Adani group’s cash generation ability underappreciated, MG says


Billionaire Gautam Adani’s group has attracted a lot of scrutiny over its debt-heavy balance sheet and not enough appreciation of its cash-flow generation ability, according to M&G Investments (Singapore) Pte.

“The businesses Adani is incubating and operating in — ports, airports, rail, logistics — they are real businesses that generate cash,” Vikas Pershad, a Singapore-based fund manager at M&G, said in an interview. “There are a lot of questions about opacity, about lack of disclosures, valuations obviously. But it’s trickier because the businesses will grow if India grows. They are at the right place at the right time.”

While Adani’s breakneck expansion into new businesses has sparked eye-catching gains in shares of the conglomerate’s firms and made its founder Asia’s richest person, it has also added both financial complexity and debt to the group’s balance sheet. Three Adani companies, including the flagship Adani Enterprises Ltd., are among the top 10 stock gainers on the MSCI Asia Pacific Index this year, defying concerns about lower liquidity and limited analyst coverage.

The market cap of Adani group's stocks has skyrocketed over the past two years

Some developments in the pipeline may address these matters. Adani Enterprises is considering issuing at least $ 1.8 billion in new shares, Bloomberg News reported on Tuesday, citing people familiar with the matter. The conglomerate has previously attributed the small free float to the Adani family holding about 75% of the flagship, and earlier this year said it is working on plans to increase the free float.

Shares in Adani Enterprises have surged more than 130% year-to-date, giving it a market value of about $ 56 billion. India’s benchmark NSE Nifty 50 Index — which added the stock in September — is up 5.3% in 2022.

“When the companies were smaller, it was easier for investors to say, I don’t understand the valuation, I don’t understand the businesses. I’m not going to participate. But now, the group is about 6% of India’s market cap, and in most key benchmarks about 500 to 700 basis points of exposure,” said Pershad. “I think investors, like it or not, do need to pay attention to what the company is doing.”

Adani Enterprises is trading at a valuation of over 160 times its one-year forward earnings. By comparison, Nifty is trading at a multiple of about 20 times and Reliance Industries Ltd. –India’s largest firm by market value — at about 21 times, according to data compiled by Bloomberg.

Valuations are “hard to justify on any time horizon,” Pershad said. “But there’s more to the story than many investors are willing to spend time on.”

Pershad said he has invested in Adani stocks, declining to give specific details.

“We are waiting,” he said, when asked about increasing allocation to the shares. “Because now that the share prices have gone up so much, I think the probability has gone up that we will see more capital raising.”