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Equity Research Report: Adani Enterprises

In FY23, core operating EPS jumped almost +295% due to the lower base effect of various incubating businesses (airports, roads); the trend may continue in FY24-25 too

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Company Overview and Business Model:

Adani Enterprises Limited (AEL) is an Indian diversified MNC holding/trading/infra/utility company and a part of Adani Group, headquartered in Gujrat’s Ahmedabad and primarily involved in the mining and trading of coal and iron ore. Through its various subsidiaries, Adani also has business interests in airport operations, edible oils, road, rail, and water infrastructure, data centers, and solar manufacturing, among others. Through its various subsidiaries, Adani Enterprises is involved in edible oils and staple foods, solar PV manufacturing, road infrastructure, water infrastructure, data centers, agri-output storage and distribution, defense and aerospace, bunkering, rail and metro infrastructure, oil exploration, petrochemicals, cement, and mass/digital media. It may also foray into B2C (direct-to-consumer) space in the coming days.

Adani Enterprises is now mainly active in energy & utility (including EV), transport & logistics, consumer business, and primary industry. Apart from the primary sector (mining, IRM, industrials-PVC, copper), all the other segments are in the incubation stage while the primary sector belongs to establishing business as per the Adani dictionary.

Adani Enterprises is a diversified group organized into five primary business segments:

·         Integrated resource management-logistics and procurement services (67% of revenue)

·         Others (22% of revenue): food manufacturing, palm oil production, sugar production, fruit storage, manufacturing of aeronautical and defense systems, construction of roads, highways, and railway infrastructure, construction of data centers, development and rehabilitation of water treatment plants and related infrastructure, etc.

·         Mining services (4% of revenue)

·         Photovoltaic/solar panel manufacturing (3.5% of revenue)

·         Airport management (3.5% of revenue): ownership, as of March 2022, of 6 airports in India

·         The revenue by the source of income is essentially divided between sales of products (86%) and services (14%).

·         Almost 60% of revenue is generated in India, while 40% comes from various international operations

Adani Enterprise was incorporated in 1993 under the name Adani Exports Limited. The company mainly deals with the group's integrated resources management, power trading, and natural resources businesses on a standalone basis. Its general purpose is to act as an in-house incubator for Adani Group's new businesses (startups) until they become self-sustainable.

Notable subsidiaries and jointly-controlled companies of Adani Enterprises include:

Adani Agri Fresh

Adani Agri Fresh is involved in the procurement, packaging, logistics, and marketing of apples produced by farmers in Himachal Pradesh, as well as other Indian fruits, under the ‘Farm Pik’ brand. It also imports fruits from other countries and sells them in the Indian market.

Adani Airport Holdings

Adani Airport Holdings is the airport management and operations subsidiary. It is the majority stakeholder in Mumbai International Airport Limited (MIAL), which owns the Chhatrapati Shivaji Maharaj International Airport and the under-construction Navi Mumbai International Airport. In addition, the company has a 50-year lease on Ahmedabad, Guwahati, Jaipur, Lucknow, Mangalore, and Thiruvananthapuram international airports, starting January 2021. It will operate, manage and develop all six airports for 50 years.

Adani Cement

Adani Cement or Adani Cement Industries Limited (ACIL) is a cement company based in Gujarat. It was incorporated by Adani Group on June’21. Adani Cement is a wholly-owned subsidiary of Adani Enterprises and has not begun its business operations. It was reported in June’21 that the Adani Group planned to set up a cement plant in Maharashtra which will have an initial capacity of 5 MT/annum with an approximate investment of INR 100B The Group has also proposed a 10MT/annum Lakhpat cement plant, but later put the plans for that plant on hold.

In Sep’22, Adani group bought Holcim (Swiss giant) stake in Ambuja Cement and ACC for around $6.40B to become India’s 2^nd largest cement player. Holcim sold its entire 63.15% stake in Ambuja Cements, which owns a 50.05% interest in ACC, as well as its 6.64% direct stake in ACC.

AdaniConneX

AdaniConneX was launched in 2021 as a 50:50 JV with EdgeConneX to develop a network of hyper-scale data centers in India, starting with Chennai, Navi Mumbai, Noida, Visakhapatnam, and Hyderabad. Recently Adani ConneX announced building a hyper-scale data center over 51.8 Acres of land in Kolkata's Bengal Silicon Valley tech hub (New Town/Rajarhat).

Adani Defence & Aerospace

It is a defense manufacturing arm of the company. It manufactures armed drones such as Hermes 900 UAV and small arms such as IWI Negev, Tavor TAR-21, and IWI ACE. As a part of a joint venture between Elbit Systems from Israel and Adani Defence and Aerospace, a manufacturing facility for the unmanned aerial vehicle (UAV) has been set up at Hyderabad, Telangana, inaugurated in 2019.

In April 2020, Adani Defence Systems and Technologies acquired Alpha Design Technologies Pvt Ltd., an organization involved in the design, development, and manufacture of defense electronics and avionics. Further, in September 2020, Adani acquired a 51% stake in PLR Systems Private Ltd which was incorporated in 2013 and engages in manufacturing and supply of indigenously built defense equipment to the armed forces. In May 2022, Adani Defence Systems and Technologies, a wholly-owned subsidiary of Adani Enterprises, signed a definitive agreement to acquire a 50% stake in Bengaluru-based General Aeronautics. The company is involved with DRDO in Long-range Guided Bombs, VSHORAD, UAV-launched Precision Guided Munition (ULPGM), and Rudram-1.

Adani Digital Labs

Adani Digital Labs was incorporated in September 2021 as a wholly-owned subsidiary of Adani Enterprises, to build a digital platform for the consumers of Adani Group's B2C businesses. In December 2022, the company made the alpha release of the mobile app, named "Adani One", with the integration of the group's airport vertical.

Adani Mining

Adani Enterprises operates its mines in India, Indonesia, and Australia, and supplies coal to Bangladesh, China, and some countries in Southeast Asia. It has a coal mine in Bunyu, North Kalimantan, Indonesia, which produced 3.9 MT of coal in 2016-17. The Group has made the largest investment by an Indian company in Australia at the controversial Carmichael coal mine in the Galilee Basin, Queensland, but the development of this mine is as of 2020 the subject of a court challenge to the Australian Government over its lack of adherence to environmental/EV legislation. In 2020, Adani Australia, the controversial Australian mining arm of Adani Enterprises was rebranded as Bravus Mining & Resources. The new subsidiary is responsible for developing the Carmichael coal mine in Central Queensland.

Adani New Industries (EV arm)

Adani New Industries was incorporated in January 2022 as a wholly-owned new energy subsidiary of Adani Enterprises. It undertakes green hydrogen projects such as low-carbon power generation, as well as the manufacture of hydrogen fuel cells, wind turbines, solar modules, and batteries. The company also announced that it would produce green hydrogen derivatives such as ammonia, methanol, and urea. In June 2022, Total Energies acquired a 25% stake in Adani New Industries.

Adani Road Transport

Adani Road Transport undertakes the construction, operations, and maintenance of roads, highways, expressways, and tollways. The company has NHAI projects in the states of Andhra Pradesh, Chhattisgarh, Gujarat, Kerala, Madhya Pradesh, Maharashtra, Odisha, Telangana, and West Bengal. In December 2021, it won the contract to build a 464 km stretch of the 594 km-long Ganga Expressway in Uttar Pradesh.

Adani Solar

Adani Solar is the solar PV manufacturing and EPC subsidiary of Adani Enterprises. As of November 2020, it is the largest integrated solar cell and module manufacturer in India.

Adani Water

It was founded as a subsidiary in December 2018, with a focus on water infrastructure construction. It is currently involved in wastewater treatment, recycling, and reuse projects at Prayagraj under the National Mission for Clean Ganga Framework.

Adani Welspun Exploration

Adani Welspun Exploration is a 65:35 JV between Adani Group (through Adani Enterprises) and Welspun Enterprises. It is involved in oil and gas exploration.

Adani Wilmar

Incorporated in 1999, Adani Wilmar is a food processing company and a JV between Adani Enterprises and Wilmar International. In November 2000, Adani Wilmar launched its flagship brand "Fortune" under which it produces and sells edible oils including sunflower oil, palm oil, soybean oil, mustard oil, rice bran oil, cottonseed oil, groundnut oil, and vanaspati. Apart from edible oils, it sells flour, rice, pulses, sugar, soya nuggets, and instant food mixes. The company also makes personal care products like soap, hand wash, and hand sanitizers under the "Alife" brand. In addition, it makes industrial-use products comprising oleo chemicals, castor oil, and lecithin. The company went public in January 2022 with an initial public offering, after which Adani Enterprises and Wilmar International continued to hold a combined 88% stake in Adani Wilmar.

AMG Media Networks

AMG Media Networks was incorporated in April 2022 as a wholly-owned media and publishing subsidiary of Adani Enterprises. In May 2022, AMG Media Networks announced the acquisition of a 49% stake in Quintillion Business Media Ltd, which operates BQ Prime, for an undisclosed amount. Adani Enterprises had previously acquired an unspecified minority stake in the company in March 2022. In August 2022, AMG Media Networks announced that it will acquire a 29.18% stake in NDTV through its subsidiary and make a tender offer to acquire another 26%. Now AMG/Adani controls almost 65% of NVTV after various controversies.

Former subsidiaries

Former subsidiaries Adani Ports & SEZ, Adani Power, and Adani Transmission were demerged from Adani Enterprises in 2015, whereas Adani Green Energy and Adani Gas were demerged in 2018.

·         Adani Ports & SEZ: Dhamra, Hazira Kamaraja, Krishnapatnam, Mormugao, Mundra, Dahej, and Vizhinjam International Seaport

·         Adani Power: Kawai Thermal, Mundra Thermal, Tiroda Thermal, Raikheda Thermal, and Udupi Power Plant

·         Adani Transmission: One of the largest private power sector (transmission) companies in India

·         Adani Total Gas: Indian Oil-Adani Gas-Total Gas

·         Adani Mining: Bravus Mining & Resources and Carmichael coal mine

·         Adani Airports: Lucknow-Chaudhary Charan Singh International Airport; Mumbai-Chhatrapati Shivaji Maharaj International Airport; Jaipur International Airport; Guwahati-Lokpriya Gopinath Bordoloi International Airport; Mangalore International Airport; Ahmedabad-Gandhi Nagar-Sardar Vallabhbhai Patel International Airport; and Thiruvananthapuram International Airport

·         Adani Green Energy: Kamuthi Solar Power Project

·         Adani Roads: Azhiyur Vengalam Road Private Limited; Bilaspur Pathrapali Road Private Limited; Mancherial Repallewada Road Project Limited; Suryapet Khammam Road Private Ltd

Currently, Adani group has 7-listed companies (NSE) and phenomenal gains (till 2022 lifetime high)

·         Adani Enterprise: gained around +124% last year (2022) and +1748% in the last three years (2019-22)

·         Adani Ports:+52% last year and +395% in the last three years

·         Adani Transmission:+155% last year and +1980% in the last three years

·         Adani Total Gas: gained around

·         Adani Green energy: +234% last year and +7350% last three years

·         Adani Power: +354% last year and +745% last three years

·         Adani Wilmar: +149% since Feb’22 IPO

Key management: Rajesh Adani (MD & ED)-brother of Gautam Adani

Board Members: Gautam Adani (Executive Chairman)

Key Shareholders: Adani Family (promoter)

Adani Enterprise is primarily an Adani family company controlling the management and holding almost 75% of publicly listed shares, while Indian DII major LICI (Government proxy) holds around 5%. But the Indian public and other DIIs and also FIIs have little ownership in the company for various reasons including sky-high valuation and credibility issues of the Adani group.

Recently GQG Partners' Rajiv Jain, a veteran influential investor raises Adani's stake by about 10% for $3.5B. As a reminder, in March’23, GQG acquired almost $2B worth of shares in four of Adani’s firms from a family trust (after Adani stocks tumbled on the Hindenburg report).

 

Summary of latest report card: Q4FY23 (Consolidated: INR 100 Cr. =1B)

·         Operating revenue INR 313.46B vs 266.12B sequentially (+17.79%) and 248.66B yearly (+26.06%)

·         Operating expense INR 277.59B vs 249.83B sequentially (+11.11%) and 236.03B yearly (+17.61%)

·         EBITDA INR 35.87B vs 16.29B sequentially (+120.18%) and 12.62B yearly (+184.14%)

·         Net interest paid INR 15.25B vs 5.96B sequentially (+155.93%) and 6.22B yearly (+145.37%)

·         Core operating profit (EBTDA=EBITDA-INTT) INR 20.62B vs 10.33B sequentially (+99.56%) and 6.41B (+221.73%)

·         Equity share capital INR 1.14B vs 1.14B sequentially (unchanged) and 1.100B yearly (+3.66%)

·         Core operating EPS (EBTDA/Share) INR 18.09 vs 9.06 sequentially (+99.56%) and 5.83 yearly (+210.39%)

·         EBITDA margin 11.44% vs 6.12% sequentially (+532 bps) and 5.08% yearly (+637 bps)

·         Core operating (EBTDA) margin 6.58% vs 3.88% sequentially (+270 bps) and 2.58% yearly (+400 bps)

·         Interest/EBITDA 42.52% vs 36.58% sequentially (+594 bps) and 49.23% yearly (-672 bps)

Summary of latest report card: FY23 (Consolidated: INR 100 Cr. =1B)

·         Operating revenue INR 1369.78B vs 694.20B (+97.32%)

·         Operating expense INR 1281.50B vs 657.07B (+95.03%)

·         EBITDA INR 88.28B vs 37.13B (+137.75%)

·         Net interest paid INR 39.70B vs 25.26B (+57.17%)

·         Core operating profit (EBTDA=EBITDA-INTT) INR 48.58B vs 11.87B (+309.16%)

·         Equity share capital INR 1.14B vs 1.100B (+3.66%)

·         Core operating EPS (EBTDA/Share) INR 42.61 vs 10.80 (+294.73%)

·         EBITDA margin 6.44% vs 5.35% (+110 bps)

·         Core operating (EBTDA) margin 3.55% vs 1.71% (+184 bps)

·         Interest/EBITDA 44.97% vs 68.02% (-2305 bps)

Remarks by Gautam Adani (Chairman) on the FY23 report card:

“Once again, Adani Enterprises has lived up to its standing as not only India’s most successful business incubator but also one of the world’s most successful infrastructure foundries. The past year’s results represent indisputable evidence of the strength and resilience of the Adani Group’s operational and financial performance. These exceptional results also highlight our consistent track record of gestating and building critical infrastructure businesses. Our mega-scale infrastructure project execution capabilities and our O&M management skills, which are comparable to the best in the world, are strengths that we continue to derive from the Adani portfolio’s diversity to create reliable long-term value for all our investors. Our focus remains on governance, compliance, performance, and cash flow generation.”

Highlights of management comments (presser and Q&A):

·         Revenue growth was supported by a strong performance by IRM (Integrated resource management) and Airport business

·         Higher EBITDA was supported by the growth of incubating (airports, roads) apart from IRM business

·         Incubating business updates (Q4FY23)

·         Adani Airports Holdings Ltd (AAHL - Airports)

·         During the quarter, Adani Airports handled:

o   21.4 Mn passengers (Up by 74% YoY)

o   149.4 k Air Traffic Movements (Up by 56% YoY)

o   1.8 Lacs MT Cargo (Up by 14% YoY)

o   Adani Road Transport Ltd (ARTL – Roads): Construction is in full swing across all HAM and BOT projects in AP, MP, TL, Kerala, OD, WB, MH, and UP) from initial to almost 50% stage

o   AdaniConnex Pvt Ltd (ACX - Data Center: Chennai Phase-I already operational; Phase-II around 49%, while Noida, Hyderabad around 37 and 30% comp0leted

o   Established Businesses for Q4 FY23

o   Adani New Industries Ecosystem

o   Solar Cell & Module

o   Cell line COD declared 31st March 2023 for the New 2.0 GW Plant

o   Completed upgradation of existing 1.5 GW module line to 2.0 GW TOPCON Cell Technology and COD declared on 1st April 2023

o   Volume increased by 4% to 315 MW

o   Wind Turbine Manufacturing

o   Prototype-2 - Assembly completed

o   Blade manufacturing facility - Machine installation and ramp-up work started

·         Primary Industries

o   Mining Services production increased by 17% to 10.0 MMT

o   Agreement for 3 commercial coal mines signed in Q4 FY23

o   Integrated Resource Management volume up by 20% to 20.5 MMT

·         Triple-digit phenomenal business and EBITDA growth comes from both strong performance in established and incubating business

·         For the first time, the EBITDA of incubating businesses at Rs. 50.43B, which is a growth of 375%, which

is higher than the operating business EBITDA or continuing business EBITDA, which itself grew at 36% to Rs. 49.82B

·         This signifies both the operational excellence of existing businesses and the coming of age of incubating businesses

·         The phenomenal growth in EBITDA was achieved without taking any fresh debt, resulting in a significantly lower debt-to-EBITDA ratio than in FY22

·         EV and related business activities were upbeat

·         Higher prices of coal also boosted IRM business

·         Airport business was boosted by higher passenger traffic (+72%) and higher ait traffic (+56%)

·         Adani Enterprises is the pioneer of the MDO - Mine Development Operator concept in India with an integrated business model that spans developing mines, as well as the entire upstream and downstream activities.

·         AEL provides a full-service range, right from seeking various approvals, land acquisition, R&R, developing required infrastructure, mining, beneficiation, and transportation to the designated consumption plant, which is thermal power stations

·         PEKB mine, which is the first mine of MDO, is located in the state of Chhattisgarh and has become the first mine to achieve the production milestone of 100 million metric tons cumulative by this year, which AEL achieved in the last quarter

·         During the quarter, AEL has won three commercial mines, Puranga, which is in Chhattisgarh, Gondbahera Ujheni, which is in MP, and northwest of Madheri, which is in Maharashtra

·         AEL is now an MDO for eight coal blocks, and two iron ore blocks, as well have now 10 commercial mine blocks with a combined peak-rated capacity of 150+ million metric tons per annum

·         These projects are located in the state of Maharashtra, Chhattisgarh, Madhya Pradesh, Orissa and Jharkhand

·         The mining production in the quarter for FY’23 increased by 17% to 10 million metric tons on a year-on-year basis, And the further dispatch increased to 7.9 million metric ton

·         During the quarter, the revenue from the mining increased by 18% to INR 8.03B, and EBITDA increased by 8% to INR 3.11B

·         Continues to develop IRM business relationships with diversified customers across various end-user industries and AEL remains the number one player in India

·         In Q4FY23, the volume of IRM increased by +20% to 20.5MT and the EBITDA increased by +42% to Rs.8.59B amid improved realization (y/y)

·         Estimated CAPEX for FY24: $2.1B for transportation business (airport, road); $800M  for data centers and utilities; and $1B for materials; a total of around $3.8B for incubating and continuing/established business (assuming average rate for USDINR around 80)

·         Capex for the green H2 plant will be ramped up from FY: 25-26 (after getting market feedback about supply & demand); for the time being Adani will continue to focus on the existing capex plan in core infra, energy, and utility space (after Hindenburg report led market disruption); there will be some ramp up in other capex from FY: 26/28-30

·         The main focus of the integrated project (like solar manufacturing) is to produce cheaper green H2 (by controlling input cost); but in the interim period, the company is also selling to 3^rd parties with a 20-25% normal margin; sales for Q4FY23 was around 375MW; going forward target will be 2GW

·         But most of the products of EV-integrated projects like testing electrolyzers for wind, solar, and  hybrid

·         Q4FY23 revenue for Cramichel (AU) plant was around Rs.17.46B; EBITDA: Rs.7.80B; FY24 target 12MT; present run rate 1.1-1.2 MT; long-term sustainable target 15MT

·         The overall domestic mining (MDO) production target for FY24 is around 40 MT

·         Adani is now comfortable with the present EV integrated facility (solar, ingot wafers, cell module, ancillaries, and wind) of 4GW for cheaper production of green H2 and is not in a hurry to go for higher volume (expansion) like 12GW

·         The surge in EBITDA by more than 100% is due to higher revenue from some capital-intensive incubating businesses such as airports, and roads

·         As more incubating/infra projects (like Mumbai airport) are now coming online, expect a similar trend in EBITDA growth

·         All such EBITDA-positive active incubating projects including green H2 ecosystem will be demerged eventually by the AEL and listed from FY:24-25/26 onwards (like Adani Green, Adani Power, ATGL, etc)

·         Hindenburg short seller report is malicious and politically motivated; AEL has good cash-flow growth along with top/bottom line growths along with an ongoing deleveraging trend since 2015-16

·         Overall incubating business is growing more than +50% on average and the story is just starting

·         As most of the road projects are now online, there are jump in EBITDA growth in FY23 compared to FY22, when they were in the development phases

·         Higher finance cost/interest expenses due to higher capex for airport business and right-of-use lease cost related to the rail line in Australia

·         Net debt to EBITDA is 2.2 in FY23, almost unchanged from FY22 despite higher revenue

·         Some reduction in short-term debt levels in airports and Australian projects due to the strategy to put longer-term capital through SPV

·         Total capex of around $50B for New Industries (Green H2, supply chain, and downstream products)

·         Out of this, around 65% would be for generation elements of green H2 power/green power, downstream products, and electrolyzer around 13-14% each, and the rest within the manufacturing ecosystem

·         The Mundra Green Hydrogen Hub project, which is an integrated manufacturing system is in the advanced preparatory stage

·         Confident in maintaining the volume of IRM/Coal business despite a steep correction in coal prices as the company is acting more in service functions across the country, but all will depend upon the actual volume of imported coal

·         Currently, mines, which AEL is operating have a peak capacity of around 50 MMT and the company is now operating around 50% of that; going forward if everything goes well and the customer agrees to higher volume, there would be no issue in increasing the mining capacity

·         Newly acquired mines in the recent past are a mix of underground, opencast, explored, and also unexplored ones; thus the company is now evaluating possible peak capacity and GR

·         The overall mining business was affected to some extent in FY23 due to some operational issues in Rajasthan’s PEKB mine, but that has been sorted out now and hopefully, it will continue to serve the mines requirement for the RJ government

·         Targeting a total of 12000 lane KM by FY26 from the present 5000 lanes KM as per available opportunities in the country mainly on a BOT basis

·         May go for monetization (listing/deleveraging) of incubating business on a whole of business/sector basis rather than a specific project like Adani Roads, Adani Airports, etc (like Adani Gas, Adani Transmission, Adani Port, etc)

·         Navi Mumbai Airport will be ready by Dec’24

·         No official communication by the government for any inordinate slowing down of the privatization of airports and Adani is quite confident about airport disinvestment plan of the government which may be executed at a gradual speed

·         Gujrat government is providing additional land (around 80000 hectares) over and above current holdings in another location

·         The planned commissioning of the test phase of the 0.2 MT green H2 plant will be by early FY27

·         Management is confident to keep business momentum in FY24 and one can expect a similar growth trend also (due to triple-digit growth in incubating business)

Fair valuation: Adani Enterprise: Rs.2386/- by FY23, 3579/- BY FY24, 4586/- by FY25 and 5878/- by FY26

Adani Enterprises reported a core operating EPS of around 42.61 in FY23 against 10.80 in FY22, which is a growth of almost +295% due to the lower base effect of incubating business led by various airports and road projects (commercial operation). Normal/established business has delivered around 20-25% normalized growth in core operating EPS.

Now looking ahead, considering the quarterly run rate, management comments, and guidance/indication about the growth of various incubation businesses near completion/to be completed in FY24, Adani Enterprises may report +150% growth in core operating EPS (if not another +300% as per run rate) to around 106.54 (primarily low base effects). In FY25, the growth in core operating EPS may come down to around +50% due to fading effect of a low base as by then various incubating businesses should start and contribute fairly towards EBITDA/cash flow. Thus, in FY25, Adani Enterprises may report core operating EPS around 159.80, followed by 199.75 and 249.69 at a normalized CAGR of around +25% (due to relatively higher base effects of incubating business EBITDA).

Similarly, if we consider BVPS and OCFS at 50% CAGR in FY: 24-25 and 30% in FY: 26-27) and assume fair average PE of 25 (EPS), P/B of 5, and P/OCFS of 10 (midterm sustainable valuation multiple), the average fair value (EPS+BVPS+OCFS) may be around Rs.2386-3579-4586-5878 (FY24-27); current fair value around Rs.1546/-. As the financial market generally discounts 1Y earnings/EPS in advance, Adani Enterprises may scale 2386/- by Dec’23, 3579/- by Mar’24, 4586/- by Mar’25, and 5878/- by Mar’26.

Although Adani Enterprise has provided no specific guidance about revenue and EBITDA margin, from the overall presentation and Q&A (as discussed above), the company is expecting overall positive and meaningful EBITDA from FY25/26 and by FY30-32 there may be more visibility of various incubation business and earnings. But even if we take Adani’s financial reports at face value, Adani Enterprise and also other group stocks were highly overvalued by any matrices till the Hindenburg report. The EBITDA margin is in the low single digits. The company is now paying almost 45% of EBITDA as interest on debts, which is itself a big red flag.

Adani Enterprise is involved in various traditional infra and utility projects, which have a normally long gestation period, capex heavy, and low operating margins. Also for new EV business, there is little earning visibility till at least FY26. Adani Enterprise is expecting India's growth story will reflect in its growth. Now even considering its proximity with the current Federal Government of India (Modi/BJP) and also various non-congress or even congress-ruled state governments and infra thrust ahead of the G20 event, 2024 general election and likely big sporting events in the next 10-20 years, the transition from fossil fuel to EV, all infra/utility companies including Adani may also report robust growth in EBITDA, but all these growth stories may be visible only after 2026-30.

But there are also immense downside risks for the projected valuation amid poor earning visibility, higher borrowing costs, higher project gestation period, limited accessibility of fresh debt or even equity funding, and various allegations of money laundering/accounting fraud.

Risk of Hindenburg Report: Adani Group

As a recapitulation, Adani Group’s shares tumbled in late December’22 from a record high around after influential U.S.-based Hindenburg Research (short seller/activist investor) issued a negative report, initiating a short position in the company. Hindenburg alleged various frauds including accounting jugglery, stock price manipulation, money laundering, and other criminal activities against the Adani group, which later denied the allegations altogether. Additionally, it’s a fact that the Adani group of stocks is significantly overvalued and highly leveraged and it has employed a small unknown auditor firm, which is very surprising for a big corporate like Adani.

Subsequently, Adani Enterprises tumbled from around 4230 in late Dec’22 to almost 950 in early February’23. But since then the scrip has been stabilized after the Q3FY23 report card, and various clarifications by the management in early May, Adani Enterprises jumped and made a high around 2778 after SC appointed committee said in a preliminary report that prima-facie there was no regulatory failure in the Adani-Hindenburg case. But some entities have taken short positions before the publication of the Hindenburg report and profited from those positions as prices crashed after the report. Overall, the report is a great relief for Adani, but it’s not a clean chit for the group.

Adani stocks were also boosted as GQG Partners' Rajiv Jain, a veteran influential investor raises Adani's stake by about 10% for $3.5B. As a reminder, in March’23, GQG acquired almost $2B worth of shares in four of Adani’s firms from a family trust (after Adani stocks tumbled on the Hindenburg report). Jain termed Adani stocks as ‘the best infrastructure assets available in India’. Jain said: “Within five years, we would like to be one of the largest investors in the Adani Group depending on the valuation, (after the family). We would certainly want to be partners in any of Adani Group’s new offerings”.

The credibility of the Adani group may be far below that of Tata, and Reliance (under Mukesh Ambani) for a long time, but it’s a known fact and most of Hindenburg’s report contents/allegations are nothing new. But at the same time, no big industrialist/business entity is a saint; they are improvising as per evolving political and economic situation/reality in the country.

In any way, Adani is an influential group; although it’s not come under ‘too big to fall’ for the Indian economy, the government will not allow it to fall under any circumstances for the financial market and also political/BJP stability. Thus despite various controversies, the Adani group may survive due to its proximity with the Modi government and also various opposition parties (providing a huge political donation to not only BJP but also various other opposition parties including INC and TMC like all other big business houses).

Despite huge falls in share prices for various Adani group companies, there is little panic among big Adani lenders or even in the market as smart investors/traders/HNI (including Ambani/Adani) all do short sell through various fronts (directly/indirectly) even their own companies in times of distress to take advantage of the volatility and possible margin call. This time, Adani is also able to meet the margin call without any big issues.

As a recapitulation, Hindenburg alleges that it has traced entities in tax havens, which held huge stakes in listed Adani firms, and were related to Gautam Adani’s brother, Vinod. But as these facts were not disclosed, in effect, the promoters’ stakes in several listed firms exceeded the legal limit of 75%. If investigations find that these entities are related to Adani, it may pose big regulatory issues for the Adani group.

Since Hindenburg's report in late Jan’23, the total market capitalization of the Adani group has fallen above 50% against Hindenburg’s target of around 75% on average. Adani is now relying on an investigation by the market regulator SEBI, which is looking into Hindenburg's allegations and the group’s related party dealings following an SC directive. Adani group recently assured investors that several top Japanese and European banks have reaffirmed confidence in them: "Global banks such as MUFG, SMBC, Mizuho, Standard Chartered, Barclays, and Deutsche Bank’ consortium lenders have reaffirmed confidence in Adani group”.

Bottom Line:

Considering various incubating businesses and the bright nature of such infra projects and prospects, Adani Enterprises may be an example of a good business model under temporary disruption.

Technical View: Adani Enterprises (LTP: 2440; EOD: 07/06/23)

Looking ahead, whatever may be the narrative, technically, Adani Enterprise has to sustain above 2775 for a further rally to 2825/2890-2975/3080-3515/3735-3900/4095 and 4200 in the coming days (under a bullish scenario). On the flip side, sustaining below 2750, Adani Enterprises may again fall to 2600/2390-2300/2170-2000/1850-1775*/1500 and 1200/1015* in the coming days (under a bearish scenario). Investors may enter/accumulate Adani Enterprises around 1775-1015 levels for mid/long term horizon.

P&L Analysis (QLY): Adani Enterprises

P&L Analysis (YLY): Adani Enterprises

 

B/S Analysis (YLY): Adani Enterprises

 

B/S Ratios and BVPS analysis (YLY): Adani Enterprises

 

C/F Analysis (YLY): Adani Enterprises

 

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