As per Adani’s financial statements, management commentaries, and potential India/Adani growth story, the present fair value of Adani enterprise may be around INR 1094-1557 (Q3FY23)
Adani Enterprises (NS:ADEL) Limited 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 a diversified group organized into 5 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.
As per Wikipedia-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 (NS:MRPL), 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 (SIX:HOLN) (Swiss giant) stake in Ambuja Cement and ACC (NS:ACC) for around $6.40B to become India’s 2nd largest cement player. Holcim sold its entire 63.15% stake in Ambuja Cements (NS:ABUJ), 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, TotalEnergies 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 (NS:ADAW)
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 (NS: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 (NS:ADAN), and Adani Transmission (NS:ADAI) were demerged from Adani Enterprises in 2015, whereas Adani Green Energy (NS:ADNA) 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 (NS:ADAG): 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
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.
Highlights of Q3FY23 report card: Adani Enterprise-AEL (Consolidated-INR 100 Cr. =1B)
- Operating revenue INR 381.75B vs 408.44B sequentially (-6.53%) and 132.18B yearly (+188.81%)
- Operating expense INR 363.06B vs 391.02Bsequentially (-7.15%) and 123.35B yearly (+194.32%)
- EBITDA INR 18.69B vs 17.42B sequentially (+7.29%) and 8.83B yearly (+111.80%)
- Net interest paid INR 9.34B vs 9.15B vs 6.22B sequentially (+2.07%) and 7.54B yearly (+23.95%)
- Core operating profit (EBTDA=EBITDA-INTT) INR 9.35B vs 8.27B sequentially (+13.05%) and 1.29B (+624.70%)
- Equity share capital INR 1.14B vs 1.14B sequentially (unchanged) and 1.100B yearly (+3.66%)
- Core operating EPS (EBTDA/Share) INR 14.52 vs 7.26 sequentially (+24.55%) and 6.42 yearly (+125.92%)
- EBITDA margin 4.90% vs 4.27% sequentially (+63 bps) and 6.68% yearly (-178 bps)
- EBTDA margin 2.45% vs 2.03% sequentially (+42 bps) and 0.98% yearly (+147 bps)
- Interest/EBITDA 49.96% vs 52.51% sequentially (-255 bps) and 85.38% yearly (-3540 bps)
Highlights of management commentaries and Q&A (analyst concall): 4th Nov’22
- AEL continues to create value for its stakeholders as a successful incubator for the past two-and-a-half decades
- This incubation model has created leaders in the respective sectors like Ports, Transmission, Green Energy, City GasDistribution, and FMCG, and the compound annual growth rate delivered for Adani shareholders is more than 38%
- These businesses Adani Ports, Adani Transmission, Adani Green, AdaniTotal Gas, and Adani Wilmar have also over the past decade exhibited growth greater than 20%
- AEL holds a portfolio of businesses both established and incubating which are spread across different verticals in energy and utility, transport and logistics, direct-to-consumer, and primary industry vertical
- Within primary industry verticals, AEL has established business for mining services, integrated resource management, and commercial mining
- As the established business has continued to sustain long-term growth, we are making significant progress in o attractive incubation pipeline
- Within the incubation pipeline, our core area of utility is AdaniNew Industries which is our green hydrogen vertical, and AdaniConneX data center business which is a joint venture with EdgeConneX of the U.S.
- On the transport and logistics side, we have Adani Airports, Adani Roads and Adani Wilmar currently sit within the Adani Enterprise shareholding
- In Adani New Industries portfolio - manufacturing ecosystem from polysilicon to ingot wafers to cell modules, wind turbines, and electrolyzers that construction and development of this manufacturing vertical is well underway with the recent installation of a 5.2-megawatt wind turbine which is currently undergoing certification
- We expect the green hydrogen generation to start sometime end of the calendar year 2025 or the beginning of 2026
- We also continue to develop downstream products like ammonia and urea
- Once we complete our investment in this vertical over the next nine-year, it will be approximately $50B
- ANIL ecosystem module sales were 206 megawatts and EBITDA itself stood at Rs.0.52B. These numbers are small compared to where this business will be but it just highlights the fact of each component being cash positive on its right
- In Adani Airport Holdings the passenger movement is now at approximately 90% pre-COVIDlevel, with a total of 16.3 million passengers
- Construction in Navi Mumbai is continuing at pace and is on schedule for completion in 2024
- Adani Road's portfolio is now approximately Rs.320B. We recently also announced the acquisition of the Macquarie road portfolio in India and we expect the continuing surge in the growth of this portfolio and its contribution to the EBITDA
- We have commissioned our first data center in Chennai and this will finally be a 33-MW data center, 17 MW of which is now operating and occupied
- Expect to report robust revenue and EBITDA/net profit growths in the coming quarters despite capital intensive and long gestation nature of infra/utility businesses like airports and roads
- As far as the mining services business is concerned, Adani EnterpriseLimited is the pioneer of the MDO concept in India. We have indicated this is the model that spans across delivery in mines as well as the entire upstream and downstream activities. We provide a full-service range of lines on checking, various approvals, land acquisition, R&R, developing required infrastructure and mining, beneficiation, and transport to designated consumption points.
- Adani is an MDO for 8 coal blocks and 2 iron ore blocks which combine a peak capacity of 100 plus million metric tons per annum. The projects are located in the state of Chhattisgarh, Madhya Pradesh, and Odisha. The mining production volume in Q2 FY2023 stood at 5.4 million metric tons and the dispatch stood at 4.9 million metric tons. The revenue for mining service for the quarter stood at Rs.4.20B and the EBITDA stood at Rs.2.07B
- As far as IRM business i.e. Integrated Resource Management business is concerned, we have continued to develop a base with diversified customers across various end-user industries. We remain the number one player in India and endeavor to maintain the leadership position going forward. The volume in Q2FY23 increased by 66% to 25.2 million metric tons on a year-on-year basis. EBITDA for the quarter has increased by 126% to Rs.1112 Crores on account of higher volumes on a year-on-year basis
- The coal trading business is seeing good traction amid a huge gap in demand and supply
- Commercial coal mining may start from FY24
- Soft Q2 number for coal mining due to rain, but on track to meet the target of 40MT (for own consumption)
- H1FY23 Airport business revenue Rs.25.73V and EBITDA Rs.10.34B
- Solar and wind manufacturing target 4 GW for the next few years; cumulative target 10 GW
- May expand wind manufacturing to offshore locations when it’s economically feasible
- Hydrogen manufacturing may begin by Dec’25 or early 2026
- Total electrolyzer capacity target 5 GW initially
- New Industry, Green Hydrogen capex will be Rs.1-1.2B /QTR in FY24, Rs.2-2.5B in FY25, and so on—will be Rs.50B by FY30
- Airport business is now like a regional or community economics business, which may give positive cashflow by FY26 and a major contributor from FY31
- Always looking for strategic JV partners in every project/business to de-risk the growth, and also to bring the required technical knowledge, marketing, etc; cash is not the issue here
- Most of the incubating business will be positive cash flow from FY23-24 (like data center, road business); airport business already have positive EBITDA; thus no need for incremental capex here
- ROE for incubating business will be positive from FY:25-26
- Adani group is exploiting India's growth story as it will help its growth and plan the capex/equity accordingly for various upcoming infra projects
- The focus on the longer-term rather than on the interest we are doing just to continue to utilize the capacity that we already have while our own Adani New Industries own production of the green electron, solar, and wind starts in the next two to three years
- We have to remain agile to upgrade the manufacturing as and when. So, currently, we think that between three to five years the upgrades will be required and therefore we have built our investment base
- Carmichael mines-Now, it has ramped fully. The next quarterly results will be the best time to go through the actual financials of it and we start doing that from next quarter when we start with reporting the individual line item as it completes the fold-up. We will better address this because currently there is too much ramp-up, capex, currently, some of the assets are capitalizing we will complete all of that this quarter and then would be best to discuss it in January 2024
- Navi Mumbai airport technical completion in 2024 and formal operational clearances shortly thereafter; so we are pretty much on track for 2024 completion
- As far as the MDO business is concerned, we have set a target; I look at the quarterback that for this financial year FY2023 we should be closer to 40MT. We should be very close to that and as far as the next financial year is concerned FY2024, we should be somewhere around 50 plus (MT)
- The long-term ROCE of New Energy business may be around 18% (high tenth to low twenties)
- No land-related issues for any city-side airport development projects
- The government is supporting the green hydrogen ecosystem including purchase obligations for the entire sector
Fair valuation: Adani Enterprise (Consolidated): INR 1094-1557 (Q2-Q3FY23/Present); INR 1857-2414-3138-4080 (FY23-26)
Adani Enterprise reported core operating EPS 8.21, 7.26, 5.83, 0.58, and 1.17 in the last 5-quarters (Q2FY23, Q1FY23, Q4FY22, Q3FY22, and Q2FY22). Now at around normalized run rate for the last 3-quarters, Adani Enterprise may report 20% sequential growths in the next two quarters (Q3FY23 and Q4FY23) for FY23 projected core operating EPS around 37.14 which would be +244% growth from FY22 core operating EPS 10.80; the FY:18-21 core operating EPS was around 7.13-3.13-6.47-10.26.
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. Thus considering a 30% average CAGR over FY:24-26, Adani Enterprise may report core operating EPS around 48.28-62.76-81.59, and assuming an average core operating PE around 50 (even after considering 30% average CAGR), the fair value may be around 1857-2414-3138-4080 (for FY: 23-26). At the current TTM core operating EPS around 21.87, the fair value of Adani Enterprise may be around 1094/- and assuming Q3FY23 TTM core operating EPS is around 31.14, the current fair value may be around 1557/-.
As a recapitulation, Adani Group’s shares tumbled after influential U.S.-based Hindenburg Research (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.
In any way, Adani group stocks and related banks & financials having significantly higher exposure with the group (such as SBI (NS:SBI), HDFC, ICICI, Axis, and Indusind) also tumbled. But as the weightage of Adani group stocks (Adani Enterprises and Adani Ports) is negligible, the crash resulted in only a -10 points slip in Nifty for every % cumulative fall. After Satyam, Reliance (NS:RELI) ADAG Yes Bank (NS:YESB), and even the ICICI Bank (NS:ICBK) fiasco, the market is now quite concerned about corporate misgovernance. 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.
But even if we take Adani’s financial reports at face value, Adani Enterprise and also other group stocks are highly overvalued by any matrices. The EBITDA margin is only around 5%, while the EBTDA margin is around +2.50% currently. The company is now paying almost 50% of EBITDA as interest on debts, which is itself a big red flag. In FY:22-18, the interest/EBITDA (%) was around 68%, 55%, 69%, 83%, and 61%.
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.
Thus without considering the Hindenburg report/allegations, Adani’s reply, and current political controversies, if we only consider Adani’s financial statements, management commentaries, and potential India/Adani growth story, the present fair value of Adani enterprise may be around INR 1094-1557 (Q3FY23) and 1857-2414-3138-4080 (for FY23-26). But there are immense downside risks for the projected valuation (FY24-26) amid poor earning visibility, higher borrowing costs, higher project gestation period, limited accessibility of fresh debt or even equity funding (at skyrocketing share prices), and various allegations of money laundering/accounting frauds.
Looking ahead, whatever may be the narrative, technically, Adani Enterprise has to sustain above 2550 for any recovery towards 3550-4200; otherwise, it may further correct towards 1550-1200 levels.
Adani Enterprise: Consolidated P/L A/C (QLY): Q2FY23
Adani Enterprise: Consolidated P/L A/C (YLY): FY22
Adani Enterprise: Consolidated B/S: FY22
Adani Enterprise: Consolidated cash-flow
