The Adani Group has forged ahead, securing over 35 deals over the past few years.
Taking the organic and inorganic path to grow, the flagship group has invested in a range of new sectors. From new era sectors such as data centers and green hydrogen to more conventional infrastructure and cement, the group currently has more than ten types of activities.
Led by a first-generation entrepreneur with a net worth of over $107 billion today, Gautam Adani is the mastermind behind this rapid diversification of the group.
After spending more than two decades building a coal-centric empire, Gautam Adani has diversified, now pivoting to become the world’s largest producer of green energy.
According to Bloomberg’s Billionaires Index, the busiest trader has landed the title of Asia’s richest person this year. However, it didn’t last long as it was a tough fight between him and Mukesh Ambani.
With the constantly changing value of Ambani’s crown jewel, Reliance Industries Ltd., the title changes hands every few days.
While Adani and Ambani share some commonalities, there is a difference in how they amassed this wealth. Unlike Ambani, Adani has had a meteoric rise in a short time.
Just two years ago, Adani’s total wealth stood at just $10 billion, a tenth of what it is today. This begs the question, what propelled Gautam Adani’s rapid rise to Asia’s richest person?
If it is difficult to identify the main driver of Gautam Adani’s success, we can analyze the valuations of the companies in his group to get a fair idea.
With that in mind, we take a look at the seven listed Adani stocks that today boast a market capitalization of over $170 billion.
#1 Adani Green (renewable energy):
The company generates electricity from renewable sources such as solar and wind power. It also builds, develops and maintains large-scale grid-connected solar and wind farm projects.
As of March 2022, the company has a current project pipeline of over 20 gigawatts (GW).
While the company’s revenues have increased 10 times over the past 5 years, the total loss of Rs 462 million turned into a profit of Rs 4.8 billion over the same period.
#2 Adani Total Gas (oil and gas):
The company operates the largest city gas distribution business in India.
It is developing a vast City Gas Distribution (CGD) network to supply Piped Natural Gas (PNG) to industrial, commercial and domestic customers and Compressed Natural Gas (CNG) to the transport sector.
The company’s total revenue grew at a 5-year CAGR of 24.5%, while net profit increased 5x over the same period.
#3 Adani Companies (Conglomerate):
The group’s flagship company is India’s largest coal trader, largest mining contractor as well as largest private airport operator, with eight airports under its umbrella.
The holding company announced a 5-year CAGR of 13.3%.
Net profit did not increase due to the developer’s acquisition frenzy, mainly because most new businesses are still expanding but have yet to turn a profit.
#4 Adani Transmission (Energy Distribution):
The company is the largest private power transmission and distribution company in India.
Competing with the government-owned Power Grid of India, the company enjoys an extensive presence in the western, northern and central regions of India.
The energy distribution business recorded a five-year CAGR of 31.4% and a five-year profitability CAGR of 23.6%.
#5 Adani Ports and Special Economic Zone (Infrastructure):
The company is India’s largest private port. It owns and operates seven ports and terminals.
Unlike other major ports, Adani Port enjoys the flexibility to decide its tariff structure.
Additionally, its proximity to the National Capital Region (Delhi, Gurgaon, and Noida), a deeper draft that allows it to accommodate large vessels, and natural protection in bad weather give it a competitive advantage.
The company’s total revenue grew at a five-year CAGR of 13.5%, while net income grew 3.7% CAGR over the same period.
#6 Adani Power (Might):
The company is the largest private thermal power producer in India with a total power generation capacity of 12 GW.
This includes thermal power plants in Gujarat, Maharashtra, Karnataka, Rajasthan and Chhattisgarh and a 40 MW solar power project in Gujarat.
It is perhaps the only company that has not registered a five-year double-digit CAGR (4.2%).
However, the profits make up for any lack of growth from a loss of Rs 61 billion to a profit of Rs 49 billion over the past five years.
#7 Adani Wilmar (Fast Moving Consumer Goods FMCG):
The company is home to the nation’s largest edible oil brand, Fortune. Apart from this, the company also sells wheat flour, rice, pulses and sugar.
The billionaire’s FMCG arm has doubled its revenue and quadrupled its profits over the past five years.
Despite the level of disparity in businesses, Gautam Adani businesses share some commonalities. Not only are they leaders in their respective fields, but they also enjoy exorbitant valuations.
Most of them are trading at valuations well above the industry average, indicating that they are very overvalued.
The PE ratios of companies that control much of his wealth are Adani Green and Adani Total Gas.
While Adani Green trades at a PE of 569, the power sector sits at a PE ratio of 10.4.
Similarly, Adani Total Gas is trading at a PE of 522 while its industry average is 8.8.
But does it add up? And what sets them apart from other companies?
Even taking into account their phenomenal growth, leadership status, or whether the companies are aligned with the government’s vision, these absurdly high valuations make no sense. Especially from a value investing perspective.
As Warren Buffet would say…
For the investor, too high a purchase price for the shares of an excellent company can negate the effects of a subsequent decade of favorable business developments.
It is therefore safe to assume that the markets are in a frenzy over Adani shares. Some call it FOMO (fear of missing out), while others probably think it’s too big to fail right now. Forgetting the checkered past of companies that were also heavily overvalued and presented as too big to fail.
The market valuation of all these companies together makes Gautam Adani one of the richest men in Asia.
But the exorbitant valuation enjoyed by these companies poses a serious threat to the title of Gautam Adani.
Moreover, not only has his business empire earned him a name in the biggest business houses in the world, but also as one of the most indebted companies.
This is not surprising as most of Mr. Adani’s growth is due to huge borrowings.
Most of his businesses financed their growth with a lot of debt.
And now, with rising interest rates, financing this gigantic debt (over Rs 2 trillion of its listed entities) may become a concern, putting a lot of pressure on the group companies to improve their profitability.
(Disclaimer: This article is provided for informational purposes only. It is not a stock recommendation and should not be treated as such.)
This article is syndicated from Equitymaster.com
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)