Adani Group: Here's why market watchers say the conglomerate's bumpy ride may continue

Adani Enterprises Ltd (AEL), the flagship company of the diversified Adani Group whose interests span airports, ports, energy, and data centres to FMCG, will complete 30 years of being listed in November 2024. It is the oldest pureblood Adani Group firm on the bourses—excluding the much-older ACC and Ambuja Cements that the conglomerate acquired in September last year—and was listed a couple of years after Business Today began its annual BT500 study in 1992.

While AEL and the other listed firms of the Adani Group—Adani Green Energy, Adani Total Gas, Adani Energy Solutions, Adani Ports and Special Economic Zone, Adani Power, Adani Wilmar and the acquired cement entities, Ambuja Cements and ACC—have had their share of ups and downs on the bourses, the past one year has been one of the most tumultuous.

The latest edition of the BT500 list—based on the average market capitalisation (m-cap) for the 12-month period between October 1, 2022, and September 30, 2023—shows that barring AEL, Adani Power and Ambuja Cements, all other group firms have seen their rankings dip when compared with last year. Let us start with those that have improved their ranks. AEL has jumped to No. 14 from No. 24, Adani Power from No. 58 to No. 51, and Ambuja Cements from No. 67 to No. 61. Meanwhile, ACC slipped to No. 142 from No. 114, while Adani Wilmar dropped to No. 82 from No. 62. The rest of the Adani Group firms also didn’t fare any better and the combined average m-cap of the group’s nine firms which are part of the BT500 shrank by nearly Rs 1.65 lakh crore or 11 per cent when compared to last year’s study.

This assumes significance as the listed companies of the Gautam Adani-led conglomerate featured among the list of entities that had registered the biggest jump in terms of rankings in last year’s list. But much has happened since then. Geopolitical and macroeconomic factors have made investors jittery. And in January 2023, short-seller Hindenburg Research released a report accusing the group of market manipulation and accounting fraud. The Adani Group dismissed the allegations, but the group entities have taken a huge hit, as the findings of this year’s BT500 study show. Stocks of most Adani group firms were trading at record levels around end-2022.

Interestingly, while the combined valuation of the Adani Group firms fell 11 per cent to Rs 13.26 lakh crore, entities controlled by Mukesh Ambani, Chairman & MD of Reliance Industries, saw their combined market capitalisation drop a marginal 1.7 per cent to Rs 16.87 lakh crore in the latest BT500 study.

Meanwhile, some market participants believe that the Adani Group is not out of the woods yet, though others are of the view that the worst could be behind them. However, it would not be smooth sailing as getting investor confidence back would be a herculean task and require more than just prepaying loans, reducing debt, selling stakes to marquee investors, exiting non-core businesses (the group is looking to exit the FMCG segment) or expanding its global footprint.

The Adani Group declined to take part in this story.

BUILDING TRUST IS THE KEY

Market expert Ambareesh Baliga, who has seen many cycles in the market, believes denying the allegations would not allay investors’ concerns. “They need to prove that there are no governance issues and, more importantly, that needs to be proven again and again. Only then will investors get confidence in the group,” he says.

To be sure, the group has been engaging with investors and analysts at regular intervals and highlighting the ‘confidence-building measures’ its firms have undertaken in the past few months, say market watchers. For instance, through a series of stake sales, global biggies like GQG Partners, Qatar Investment Authority and Total Energies have come on board as investors; these three cumulatively have invested nearly Rs 40,000 crore, reposing their faith in the group.

The management has also reiterated that Adani Group firms don’t face any refinancing risk, even as the group has consistently diversified its long-term debt portfolio to reduce its exposure to domestic banks. As of September 30, bonds accounted for 35 per cent of its debt with the rest originating from global banks. At the end of FY23, the mix was bonds (39 per cent), global banks (29 per cent), and private banks and NBFCs (32 per cent).

“High leverage or high debt is a myth as our net debt to Ebitda ratio has improved from 7.6 around 10 years ago to 3.8 around two years ago, and is currently under 3. Anything under 3 is not considered high,” says a senior official of the Adani Group, who declined to be named as he is not authorised to speak to the media. “Existing funds from operations and cash balances in each company are enough to repay all existing long-term debt and hence there is no refinancing risk.”

The Hindenburg report didn’t stop the group from courting investors. A little over a month after the report came out, it held a roadshow in Singapore; it was followed by another in Hong Kong that was attended by over a dozen global banks including BNP Paribas, Deutsche Bank, DBS Bank, Standard Chartered Bank, ING, MUFG and Mizhuo.

However, the publication of the report has impacted its pace of growth. “The pace at which the group was growing has slowed down for the simple reason that they do not want to take any risk related to potential default at this juncture in a negative environment where a genuine problem gets blown out of proportion,” says J.N. Gupta, Founder & Managing Director of proxy advisory firm Stakeholders Empowerment Services.

The group has reassured investors that there is no liquidity crisis and even pre-paid certain debt obligations to instil more confidence; its debt was pegged at Rs 2.27 lakh crore or $27.3 billion, as of March 31, 2023. It has paid back around $2.15 billion worth of loans taken by pledging shares in its listed firms and another $500-million loan it took to acquire Ambuja Cements. It has also pre-paid Rs 7,374 crore worth of loans that were taken by pledging shares in four group firms.

More importantly, the group has said that irrespective of the massive erosion in its valuations, it remains firmly focussed on its green hydrogen business—executed under the aegis of Adani New Industries Ltd (ANIL)—along with its focus areas of airports, data centres, metals & mining (it is already a leader with 50 per cent market share in the mine developer & operator or MDO segment) and roads, and is looking to unlock value in these verticals. In fact, Founder & Chairman Gautam Adani referred to new businesses becoming market-ready while announcing the H1FY24 results of Adani Enterprises on November 2.

“We will be divesting some businesses including airports, roads and some other businesses at some point in the future,” says the Adani Group official quoted earlier, while highlighting the fact that such divestments and stake sales will bring in significant amount of liquidity.

At the same time, the group also needs to keep an eye on another important metric—the return on capital employed (ROCE)—as many global investors consider this number while making an investment decision. For instance, legendary investor Mark Mobius, who had said earlier that he has stayed away from the group due to debt concerns, recently revealed that the first thing he looks at is the return on capital, and it should be at least over 20 per cent. Adani Group firms do not fare high on this parameter with the average ROCE pegged at 12.6 per cent, per the BT500 analysis (See table ‘Profit Performance’).

A BUMPY ROAD AHEAD

Gupta of Stakeholders Empowerment Services believes that investors could see some amount of stability going ahead even though the negative news flow may continue in the near future. “Retail investors have increased their exposure in the group probably because they see value and did bottom-fishing. So as far as the investor community is concerned, it seems that whatever panic had to happen around the Adani counters has already happened and there could be some amount of stability going ahead,” he says.

Indeed, all but one company—Adani Power—saw an increase in the share of retail holding over the last three quarters even as mutual funds largely continued to stay away from the group (see table ‘The Holdings Story’). In a similar context, Baliga says that prior to the Hindenburg report, investors were mostly chasing momentum and the report switched that off. “I think the movement in the Adani Group stocks going ahead would be lacklustre in nature as controversies keep coming up,” he says, adding that the group needs to bring on board more serious domestic and foreign investors.

Finally, one must keep in mind that the Supreme Court verdict based on the Sebi report on Hindenburg’s allegations is still awaited. The decision of the apex court will undoubtedly have an impact on the group’s future stock market movement.

@ashishrukhaiyar

The full BT500 List can be accessed here