:
there is high dependence on tenders floated by government, semi-government and other entities; these are awarded through competitive bidding.
Due to high competition and the lowest-price-based bidding system, when its input costs increase, then Advait Energy Transitions Ltd finds it difficult to increase prices to its customers, which brings a high volatility in its profit margins. Prices of its inputs are dependent upon prevailing market prices, which makes them volatile.
RHP for IPO, Sept 2020, page 20:
The prices we are able to obtain for our products that we trade depend largely on prevailing market prices.
In the past, the intense competition has pushed the company closer to losses. For example, in FY2015, the company made operating losses and in FY2020, it barely managed to report a profit with a net profit after tax of about ₹0.50 cr for a revenue of about ₹45 cr.
The business of manufacturing products of power transmission and telecommunication is very tough. The joint venture, TG Advait India Private Limited, that it formed in FY2018, with its promoters and a Chinese player, Jiangsu Tongguang Optical Fiber Cable Co. Ltd, from which it buys optical fibre ground wires (OPGW) and optical fibre cables (OFC) reported continuous losses from FY2018 to FY2023. After reporting cumulative losses of about ₹18.5 cr in over 7 years of operations, it reported a small profit of about ₹0.36 cr in FY2024.
The auditors of TG Advait India Private Limited have raised serious questions on the going concern/survivability of the company.
FY2024 annual report, page 160:
As per Audit…of M/S TG ADVAIT INDIA PRIVATE LIMITED (Joint Venture) which stated that the company has accumulated losses amounting to Rs.1851.16 lakhs as at 31st March 2024…company has started making profits from the current year ending 31st March 2024…existence of a material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern.
An investor should keep in her mind the tough competition in the business segments of Advait Energy Transitions Ltd.
Also read: How to analyse New Companies in Unknown Industries?
2) Strategies used by Advait Energy Transitions Ltd to grow and improve profit margins:
In recent years, the company has grown both its sales as well as profit margins. Let us see some of the steps taken by the company to achieve this performance.
2.1) Backward and forward integration:
Advait Energy Transitions Ltd has expanded its manufacturing footprint as well as entered into the EPC segment to capture a higher share of the value addition of the supply chain to improve its profit margins.
For example, in recent years, the company installed manufacturing plants to produce aluminium-clad steel wire (ACS), emergency restoration systems (ERS), stringing tools etc.
FY2023 annual report, page 29:
company has commenced production of the factory to manufacture ACS wire, Stringing Tools, Joint Box, ERS and Assembly Utility, and also manufacturing Tools, Joint Boxes locally to serve the domestic market
This integration resulted in an improvement in profitability for the company.
Credit rating report by CRISIL, Nov. 7, 2023, page 1:
improvement in the company’s business risk profile with faster execution of orders and commencing of the manufacturing units which is also a part of forward and backward integration that is eventually benefitting the profitability as well.
The addition of these new products in the portfolio added to both a higher turnover as well as an improvement in the business profile i.e. diversification for Advait Energy Transitions Ltd.
Credit rating report by CRISIL, December 2024, page 1:
upgrade reflects the diversification in business risk profile with introduction of new products under the company’s power transmission and solution division
rise in turnover was due to a large order book and the commencement of the company’s manufacturing units related to Aluminum Clad Steel Wire (ACS), Emergency Restoration System (ERS) and stringing tools.
Also read: Credit Rating Reports: A Complete Guide for Stock Investors
2.2) Business tie-ups by Advait Energy Transitions Ltd:
Over the years, the company has associated with many foreign players to gain access to technological expertise to improve its competitive advantages including help in setting up manufacturing facilities in India.
Apart from the tie-up with Tongguang Group, China for OPGW and OFC cables, Advait Energy Transitions Ltd has tied up with the Council of Scientific and Industrial Research (CSIR) to gain technology to make an emergency retrieval system (ERS).
FY2021 annual report, page 15:
company has made joint venture agreement with Council of Scientific and Industrial Research (CSIR), New Delhi for transfer of CSIR-SERC technology on “Emergency Retrieval System” (ERS) under Atmanirbhar Bharat Policy.
Advait Energy Transitions Ltd tied up with Jiangsu Guofu Hydrogen Energy Equipment Co. Ltd. (GUOFUHEE) to gain access to the technology to make electrolysers to produce green hydrogen as well as importing electrolysers built by Guofuhee for the executing the orders won by it.
FY2024 annual report, page 14:
Formed a strategic partnership with Jiangsu Guofu Hydrogen Energy Equipment Co. Ltd. (GUOFUHEE) for the transfer of cutting-edge electrolyser technology, enhancing our technical capabilities…inked MoU for integral supply of Goufuhee’s Green Hydrogen equipments into Indian market, enabling Advait to secure a 300MW/year PLI local manufacturing subsidy from the Indian Government
The company also tied up with a Norwegian company, TECO 2030 for accessing the technology of fuel cells to produce electricity from green hydrogen.
FY2024 annual report, page 14:
Embarked on a technology partnership with Norwegian firm TECO 2030 to address the Green Hydrogen (GH2) fuel cell market across SAARC nations, with a focus on mobility and the shipping sector.
Advait Energy Transitions Ltd also entered into a memorandum of understanding (MoU) with CarbonTechnology Energy (CTE) for making fuel cells using carbon plates.
FY2024 annual report, page 25:
MoU with CarbonTechnology Energy (CTE) to develop a prototype fuel cell using carbon plates, aiming to revolutionise the fuel cell and electrolyser industry with energy- efficient solutions.
These initiatives add to the range of solutions that Advait Energy Transitions Ltd can offer to its customers. However, not every initiative has turned out as contributory as the company expected. For example, the entry into the Emergency Retrieval System (ERS) did not generate a lot of business. In fact, the company did not get any orders for the same after 2021.
Corporate presentation, Dec. 2024, page 10:
No new orders since 2021 due to COVID-19 and budget issues Utilities planning procurements
Also read: How to do Business Analysis of a Company
3) Diversification attempts by Advait Energy Transitions Ltd:
Over the years, the company has tried to expand beyond its core business segment of power transmission and telecommunications infrastructure. For example, in FY2024, the company entered the green hydrogen business and completed the installation of a 300 KW electrolyser and a 70 KW fuel cell in Rishikesh.
FY2024 annual report, page 14:
We won India’s first microgrid Green Hydrogen project for THDC and successfully commissioned a 300 kW electrolyser and a 70 kW fuel cell
Advait Energy Transitions Ltd also entered into EPC of power distribution in FY2024 and won an order of ₹60 cr.
FY2024 annual report, page 14:
Enter into EPC of power distribution sector by securing first projects from UGVCL & DGVCL…order valued at ₹ 60 Crore.
The company also entered the EPC of solar power plants and won an order for installing 30 MW of solar power plant.
FY2024 annual report, page 14:
SOLAR EPC: We are actively executing approximately 30 MW of ongoing ground-mounted solar projects
Advait Energy Transitions Ltd has also entered into carbon credit consultancy.
FY2024 annual report, page 9:
carbon credit consultancy vertical, we have successfully onboarded several clients, marking a promising start…Advait, through its subsidiary, is currently managing an inventory of over 2 million carbon credits.
The company has also entered into electrolyser manufacturing for green hydrogen in collaboration with GuoFu Hydrogen, China and has won subsidy from the govt. under its production-linked incentives (PLI) scheme.
FY2024 annual report, page 15:
Being proud recipients of PLI scheme for Electrolyser manufacturer- we have emerged as successful bidders in the Solar Energy Corporation of India’s (SECI) tender under SIGHT Program for Tranche I & II with a cumulative allocation of 300 MW.
Advait Energy Transitions Ltd also plans to enter into fuel cell manufacturing and for that, it has tied up with TECO 2030 of Norway and has decided to invest about $5 million with the Norwegian company.
FY2024 annual report, page 71:
Advait Energy holding AS – Overseas Subsidiary in Norway on 4th July…strategic collaboration and investments, services, marketing, manufacturing and exchanging technical know-how in the space of the green hydrogen ecosystem. The Company has also, decided to Invest further amount of up to 5 million USD in this subsidiary
As per Q2-FY2025 results, the company seems to have already invested about ₹40 cr.
This investment has given Advait Energy Transitions Ltd a 4.89% stake in TECO 2030 AS.
Corporate announcement on BSE, September 23, 2024:
made further investment in TECO 2030 AS. TECO 2030, a Norwegian-based clean-tech listed Company. Post this 2nd tranche of investment, Advait Energy Holding AS holds 4.89% shares of TECO 2030 AS.
Moreover, in Feb. 2024, the company pointed out that it is planning to enter into the software development field and thus opening a new business segment of information technology (IT)/internet of things (IoT).
Corporate announcement to BSE, February 23, 2024:
marking its entry into the IT/loT domain, will undertake the development of software
Many of these initiatives might seem very diverse for a company that has until now focused on manufacturing and installing primarily power distribution and telecommunication equipment.
Nevertheless, when an investor notices that a company is rapidly announcing entry into too many new verticals without executing and establishing its stable presence in initially announced ventures, then she should be cautious. This is because each of the business initiatives provides an opportunity where the company can spend many years to establish itself, gain a significant market share and then venture out into other related fields.
If without showing good results in initial ventures, a company keeps on announcing newer ventures, then it might be an attempt by the company to influence investors’ perception.
In the past, there have been instances where companies influenced their share price by making positive corporate announcements, which later on, SEBI found to be false.
For example, take the case of Urja Global Ltd, which made fake announcements of supplying a fake mineral “Zacobite” to a Japanese company, Nippon Shinyaku Co Ltd. The announcement led to a sharp increase in the company’s share price. However, later on, SEBI found that all of it was fake. The Japanese company denied signing any contract with Urja Global. SEBI barred Urja Global Ltd and its executives from the market for 2 years (Sources: SEBI, CNBC TV18)
The top brass of Urja Global — now barred by SEBI from the markets — thought nothing of thinking up the non-existent Zacobite, which it was purportedly going to supply to Nippon Shinyaku Co Ltd. Simply put, Zacobite does not exist. Not on the Periodic Table, not even on a Google search. That’s right. The company decided to sell a product that does not exist.
Therefore, it is advised that investors should be very cautious while analysing corporate announcements made by companies and always cross-check the developments mentioned in these announcements from independent sources like customers, media and govt. authorities’ websites.
Also read: How to study Annual Report of a Company
4) Change in technology risk faced by Advait Energy Transitions Ltd:
As per Advait Energy Transitions Ltd, different segments of its business face rapid technological advancements, which makes existing products become obsolete very soon. As a result, it has to continuously keep sourcing technology from overseas players so that its products stay relevant to the demand from customers.
RHP for IPO, Sept 2020, page 20:
The industry we cater is characterized by rapid technological changes, evolving industry standards, changing client preferences that could result in product obsolescence and short product life cycles.
Moreover, the newer fields in which Advait Energy Transitions Ltd is entering like solar power, green hydrogen, fuel cells, software development etc. witness sharp technological changes.
Such technological advancements pose a challenge for smaller players like Advait Energy Transitions Ltd which lack the financial, human and technological resources to generate newer technologies. In fast-changing technological fields, many times, the existing investments done by companies become unviable when the existing products do not meet customers’ requirements.
Therefore, in industries with rapidly changing technology, companies that are currently earning high profit margins cannot stay assured of continued high profitability.
An investor may read an example of how a company in the solar power industry had to write off huge sums of money spent on creating manufacturing plants when rapidly changing technology made existing plants, even those created only a couple of years back, as economically unviable leading to large losses for lenders as well as shareholders: Analysis: Websol Energy System Ltd
Going ahead, an investor should keep a close watch on the profit margins of the company to check if it is able to maintain its advantage of forward and backward integration. She should also monitor the outcome of its numerous new business initiatives and whether it is able to successfully execute these ventures.
An investor should keep a close watch on the regulatory developments as well as technological advancements related to the renewable power industry as these have the potential to significantly impact the business model of the company.
Over the years, the tax payout ratio of Advait Energy Transitions Ltd has been mostly in line with the standard corporate tax rate in India. In FY2021, the company had a negative tax payout ratio, which was primarily due to deferred taxes.
FY2021 annual report, page 82:
Also read: Deferred Tax Assets, Tax Payout (P&L vs. CFO): Queries Answered
Operating Efficiency Analysis of Advait Energy Transitions Ltd:
a) Net fixed asset turnover (NFAT) of Advait Energy Transitions Ltd:
Over the years, the NFAT of the company has seen significant variations. Initially, NFAT used to be very high i.e. almost 10-22 until FY2018 as the company primarily relied on trading activities/third parties for getting goods for installation without a lot of focus on manufacturing.
For example, it had marketing arrangements for various insulators with overseas players like Global Insulator Group (GIG) (here) and Dalian Insulator Group T&D Co. Ltd (here).
Glass Disc Insulators: Advait Energy Transitions Limited serves as the official marketing partner for Global Insulator Group (GIG)
Porcelain and Composite Insulators: Advait Energy Transitions Limited serves as a marketing partner for Dalian Insulator Group T&D Co. Ltd.
Therefore, the company directly purchased products from third parties and then used them in installation projects, which did not require Advait Energy Transitions Ltd to invest large sums of money in manufacturing plants leading to a higher
In FY2018, it formed a joint venture, TG Advait India Private Limited, with a Chinese company, Jiangsu Tongguang Optical Fiber Cable Co. Ltd, to manufacture optical fibre ground wires (OPGW) and optical fibre cables (OFC). Due to this investment in the manufacturing plant, its NFAT declined sharply from 22.1 in FY2018 to 2.7 in FY2019.
Since FY2019, as the plant increased its capacity utilization and the company also increased its scope for project executions, its NFAT increased to 5.2 in FY2022.
Thereafter, in FY2023, it made investments in another manufacturing plant for ACS wire, Stringing Tools, Joint Box, ERS and Assembly Utility, manufacturing Tools, Joint Boxes etc.
The plant became operational in FY2023 leading to a decline in NFAT to 4.2. Now, as the plant enhanced its capacity utilization, the NFAT of Advait Energy Transitions Ltd has improved to 5.5 in FY2024.
Going ahead, an investor should monitor the NFAT of Advait Energy Transitions Ltd to understand whether it is able to improve its asset utilization efficiently and whether it is able to keep its debt levels under control without further equity dilution.
Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors
b) Inventory turnover ratio (ITR) of Advait Energy Transitions Ltd:
Over the years, the ITR of Advait Energy Transitions Ltd has been improved from 8.7 in FY2016 to 12.6 in FY2024. An improvement in the inventory turnover ratio indicates that the company is able to utilize its inventory more efficiently.
The company reported a very high ITR of 82.7 in FY2018 before it started manufacturing operations in its joint venture. However, after the commencement of manufacturing operations in the JV company in FY2019 and then in the plant of the company in FY2023, its inventory requirements increased and the ITR started declining to reach 10.1 in FY2023. In FY2024, Advait Energy Transitions Ltd reported an ITR of 12.6.
Going ahead, an investor should monitor the inventory position of Advait Energy Transitions Ltd to assess whether it is able to manage its inventory efficiently.
Further advised reading: Inventory Turnover Ratio: A Complete Guide
c) Analysis of receivables days of Advait Energy Transitions Ltd:
Over the years, the receivables days of Advait Energy Transitions Ltd have increased from 114 days in FY2016 to 64 days in FY2024.
Receivables days increased significantly to about 168 days in FY2019; however, since then, the company has managed to bring them down.
Operations of Advait Energy Transitions Ltd are highly working capital intensive as a significant amount of money is always stuck in receivables.
RHP for IPO, September 2020, page 18:
Our business is working capital intensive and hence, Trade Receivables forms substantial part of our current assets and net worth.
The company has large outstanding trade receivables for the following reasons. First, in its business, most of the customers expect a longer credit period. Second, being a smaller player, it has to extend favourable credit terms to customers to gain business. Third, in its EPC business, 10% of the order amount is withheld by customers for two years as retention money to ensure good quality of the work.
Credit rating report by CRISIL, July 2022, page 1:
Working capital intensive operations…company needs to extend a long credit period in line with industry standards, however receivables include 10% of the EPC contract amount, which is held as retention money for two years
Due to pending retention money, for FY2024, the overall receivables days of Advait Energy Transitions Ltd was about 122 days.
Credit rating report by CRISIL, December 2024, page 1:
Working capital-intensive operations:…total receivables of 122 days (comprising of 71 days of receivable and 51 days of retentions)
Due to very high working capital requirements, Advait Energy Transitions Ltd has to repeatedly raise money by equity dilution to meet its working capital needs.
In fact, rising demand for working capital was the primary use for funds raised by the company in its IPO in 2020. Almost 75% of the funds were reserved for infusion in working capital.
RHP for IPO, September 2020, page 12:
This was a very costly source of funds because Advait Energy Transitions Ltd had to pay almost 10% of the money raised in the IPO as fees. For an IPO of ₹6.88 cr, Advait Energy Transitions Ltd paid ₹0.70 cr as fees/expenses and got to use only ₹6.18 cr for its business.
RHP for IPO, September 2020, page 57:
Moreover, in 2024, Advait Energy Transitions Ltd raised money twice by equity dilution by way of preferential allotment of shares (₹82.3 cr, July 2024) and warrants (₹25.5 cr, Sept 2024). In each of these fund-raisings, working capital requirement was one of the important objectives.
EGM notice to BSE, May 30, 2024, page 18:
The Company intends to utilize the proceeds raised through the issue (“Issue Proceeds”) towards the following objects:
- Working Capital Requirements
- Capital Investment in Plant and Machinery
- To meet investment in subsidiary to mitigate any business prospects and
- General corporate purpose
EGM notice to BSE, July 15, 2024, page 18:
The Company intends to utilize the proceeds raised through the issue (“Issue Proceeds”) towards the following objects:
- Working Capital Requirements
- Capital Investment in Plant and Machinery
- To meet investment in subsidiary to mitigate any business prospects and
- General corporate purpose
Therefore, receivables/working capital is one the most capital-consuming areas for Advait Energy Transitions Ltd. Going ahead, an investor should watch the trend of receivables days of Advait Energy Transitions Ltd to assess whether it continues to collect its receivables on time.
Further recommended reading: Receivable Days: A Complete Guide
In the assessment for comparison of cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Advait Energy Transitions Ltd, an investor can only use the data for FY2018-FY2024 because the data of cash flow statement before FY2018 is not available.
During FY2018-FY2024, Advait Energy Transitions Ltd is not able to convert its profit into cash flow from operations. Over FY2018-24, Advait Energy Transitions Ltd reported a total net profit after tax (cPAT) of ₹49 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹23 cr.
It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than PAT.
Further recommended reading: Understanding Cash Flow from Operations (CFO)
Learning from the article on CFO and the fund flow analysis over the last 10 years will show to an investor that the company could not convert its profits into CFO as over FY2018-FY2024, incremental inventory requirements consumed ₹19 cr and increased receivables requirements consumed ₹35 cr of its funds.
Going ahead, an investor should keep a close watch on the working capital position of Advait Energy Transitions Ltd.
The Margin of Safety in the Business of Advait Energy Transitions Ltd:
a) Self-Sustainable Growth Rate (SSGR):
Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company
Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.
Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.
An investor may calculate the SSGR using the following formula:
SSGR = NFAT * NPM * (1-DPR) – Dep
Where,
- SSGR = Self Sustainable Growth Rate in %
- Dep = Depreciation rate as a % of net fixed assets
- NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
- NPM = Net profit margin as % of sales
- DPR = Dividend paid as % of net profit after tax
(For systematic algebraic calculation of SSGR formula: Click Here)
An investor would notice that initially, when Advait Energy Transitions Ltd did not have any major manufacturing presence, then its NFAT was very high and as a result, its SSGR was also very high as during that period, it did not require a lot of capital investment for growth. However, after the start of the manufacturing plant in the joint venture, its NFAT and SSGR declined.
Now, with its current business set-up, the company has an SSGR of about 20%-30%. However, over the years, the company has grown at a rate of about 39%. As a result, the company has grown its sales at a rate higher than what its business profits can sustain.
Therefore, the company had to continuously rely on additional funds i.e. incremental debt and equity dilution to meet its funds’ requirement.
In the past, the company has raised an additional debt of about ₹57 cr as its total debt has increased from ₹2 cr in FY2015 to ₹59 cr in FY2024. In addition, it raised money about ₹6.88 cr in its IPO in September 2020.
Moreover, in the ongoing financial year, the company has raised about ₹82.3 cr in July 2024 from preferential allotment of shares.
Corporate announcement to BSE, July 4, 2024:
Company at its Meeting held on Thursday, 4 July, 2024…approved the allotment of 5,92,940 equity shares…at a price of Rs. 1388/- per equity share…aggregating to Rs. 82,30,00,720/-…on a preferential issue basis
In addition, in September 2024, it did a preferential allotment of warrants valuing ₹25.5 cr. For these warrants, Advait Energy Transitions Ltd received the initial 25% of money about ₹6.3 cr on the allotment.
Q2-FY2025 annual report, page 6:
In addition, in FY2024, the company raised ₹6.11 cr by diluting its stake in its wholly owned subsidiary, Advait Greneergy Private Limited from 1005 to 76.32%.
Corporate announcement to BSE, March 31, 2024, page 3:
The total sum of Rs. 6,11,48,800 has been raised by the issue of 3152 shares by Advait Greneergy Private Limited…With this allotment, Advait Infratech Limited’s stake in Advait Greenergy Private Limited has been reduced to 76.32% from 100%
Therefore, to fund its business growth, Advait Energy Transitions Ltd has to raise a significant amount of additional funds through incremental debt and equity dilution.
The investor gets the same conclusion when she analyses the free cash flow position of Advait Energy Transitions Ltd.
b) Free Cash Flow (FCF) Analysis of Advait Energy Transitions Ltd:
While looking at the cash flow performance of Advait Energy Transitions Ltd, an investor is limited to only the FY2018-FY2024 period because the cash flow data for prior periods is not available.
During FY2018-FY2024, it generated cash flow from operations of ₹23 cr. During the same period, it made a capital expenditure of about ₹54 cr.
Therefore, during this period (FY2018-FY2024), Advait Energy Transitions Ltd had a negative free cash flow (FCF) of (₹31) cr (=23 – 54).
In addition, during this period, the company had a non-operating income of ₹12 cr and an interest expense of ₹14 cr. As a result, the company had a total negative free cash flow of (₹33) cr (= -31 + 12 – 14). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.
As discussed above, Advait Energy Transitions Ltd used incremental debt and equity dilution to meet this cash shortfall.
In such a situation, when the company’s business is highly cash-consuming and its profits are not able to meet its capital expenditure requirements leading to a reliance on debt and equity dilution; an investor notices a tricky situation that the company has paid about ₹3 cr as dividends to its shareholders.
Whenever a company with a negative free cash flow relying on additional debt and equity, pays dividends, then it might mean that these dividends in the hands of shareholders are simply a pass on from the debt proceeds or equity issuances.
Going ahead, an investor should keep a close watch on the free cash flow generation by Advait Energy Transitions Ltd to understand whether the company is able to generate surplus cash from its business or it keeps on relying on outside funds for growth.
Further recommended reading: Free Cash Flow: A Complete Guide to Understanding FCF
Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.
Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing
Additional aspects of Advait Energy Transitions Ltd:
On analysing Advait Energy Transitions Ltd and after reading annual reports, credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.
1) Capital allocation by Advait Energy Transitions Ltd:
There have been many capital allocation decisions by the management/promoters of Advait Energy Transitions Ltd, whose assessment is important for any investor.
1.1) Investment in equity shares of TECO 2030:
As discussed earlier, Advait Energy Transitions Ltd has invested about ₹40 cr to acquire a 4.89% stake in a Norwegian publicly listed company, TECO 2030 AS (Euronext).
Corporate announcement on BSE, September 23, 2024:
made further investment in TECO 2030 AS. TECO 2030, a Norwegian-based clean-tech listed Company. Post this 2nd tranche of investment, Advait Energy Holding AS holds 4.89% shares of TECO 2030 AS.
However, on Dec. 10, 2024, TECO 2030 has filed for bankruptcy. (Source)
Norwegian shipping hydrogen fuel cell pioneer Teco 2030 has admitted defeat in its efforts to continue operations. The Oslo-listed company filed for bankruptcy on Tuesday evening after running out of money.
The trading in the shares of TECO 2030 on the Euronext Stock Exchange is suspended (Source: Euronext)
From the disclosures of Advait Energy Transitions Ltd, it seems that it had invested in the publicly listed shares of TECO 2030 and not in any asset/factory or any research project leading to the development of intellectual property etc.
So, now, almost ₹40 cr worth of investment done by Advait Energy Transitions Ltd in TECO 2030 seems to be in the lowest ranking in the claims of recovery.
Moreover, an investor may also do her due diligence if it was possible for the company to assess the financial health of TECO 2030 before investing about ₹40 cr in its shares in September 2024 whereas it became bankrupt within 3 months from the investment.
An investor may contact the company directly to understand if there is any chance of recovery of the significant amount of money invested by it in TECO 2030, which it had raised by doing equity dilution by way of preferential allotment of shares (₹82.3 cr) in July 2024.
Also read: How to Identify if Management is Misallocating Capital
1.2) Investment in the joint venture TG Advait India Private Ltd:
Advait Energy Transitions Ltd made an equity investment of ₹10.8 cr in the joint venture company, TG Advait India Private Limited (TAIPL) with its promoters and a Chinese company.
FY2024 annual report, page 131:
However, after running the plant of TAIPL for about 7 years producing OPGW and OFC, the company has barely managed to make a profit of ₹0.36 cr for the first time in FY2024 and is currently carrying forward accumulated losses of more than ₹18.5 cr. The situation of the business of TAIPL is such that the auditor of the company has raised serious questions on the going concern/survivability of the company.
FY2024 annual report, page 160:
As per Audit…of M/S TG ADVAIT INDIA PRIVATE LIMITED (Joint Venture) which stated that the company has accumulated losses amounting to Rs.1851.16 lakhs as at 31st March 2024…company has started making profits from the current year ending 31st March 2024…existence of a material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern.
1.3) Investments in equity shares of Yes Bank Ltd by Advait Energy Transitions Ltd:
In addition, an investor also notices that Advait Energy Transitions Ltd has made investments in equity shares of Yes Bank Ltd.
FY2024 annual report, page 131:
An investor may contact the company directly for clarification about how an investment in the shares of Yes Bank Ltd benefits the business of the company at a time when it has to raise debt and dilute equity for its working capital and other investment needs.
Also read: How to do Financial Analysis of a Company
2) Related party transaction of Advait Energy Transitions Ltd with promoters and their group entities:
Over the years, Advait Energy Transitions Ltd has entered into numerous related party transactions with promoters and their entities. These transactions range from buying and selling goods, payment of rent, and giving corporate guarantees for loans taken by entities in which promoters have personal stakes.
Let us see some of these transactions.
2.1) Purchase and sale of goods by Advait Energy Transitions Ltd from/to promoters’ entity:
The company has been buying and selling goods from Hind Power Services (HPS), which is a proprietorship firm of Mr Rahul Sheth, father of the founder, Mr Shalin Sheth.
FY2020 annual report, page 12:
Mr Rahul Sheth owns the firm, Hind Power Service.
FY2023 annual report, page 92:
Over the years, Advait Energy Transitions Ltd has made purchases and sales of goods from HPS. For example, the company purchased goods worth ₹25 cr and ₹3 cr from HPS in FY2022 and FY2021 respectively.
FY2022 annual report, page 119:
Other than the sale and purchase of goods from promoters’ personal entities, Advait Energy Transitions Ltd has also been paying rent to the promoter Mr Shalin Sheth and his wife, Ms Rejal Sheth. In FY2023, the company paid them a rent of ₹17.88 lakh as rent (=7.14 + 10.74).
FY2023 annual report, page 92:
An investor should be extra cautious while assessing companies that enter into sale and purchase transactions with promoters’ related parties. This is because such transactions have the potential to shift economic benefits from minority shareholders to promoters if the company buys goods/services from the promoters’ entity at a price higher than the market price or sells goods/services to the promoters’ entity at a price lower than the market price.
Also read: How Promoters benefit from Related Party Transactions
2.2) Conflict of interest of promoters with minority shareholders of Advait Energy Transitions Ltd:
As discussed above, Advait Energy Transitions Ltd has formed a joint venture, TG Advait India Private Limited (TAIPL), with a Chinese company, Jiangsu Tongguang Optical Fiber Cable Co. Ltd. for manufacturing optical fibre ground wires (OPGW) and optical fibre cables (OFC). As a part of this arrangement, Advait Energy Transitions Ltd buys OPGW and OFC from TAIPL for use in its contracts.
Usually, in a joint venture, the two partners have 50:50 or nearly equal stakes. However, in TAIPL, Advait Energy Transitions Ltd has only a 33.5% stake.
FY2024 annual report, page 167:
The promoters of Advait Energy Transitions Ltd own a stake in TAIPL in their personal capacity, which creates a conflict of interest as for the orders placed by Advait Energy Transitions Ltd to TAIPL for the purchase of OPGW and OFC, the promoters benefit in their personal capacity.
In the risk factors for investment in the IPO, the company had to disclose this conflict of interest in the RHP.
RHP for IPO, September 2020, page 23:
Our Company may have potential Conflicts of interest with our Joint Venture (Group company)…Our Promoters have interest in joint venture that conduct businesses with operations that are similar to ours.
Such conflict of interest is a risk for minority shareholders of publicly listed companies because the promoters while being in charge of the listed company may make it take decisions/sale/purchase transactions that benefit them personally and as a result, the minority shareholders suffer a loss of economic benefits.
Please note that Advait Energy Transitions Ltd also gave a corporate guarantee of about ₹25 cr to the loans taken by TAIPL from its lenders.
FY2022 annual report, page 96:
Also read: Why Management Assessment is the Most Critical Factor in Stock Investing?
3) Management Succession of Advait Energy Transitions Ltd:
The company was established by Mr Shalin Sheth (age 51 years) and his wife, Ms Rejal Sheth (age 47 years).
Currently, Mr Shalin Sheth is working as the managing director (MD) of Advait Energy Transitions Ltd and his wife, Ms Rejal Sheth is working as a director and chief financial officer (CFO) of the company.
The founder couple has two daughters, Ms Rutvi Sheth and Ms Aarini Sheth.
RHP for IPO, Sept 2020, page 110:
Currently, one of the daughters of promoters, Ms Rutvi Sheth is working in Advait Energy Transitions Ltd as the head of human resources and strategic communications.
FY2024 annual report, page 11:
The presence of the next generation in the active role in the business when the founder promoter is still active shows signs of good succession planning.
The presence of a well-thought-out management succession plan is essential in the case of promoter-run businesses as it provides for a smooth transition of leadership over the generations and provides continuity in the business operations of any company.
Further advised reading: How to do Management Analysis of Companies?
4) Weakness in the internal controls and processes at Advait Energy Transitions Ltd:
4.1) Noncompliance with legal requirements:
An investor comes across numerous instances where Advait Energy Transitions Ltd has not complied with legal requirements and as a result, has been fined by authorities.
For example, in FY2024, the board of directors of the company was not composed as per legal regulations. The company did not have a regular chairman and also did not have the required number of independent directors. As a result, BSE fined the company for ₹460,000.
FY2024 annual report, page 81:
company has not appointed regular chairman…Board of Directors of the Company was not comprising half of the independent directors…and BSE Limited has levied penalty of ₹4,60,000/- for violation of aforesaid SEBI Regulations.
In Oct. 2020, it closed the trading window for insiders after 23 days, which was required to be done immediately after the end of the quarter.
FY2021 annual report, pages 49-50:
The Company has closed Trading Window…for all designated persons and their immediate relatives on 23/10/2020 for quarter ended 30/09/2020.
On other occasions, the company did not file its disclosures on time to stock exchanges and other authorities.
In 2022, it filed the disclosure for the large corporate entity by a delay of 10 days (FY2022 annual report, page 65).
In 2020, it did not file the form MGT-14 after its board had approved credit facilities in August 2020 (FY2021 annual report, pages 45-46).
In 2023, it did not file the compliance certificate with BSE on time (FY2024 annual report, page 81).
Additionally, on multiple occasions, in FY2021, FY2022 and FY2023, Advait Energy Transitions Ltd did not deposit its undisputed statutory dues with govt. authorities on time and made substantial delays.
Also read: How to study Annual Report of a Company
4.2) Errors in the annual reports of Advait Energy Transitions Ltd:
On numerous instances, an investor observes errors in the annual reports and other public disclosures of Advait Energy Transitions Ltd, which indicate that the maker-checker mechanism at the company for vetting documents before filing them with stock exchanges has a lot of scope for improvement. Such errors also raise concerns in the minds of investors about how much reliance they can place on the data presented by the company.
For example, in disclosures of related party transactions, in the FY2022 annual report, the company disclosed that it purchased goods for about ₹25 cr from the promoters’ entity: Hind Power Services (HPS).
FY2022 annual report, page 119:
However, in the next year’s annual report, i.e. FY2023, while mentioning the purchases from HPS in the previous year, i.e. FY2022, the company reported a different figure of ₹21.40 cr.
FY2023 annual report, page 92:
An investor may contact the company directly to understand what is the correct figure of purchases done by it from HPS in FY2022.
In the FY2020 annual report, Advait Energy Transitions Ltd made errors while presenting the data for the short-term loans & advances (STLA). It reported a total STLA of ₹3.8 cr whereas the actual number should have been ₹7.7 cr. It had made a totalling error.
FY2020 annual report, page 68:
In multiple annual reports, while disclosing the remuneration of the managing director, Mr Shalin Sheth, in the related party transactions table, the company disclosed his remuneration as ₹39 lakh whereas in the employee benefits table in the detailed notes to the financial statement, it disclosed his remuneration as ₹63 lakh. For example, the FY2022 annual report, pages 117 and 119.
In the corporate announcement to BSE on September 5, 2024, about warrants allotment, Advait Energy Transitions Ltd gave reference to the dates of the board meeting, EGM and approval of BSE and the number of warrants as such figures which were completely wrong. It mentioned the EGM date as March 20, 2024, the BSE approval date as March 21, 2024, board meeting date as March 28, 2024, whereas there were no such meetings on these dates. In the announcement, the company mentioned the number of warrants as 86,90,976 whereas the actual number of warrants in the proposal was 141,591. The company also highlighted that it had received ₹2.17 cr as 25% consideration for warrant allotment whereas the actual amount was ₹6.28 cr.
Corporate announcement to BSE, September 5, 2024, page 2:
The company had to file a revised and rectified disclosure to BSE via another corporate announcement on September 6, 2024.
In the FY2023 annual report, while providing details of a new subsidiary formed by the company, it mentioned its own name at that time, i.e. Advait Infratech Ltd as the name of the new subsidiary.
FY2023 annual report, page 29:
At the time of its IPO, in Sept 2020, in the RHP, the company had included financial results for the last 3 years, i.e. FY2020, FY2019 and FY2018. However, while presenting the consolidated balance sheet, it made a mistake and represented the financials to be from years FY2019, FY2018 and FY2017.
RHP for IPO, September 2020, page 119:
Therefore, while going through the data presented by Advait Energy Transitions Ltd, an investor is uncertain whether the data that she is reading and based on which she has to make the investment decision is correct and reliable or not.
We recommend that investors should be very cautious while analyzing the data provided by the company in its public disclosures and crosscheck the data from multiple disclosures, reports and sources before making any final investment decision.
The Margin of Safety in the Market Price of Advait Energy Transitions Ltd:
Currently (Dec. 13, 2024), Advait Energy Transitions Ltd is available at a price-to-earnings (PE) ratio of about 71.2 based on consolidated earnings of the last 12 months ended Sept 30, 2024 (i.e. Oct. 2023-Sept. 2024).
We recommend that an investor read the following articles to assess the PE ratio to be paid for any stock, which considers the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be a sign of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
Analysis Summary
Overall, Advait Energy Transitions Ltd has grown its business at a very fast pace of 39% year on year over the last 10 years (FY2015-FY2024). However, this fast growth has come with its own challenges. A detailed analysis of Advait Energy Transitions Ltd. raises several concerns and red flags that investors should be aware of.
The company operates in highly competitive fields of power transmission & telecommunications equipment, where numerous players from organized as well as unorganized sectors compete with each other. These have a large presence of SME companies. Most of the orders are received by competitive bidding where players offering the lowest price are preferred. As a result, Advait Energy Transitions Ltd does not have a lot of negotiating/pricing power over its customers leading to fluctuating profit margins.
In order to improve its competitive advantages and improve its profitability, Advait Energy Transitions Ltd has expanded into forward and backward integration by entering into manufacturing (OPGW and OFC cables), ACS wire, Stringing Tools, Joint Box, ERS etc. as well as undertaking EPC contracts to install the equipment. It has managed to improve its profit margins significantly over the last 4-years (since its IPO) due to these initiatives.
In addition, the company has tied up with many institutions to gain access to the latest technology and to diversify into areas like IT/IoT, green hydrogen electrolysers, fuel cells, solar power EPC, power distribution EPC, carbon credits consultancy etc. to strengthen its business model. However, not all initiatives have worked as per plan e.g. emergency retrieval system (ERS) technology sourced from CSIR has not seen any orders from FY2021.
Business operations of Advait Energy Transitions Ltd are highly working capital intensive because it has to give a long credit period to its customers and in addition, customers of its EPC projects withhold 10% of order value as retention money for 2 years. Therefore, a large amount of money from Advait Energy Transitions Ltd is always stuck in receivables putting pressure on its financial position. Over FY2018-2024, against its profits of about ₹49 cr, it could only generate a CFO of about ₹23 cr.
Due to its capital-intensive business model, it had to do a capex of about ₹54 cr during this period and had to raise money from additional debt as well as equity dilution via IPO, preferential allotment of shares and warrants.
Advait Energy Transitions Ltd invested a significant amount of money raised from equity (₹40 cr) into shares of a Norwegian company, TECO 2030 and in Sept 2024, acquired a 4.89% stake in it. However, recently, within 3 months of its investment, TECO 2030 filed for bankruptcy citing its inability to run its operations due to lack of money. Shares of TECO 2030 are suspended from trading and it remains unclear whether Advait Energy Transitions Ltd will be able to recover its money or not.
Similarly, there are other capital allocation decisions of Advait Energy Transitions Ltd, which raise concerns in the minds of investors. For example, it invested ₹10.8 cr in a JV with its promoters and a Chinese company to manufacture OPGW and OFC cables; however, this JV has reported huge losses since its inception in FY2019 and has accumulated losses of ₹18.5 cr raising doubts on its survivability as a going concern.
Additionally, Advait Energy Transitions Ltd is investing its money in equity shares of unrelated companies like Yes Bank Ltd.
The company has entered into related party transactions with promoters and their entities like purchasing and selling goods, investing in JV with promoters, giving guarantees for their loans etc., which raise concerns of conflicts of interest where promoters may shift economic benefits away from minority shareholders.
Over the years, there have been multiple instances of noncompliance with legal regulations by Advait Energy Transitions Ltd, which have resulted in financial penalties for the company. In addition, public disclosures by the company have seen numerous errors, which indicate a large scope for improvement in its internal processes and controls.
Going ahead, an investor should keep a close watch on the profit margins of the company to check if it is able to maintain its advantage of forward and backward integration. She should also monitor the outcome of its numerous new business initiatives and whether it is able to successfully execute these ventures. She should check all the transactions of the company with its promoters as well as its capital investments to see if it is able to generate value for minority shareholders.
The investor should assess whether it is able to generate free cash flow. Any dividend payment without achieving free cash flow is similar to giving the money raised from debt or equity dilution to the shareholders as dividends.
Further recommended reading: How to Monitor Stocks in your Portfolio
These are our views on Advait Energy Transitions Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.
You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”
I hope it helps!
Regards,
Dr Vijay Malik
P.S.
Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
