Adani Group Stocks – A buying Opportunity?

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An adage goes that every crisis is an opportunity. After the recent fall in Adani group stocks, some investors are looking at this fall from the prism of finding opportunities at this point of time. In fact, history has shown that sectors and companies bounce back with great vigour post a crisis. Take the example of the hotel industry, whose stocks hit rock bottom at the beginning of the pandemic in 2020. Investors who saw an opportunity and picked up these stocks in mid-2020 have made more than 5-6 times returns on their investment in the last two and a half years. 

Does the recent fall in Adani Group stocks present such an opportunity?

Firstly, the Hindenburg report that caused the panic and sell off in these stocks can be attributed as a news-based event. Though the report places several allegations, they have not been able to provide substantial proof to prove these allegations. Secondly, as the narrative was trying to be driven, somewhat akin to the scam involving PSU bank lending to Nirav Modi and Mehul Choksi, regulators and banks have confirmed that all the lending is within limits as permissible by law. There seems to be no bypassing of laws for now.

So where does the problem really lie?

Adani Group has been on an acquisition spree over the last few years and has incurred lots of debt and that is a matter of concern. Thanks to a fellow professional, Vinit Bolinjkar, who helped crunch numbers regarding debt and presented the data in black and white.

Adani Enterprises	Debt Breakdown (Rs crore)	Status
Total debt	33500
Airport 7 yrs	12000	Ringfenced
Roads 5-7 years	2700	Ringfenced
Mining 8-10 years	1450	Ringfenced
Total loan ring-fenced	16150

Ring-fenced means banks and institutions have first charge on these assets, and Adani can only cater to the surplus.

From the balance loan of Rs 17350 crore, Working Capital forms Rs 7250 crore.
Working capital is short term and secured by hypothecating current assets and margins between 10-25%.

From the remaining balance loan of Rs 10,100 crore, Australia Coal mine part is Rs 6700 crore. This is a refinance facility catering to a coal block with a life of 100 years, decaying at 15 MMT pa.

What remains then is debt of Rs 3400 crore, of which Hydrogen is Rs 2500 crore and the rest is a Corporate loan of Rs 900 crore, which is for corporate purposes and other smaller businesses of Adani Enterprises.

So, while 50% of the loan is ring-fenced, 28% is secured by hypothecation and margin and 20% is from a coal block with refinance whereas only Rs 900 crore is unsecured exposure.

Over last 7 years, the cash flows accruing to Adani is Rs 2,88,874 crore, so obviously the loans can be repaid. But Adani Enterprises will be one of the highest capex cos until 2030 due to its huge green hydrogen expansion. So, it will be in the investment phase only.

Banks and Regulators clear the air

The Finance minister Nirmala Sitharaman told CNBC-TV18, “Both RBI and we know the banking sector today, having gone through the twin balance sheet problem, is at a comfortable level with NPAs coming down to absolutely low levels and recovery happening, and their position is very sound.” 

Axis Bank said on February 4 that its exposure to the crisis-ridden Adani Group stands at 0.94 percent of its net advances.

“We extend credit basis comfort on cash flow, security, and repayment capability of obligors as per the Bank’s credit assessment framework. We remain comfortable with our exposure to Adani Group basis the same,” the bank said in a regulatory filing.

“We have lent to Adani (group) for projects, which are tangible assets and which have adequate cash generation. They have been able to meet their obligations. The bank’s exposure is around 0.88% of the total loan book,” said Dinesh Khara, chairman of SBI. Khara told reporters that the bank does not envisage any challenge in the group’s ability to repay dues.

Among the mutual funds, it is well known that most of them do not have a high exposure to Adani Group stocks. The only exception being Quant mutual fund, whose exposure is 11% of its AUM across schemes. In an interview with CNBC, the CIO of Quant Mutual Fund, Mr. Sandip Tandon said that their weightage was a little more and they made good money in this group, they participated at a very early stage when Ambuja Cement was not even part of the Adani group which they bought at around Rs 282. So, they have been deep in the money on this stock, and have sold up also. He added that they have sold a comparatively big quantity, which is reflected in their portfolio for January and December. He also mentioned that Quant had sold stock in the group flagship Adani Enterprises in October 2022 itself.

The Hindenburg report came out just before the FPO, worth Rs 20,000 crore for Adani Enterprises was to open. The FPO got fully subscribed thanks to participation from some of India’s large industrial houses and family offices. Later on, Adani Group also withdrew its FPO, after being fully subscribed which has also boosted investor confidence for now. Though there may still be some unanswered questions from the report, events that have unfolded since the report came out point that the narrative being driven by this report may be half the truth and hints at a hidden agenda, given the timing of the report as well as the financial interest of the short sellers.

After the recent fall, most market participants believe that the worst may be over in the Adani Group stocks. However, it is prudent to have a cautious approach and seek opportunity at these levels in group stocks which can generate cash. ACC, Ambuja Cements as well as Adani Ports and SEZ can be seen with a prism of an opportunity at this point. Most of the other companies have a huge capital expenditure, particularly in the energy space. It will take time for the investments to come to fruition and these may play out over time in the future. 

An analysis few months down the line, will give greater clarity on where the group companies are headed and may just throw up some more investible ideas from this group.

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ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255 )

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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