Adani Group: Is it the end of the biggest dream run of the year?

Some stocks would crash upto 25%, some dream runs would come to a halt & someone would lose $7.6 Bn of wealth! All of it - in a single day!!

Adani Group, it is. On Monday, several of the group companies’ shares fell by 5-25%, leading to a cumulative drop in Market Cap of about Rs 1 Lakh Crore! Meanwhile, the founder-chairman of the group, Gautam Adani, who also happens to be India’s second-richest person, witnessed his net worth slip by over Rs 55,000 Crore!

And all of this was an offshoot of NSDL freezing three of the group’s foreign public shareholders’ accounts.

But what’s interesting is that these Adani Group shares have shown a stellar performance as their prices have shot through the roof in the past one year. Powered by this, Gautam Adani would also go on to become the second-richest person in Asia. And if you weren’t aware of all of this, don’t admit it out loud. You may be considered as living under a cave! Seriously.

So, is it the end of Adani Group’s dream run? Did anyone see this crash coming? And was the massive rally justifiable in the first place? Read on to make sense…

Adani Group’s Dream-run

The group’s companies have been on the air for quite some time. The reason being the massive wealth that they have generated for their shareholders. And if you aren’t aware, have a glance at the gains since June 2020 -

Considering that the benchmark Sensex index has surged a little over 56% in the same period, hope you realize what a spectacular performance Adani Group’s shares have exhibited!

And this was bound to have ripple effects.

With a $16 Bn year-on-year surge in net worth, in March 2021, (the founder-chairman of the group) Mr. Gautam Adani defeated the likes of Larry Page, Sergey Brin, Warren Buffett & Mukesh Ambani to top the ‘World’s Biggest Wealth Gainers’ chart!

Moreover, with an addition of $43 Bn to his net worth, according to the Bloomberg Billionaires Index, the then $78Bn-wealth tycoon overtook China’s Zong Shanshan to become Asia’s second-richest person!

And perhaps it was all rosy before the news shattered the dreams. Or was it?

No doubt, the group's shares have put on quite a show; but here's the catch... the rally wasn’t exactly backed by fundamentals!

As the devil’s in the details, let’s dive in and understand the nitty-gritty of the matter.

The beginning of the end of a massive rally

While you’d be prompted to think that this is kind of a sudden crash for the Adani’s, that’s not necessarily true. In fact, Adani’s had this coming, and perhaps it’s now come full circle! Why, you ask?

Let’s take a closer look at two of the companies in Adani Group’s umbrella - Adani Green Energy & Adani Total Gas.

In September 2020, Adani Green Energy Ltd (AGEL) was named the World’s Largest Solar Energy Developer. However, the cherry on the cake was when last month AGEL acquired SoftBank’s clean energy unit in India, SB Energy Holdings, which took AGEL’s energy portfolio to a whopping 24.3 GW! For context, this is more than double of its closest competitor, (Goldman Sachs backed) ReNew Power.

Then perhaps, it makes sense that AGEL surged 4x in this stellar past year, eh? Well, NO.

You see, only 20% of AGEL’s portfolio is operational, compared to 55% for ReNew. If you were to do some calculations, you’d realize that, in fact, ReNew power’s operational portfolio is bigger than AGEL.

Moreover, 80% of AGEL’s non-operational pipeline doesn’t have power purchase agreements, compared to 58% for ReNew. This basically means that even though AGEL is the undisputed leader by overall capacity, it doesn’t have many guaranteed customers!

Consider other such numerous issues, and see that AGEL is trading at a PE multiple of 515x. In contrast, Tata Power (its competitor) is at a mere 42x, and NextEra Energy (the world’s largest clean power producer) is at just 30x! So, do you think AGEL’s price is justifiable in the first place? Well, we leave it to you.

Speaking of Adani Total Gas Ltd, a Mr. Giriraj Daga depicted it succinctly in his tweet:

In simple words, this means that Adani Total Gas’s Market Cap alone is greater than the combined Market Cap of five other gas utility companies, despite its FY20 profit being a minuscule 5% of their combined profits!

And if you were to take account of several other problems plaguing its business, a 13x surge in a year seems unreasonable!

The Shareholdings Quandary

Even if you overlook everything else, the main problem with the group is its shareholding pattern. Have a look:

As you would have noticed, the Public's pie in most group companies' shareholdings is abysmally low! Even though the non-promoters holdings are marginally above the SEBI’s mandated limit (25%) for most of the group’s companies, a larger fraction is held by foreign institutional investors (FIIs). And that’s why less than 5% is the effective free float, i.e., shares available for retail investors like you and me!

But what’s the pain point in that, you ask?

Well, it's layman's economics that when supply is scarce and demand is significantly higher, none can stop the price from shooting through the roof!

So, now you know what’s mainly fueling Adani’s stock-price rally, right? A demand-supply mismatch!

Anyway, fast forward to June 2021...

Adani Group’s Stock-crash

The trigger of Adani's crash is noteworthy! How often have you heard that a journalist's tweet swept away billions from the market? Hmm? Atleast not in the recent times, right? But this time, it did.

The tweet’s from Sucheta Dalal (known for unraveling scams like the Harshad Mehta’s case):

What she meant is that many foreign investors (FPIs) have actually been common across most Adani stocks for a long time. But, interestingly enough, many of those FPIs are ‘largely unknown names’ from tax havens like Mauritius, and they have invested more than 95% of their total funds (AUM) in the Adani group only! (That’s not how funds usually diversify.)

So: Is it like these funds were created for that purpose only? Was it some kind of price-rigging exercise? Like a deliberate setup? And is this ‘the return of an operator from the past’? Uh-oh, we don’t know that yet. But this we can say, the SEBI has got really skeptical regarding the foreign element in the group.

It had asked for the disclosure of information regarding the beneficial ownership under the Prevention of Money Laundering Act (PMLA).

On the 14th of June 2021, The Economic Times reported that Adani Group had failed to produce the required information, which led to the NSDL freezing three of its FPI’s accounts (Albula, Cresta & APMS) which held over Rs 43,500 Crore worth of Adani’s shares!

This news was more than enough for the markets to react, whereby Adani Group’s shares plummeted up to 25% in the morning trades to hit the Lower Circuit and closed in the red! Moreover, Mr. Adani lost $7.6 Bn of his wealth in a single day, thus risking his position as Asia’s second-richest person!

Mr. Adani later clarified that the report was ‘blatantly erroneous’, and perhaps, the market seemed to sidestep the minute details like the date of freezing, etc. With the NSDL's clarification, it seems to be a false alarm. Anyway, we would prefer not to comment on that unless there is precise information from the market regulator SEBI.

If you ask us what this holds for the Adani group, we feel that this could spill over to its other plans as well. For instance, the group is planning a new public offer for Adani Wilmar at $1 Bn & Adani Airports at $500 Mn. However, due to skepticism, the valuations might be affected. Moreover, as the group’s growth is mainly fuelled by debt, there could be issues going ahead, as the bankers will now probably be more cautious before funding Adani’s expansion plans.

Will Adani Group be a case study for ‘the higher you climb, the harder you fall’ in the markets? Only time will tell!

So, what should you do?

Domestic institutional investors have shunned the Adani group’s shares. For instance, India's mutual funds hold only a 0.1% stake in Adani Green Energy, while 9% in Tata Power (its peers). And this has been the case for other companies in the group as well (except Ports & SEZ).

With domestic institutions shying away from the group, it’s only natural for retail investors like us to step back.

So, you'd be wise enough to stay on the sidelines unless and until the skepticism bit is entirely eliminated. What say?

Invest with caution!