Strategic Exit: Behind the Adani Group’s decision to sell its stake in FMCG food business

It is a good time for companies to venture into the fast-moving consumer goods (FMCG) space. Increased spending reflects greater confidence in launching new brands or exploring low-penetration and untested product segments. A quick glance at FMCG valuations and the rising stock performance for some of the listed entities highlight this growing trend. Quite clearly, investors like the sector and brands with high market share in segments that are poised for growth are most sought after.

Against this backdrop, Gautam Adani-led Adani Group’s decision to exit its stake in food FMCG major Adani Wilmar appears both surprising and intriguing. A significant portion of Adani Wimar’s revenue of over Rs 51,500 crore in FY24-comes from edible oils, a high-volume, low-margin category (Rs171 crore net profit in the same fiscal, reflecting a margin of just 0.33%). Beyond edible oils, the company’s portfolio includes basmati rice, pulses, soya chunks, gram flour, sugar, and wheat flour.

As the market transitions into a more organised structure, most of these categories offer a tremendous opportunity-these are a part of the essential consumer basket and there is serious room for innovation. Companies getting it right can charge a premium and in the process, and can create serious entry barriers for competitors.

An investor presentation from August showed that the company’s edible oil brand Fortune’s market share is 1.5 times that of its closest competitor. “There is potential to consolidate that since around 50% share is held by regional brands,” the presentation said. Some of the key competitors of the brand would be Sundrop Oils, Saffola Oil, and South-based Gemini, among others. A multitude of regional brands dot the landscape and are very strong in the markets they operate in. To that extent, Fortune’s market share is healthy given its presence across many markets and potentially through buyouts, can become even more  formidable.

Additionally, the total addressable market for Adani Wilmar’s product categories stands at Rs 9 lakh crore, led by edible oils and rice (Rs 2 lakh crore each) and wheat (Rs 1.5 lakh crore), data from the presentation showed.

Assuming even a small proportion of that gets organised, a player with high-quality and well-known brands coupled with a strong distribution network can gain substantially.

Ambitious plans

The company has shown its ability to scale rapidly. For example, it launched personal care brand Alife Soap in 2020, achieving Rs 100 crore in sales within two years. It also acquired Kohinoor rice from McCormick Switzerland GMBH, transforming it into a Rs 350-crore brand, while branded exports tripled between FY22 and FY24.

Adani Wilmar went public in February 2022, and with a well-set portfolio of brands—led by foods and oils under the flagship Fortune-growth seemed inevitable. However, less than three years later, the Adani Group sold its 44% stake (held by Adani Enterprises) in the company. Of this, 31% was acquired by Singapore-based Wilmar International-a key player in the edible oil business-while the remaining 13% was sold in the open market, generating around $2 billion. Adani’s Rs 65-crore stake in Adani Wilmar’s equity delivered an impressive return.

Wilmar International, which partnered with the Adani Group in a 50:50 joint venture in 1999, now leads the edible oils market in India with a 20% share.

Several factors may have influenced this decision. The bribery allegations against the Adani Group last November have created a perception that raising funds, particularly in overseas markets, in the short to medium term, might be difficult for the company. Additionally, the Group carries substantial consolidated debt-over Rs 2.4 lakh crore across its listed companies for FY24-raising concerns about financial flexibility.

Freeing up funds

In August, Adani Enterprises proposed a demerger of the food FMCG business to bring it under the promoter and promoter group shareholders. However, this plan was withdrawn in October, signalling Adani Group’s intent to exit the business altogether.

Industry experts suggest this move aligns with the Group’s strategy to allocate capital more effectively. “It was always on the cards,” Deven R. Choksey, Chairman and MD of wealth management and investment advisory firm DRChoksey Finserv, says. “Typically, the infrastructure businesses deliver a return on equity of 14-15% but that is just about 1% for Adani Wilmar.” Choksey adds that the Group likely realised the limitations of playing in commodities, making it difficult to emulate the success of competitors like Hindustan Unilever Limited or ITC Limited. “The proceeds from the sale can be better utilised elsewhere. This decision to exit Wilmar must be viewed as one that is about smart capital allocations and playing to one’s core strengths in infrastructure,” he says.

The Adani Group’s capital expenditure requirements are estimated at over $75 billion for investments across energy, transport, utilities, and logistics, with a significant focus on new energy initiatives. “There are multiple options available to raise funds including interest from investors in Japan and Europe. In that sense, the consumer business is only a distraction compared to other ambitious forays,” says Vinit Bolinjkar, Head of research at Ventura Securities.

He also says that the primary objective with Adani Wilmar was to secure a good price. “With the $2 billion, it is now possible to leverage that by 3x to raise at least $6 billion. Fundamentally, we do not see any difficulty for the Adani Group when it comes to raising funds for its big-ticket projects,” he says.

@krishnagopalan