Adani stocks valuation: Is there really a need to be surprised?

Adani stocks valuation: Is there really a need to be surprised?

Stocks of Adani group companies have skyrocketed in the last one year, making Chairman Gautam Adani the second-richest Asian. However, the group's finances are still to catch up, questioning the rationale behind the meteoric rise

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Adani group Chairman Gautam Adani --Photograph by Umesh GoswamiAdani group Chairman Gautam Adani --Photograph by Umesh Goswami
Nevin John
  • Jun 24, 2021,
  • Updated Jun 25, 2021 10:07 PM IST

In June 2020, the board of Adani Power decided to delist the company whose share price was languishing at Rs 38 against its August 2009 listing price of Rs 100. The low price was affecting fundraising and growth plans. The board set the floor price for delisting at Rs 33.82 and has been waiting for approval from stock exchanges. However, over the last seven months - December 2020 to June 2021 - the company's share price surged around 300 per cent, pushing the scrip to Rs 166.

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Shares of five other Adani group companies grew three to 10 times in the last one year until June 11, 2021. Market value of Adani Green Energy (AGEL) increased to Rs 1.9 lakh crore (as on May 31, 2021). Barring Adani Power (Rs 57,000 crore), each of the other group firms' market cap crossed Rs 1.7 lakh crore by June 11. Aggregate market capitalisation of the six entities stood at Rs 9.5 lakh crore. The rise in market value propelled group Chairman Gautam Adani (the family owns 56-75 per cent in listed entities) to being Asia's second-richest man, after Reliance Industries' Mukesh Ambani. Adani's wealth shot up to $77 billion.

The spike in Adani group stock prices was, however, highly unusual. They grew 122-819 per cent during January 2020-June 11, 2021, while the Sensex and the Nifty rose 27 per cent and 30 per cent, respectively.

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Adani group did not respond to BT's questions on the unusual rise in share prices. But here's how the group reasons out the share price rise. In a recent public statement, it said Adani Ports & SEZ handled 247 million metric tonnes (MMT) of cargo, registering a compounded annual growth rate (CAGR) three times higher than the industry. "It has best in class EBITDA margin of 70 per cent and has registered volume CAGR of 10 per cent during the last five years," the statement said. For Adani Green Energy, the EBITDA margin is 89 per cent. Adani Transmission operates the largest private network in India. Adani Electricity Mumbai, a subsidiary of Adani Power, distributes power to over 3 million homes in Mumbai. Adani Total Gas, which has presence across 38 geographical areas, registered 41 per cent EBITDA. Adani Enterprises, which witnessed 10 times growth in share price in the last one year until early June, incubates new businesses such as airports, roads, data centre and solar manufacturing, besides enhancing its FMCG portfolio.

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But, industry experts and observers found it difficult to comprehend the price surge, putting a question mark on the valuation of Adani group companies. Especially when the group's market capitalisation crashed by over Rs 1 lakh crore on June 14 on incorrect reports of the National Securities Depository Ltd (NSDL) freezing the accounts of foreign portfolio investors who hold a vast majority of their portfolio in Adani group firms. Even though NSDL later clarified to Adani group about the inaccuracy of the information (it said the three accounts were 'active'), retail investors have since pulled down the prices of Adani Power, Adani Transmission and Adani Total Gas by 18 per cent as on June 18. 2021. Chairman Gautam Adani lost almost $10 billion in the four days of trading since June 14, bringing him down to the third spot in the Asian wealth ranking.

Some analysts say the dip in share prices is due to a correction since group firms were highly over-valued compared to peers. For instance, share prices of three Adani group companies in the power sector- Adani Power, Adani Green Energy and Adani Transmisssion - have jumped 200 per cent to 600 per cent in the last one year, and the aggregate market cap of these companies zoomed to Rs 4 lakh crore as on June 11, 2021. Rival Tata Power Company (TPCL), which operates in all the areas of the three Adani companies, witnessed nearly 200 per cent rise in its share price in the one year since June 10, 2020, but its market value was still one fourth at Rs 40,000 crore on June 11, 2021. JSW Energy has seen a 235 per cent rise in share price and its market value was Rs 27,000 crore during the same period.

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The three Adani companies own coal-fired, solar and wind power projects with around 16,000 mega watt (MW) capacity and 17,200 circuit kilometres (CKm) of transmission lines and distribution rights in Mumbai. The three posted an aggregate net profit of Rs 2,642 core on combined revenue of Rs 39,172 crore in FY21. But these companies also had gross and net debts of Rs 98,853 crore and Rs 94,938 crore, respectively, in FY21. Rival Tata Power Company has 12,808 MW of generation capacity (30 per cent from renewable), 3,531 kilometres of transmission network and distribution rights in Delhi, Mumbai, Ajmer and Odisha. The company, which posted a net profit of Rs 1,439 crore in 2020/21, has a debt of just Rs 36,000 crore.

A big surprise is Adani Total Gas, valued at Rs 1.48 lakh crore on June 18, 2021. It reported Rs 471-crore profit in FY21. In comparison, its much-larger peer and the more profitable Gujarat Gas had a market cap of Rs 36,921 crore, though it generated a profit of Rs 1,275 crore. Indraprastha Gas, which posted a profit of Rs 1,249 crore, had a market cap of Rs 37,000 crore.

Valued at Rs 9.5 lakh crore before the crash, the Adani group reported an aggregate net profit of Rs 8,922.93 crore in FY21. Its gross and net debt stood at Rs 1.48 lakh crore and Rs 1.37 lakh crore. Mukesh Ambani's Reliance Industries (RIL), which generated a profit of Rs 53,739 crore in FY21 and has zero net debt, is valued at Rs 14.7 lakh crore. India's third most valuable firm, HDFC Bank, which posted Rs 31,116-crore profit in FY21, is valued just above Rs 8 lakh crore.

In June 2020, the board of Adani Power decided to delist the company whose share price was languishing at Rs 38 against its August 2009 listing price of Rs 100. The low price was affecting fundraising and growth plans. The board set the floor price for delisting at Rs 33.82 and has been waiting for approval from stock exchanges. However, over the last seven months - December 2020 to June 2021 - the company's share price surged around 300 per cent, pushing the scrip to Rs 166.

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Shares of five other Adani group companies grew three to 10 times in the last one year until June 11, 2021. Market value of Adani Green Energy (AGEL) increased to Rs 1.9 lakh crore (as on May 31, 2021). Barring Adani Power (Rs 57,000 crore), each of the other group firms' market cap crossed Rs 1.7 lakh crore by June 11. Aggregate market capitalisation of the six entities stood at Rs 9.5 lakh crore. The rise in market value propelled group Chairman Gautam Adani (the family owns 56-75 per cent in listed entities) to being Asia's second-richest man, after Reliance Industries' Mukesh Ambani. Adani's wealth shot up to $77 billion.

The spike in Adani group stock prices was, however, highly unusual. They grew 122-819 per cent during January 2020-June 11, 2021, while the Sensex and the Nifty rose 27 per cent and 30 per cent, respectively.

Advertisement

Adani group did not respond to BT's questions on the unusual rise in share prices. But here's how the group reasons out the share price rise. In a recent public statement, it said Adani Ports & SEZ handled 247 million metric tonnes (MMT) of cargo, registering a compounded annual growth rate (CAGR) three times higher than the industry. "It has best in class EBITDA margin of 70 per cent and has registered volume CAGR of 10 per cent during the last five years," the statement said. For Adani Green Energy, the EBITDA margin is 89 per cent. Adani Transmission operates the largest private network in India. Adani Electricity Mumbai, a subsidiary of Adani Power, distributes power to over 3 million homes in Mumbai. Adani Total Gas, which has presence across 38 geographical areas, registered 41 per cent EBITDA. Adani Enterprises, which witnessed 10 times growth in share price in the last one year until early June, incubates new businesses such as airports, roads, data centre and solar manufacturing, besides enhancing its FMCG portfolio.

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But, industry experts and observers found it difficult to comprehend the price surge, putting a question mark on the valuation of Adani group companies. Especially when the group's market capitalisation crashed by over Rs 1 lakh crore on June 14 on incorrect reports of the National Securities Depository Ltd (NSDL) freezing the accounts of foreign portfolio investors who hold a vast majority of their portfolio in Adani group firms. Even though NSDL later clarified to Adani group about the inaccuracy of the information (it said the three accounts were 'active'), retail investors have since pulled down the prices of Adani Power, Adani Transmission and Adani Total Gas by 18 per cent as on June 18. 2021. Chairman Gautam Adani lost almost $10 billion in the four days of trading since June 14, bringing him down to the third spot in the Asian wealth ranking.

Some analysts say the dip in share prices is due to a correction since group firms were highly over-valued compared to peers. For instance, share prices of three Adani group companies in the power sector- Adani Power, Adani Green Energy and Adani Transmisssion - have jumped 200 per cent to 600 per cent in the last one year, and the aggregate market cap of these companies zoomed to Rs 4 lakh crore as on June 11, 2021. Rival Tata Power Company (TPCL), which operates in all the areas of the three Adani companies, witnessed nearly 200 per cent rise in its share price in the one year since June 10, 2020, but its market value was still one fourth at Rs 40,000 crore on June 11, 2021. JSW Energy has seen a 235 per cent rise in share price and its market value was Rs 27,000 crore during the same period.

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The three Adani companies own coal-fired, solar and wind power projects with around 16,000 mega watt (MW) capacity and 17,200 circuit kilometres (CKm) of transmission lines and distribution rights in Mumbai. The three posted an aggregate net profit of Rs 2,642 core on combined revenue of Rs 39,172 crore in FY21. But these companies also had gross and net debts of Rs 98,853 crore and Rs 94,938 crore, respectively, in FY21. Rival Tata Power Company has 12,808 MW of generation capacity (30 per cent from renewable), 3,531 kilometres of transmission network and distribution rights in Delhi, Mumbai, Ajmer and Odisha. The company, which posted a net profit of Rs 1,439 crore in 2020/21, has a debt of just Rs 36,000 crore.

A big surprise is Adani Total Gas, valued at Rs 1.48 lakh crore on June 18, 2021. It reported Rs 471-crore profit in FY21. In comparison, its much-larger peer and the more profitable Gujarat Gas had a market cap of Rs 36,921 crore, though it generated a profit of Rs 1,275 crore. Indraprastha Gas, which posted a profit of Rs 1,249 crore, had a market cap of Rs 37,000 crore.

Valued at Rs 9.5 lakh crore before the crash, the Adani group reported an aggregate net profit of Rs 8,922.93 crore in FY21. Its gross and net debt stood at Rs 1.48 lakh crore and Rs 1.37 lakh crore. Mukesh Ambani's Reliance Industries (RIL), which generated a profit of Rs 53,739 crore in FY21 and has zero net debt, is valued at Rs 14.7 lakh crore. India's third most valuable firm, HDFC Bank, which posted Rs 31,116-crore profit in FY21, is valued just above Rs 8 lakh crore.

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