Is The Adani Group Rally Sustainable?

The remarkable surge in Adani Group’s stock prices has reignited the attention of both traders and investors. Many are now pondering whether these stocks still have potential for further growth and whether it’s the right time to enter the market. The report takes a closer look at the scenario
 

The Indian stock market has sustained its upward momentum, continuing the rally that commenced in November. With a gain of over 5 per cent last month and an additional 4 per cent in the first six trading sessions of December, one important contributor to this surge has been the resurgence of Adani Group stocks. Since the latter part of November, Gautam Adani’s conglomerate has witnessed a remarkable surge in market capitalisation, soaring by up to 48 per cent. Several of these stocks have even hit fresh 52-week highs, with Adani Total Gas emerging as a standout performer, boasting a 115 per cent increase within just nine trading sessions. [EasyDNNnews:PaidContentStart]
 

Presently, the Adani Group stocks collectively hold a market capitalisation close to ₹ 15 lakh crore, a significant climb from the ₹ 10 lakh crore mark observed in the final week of November. The impact was even visible in the bond yields, which dropped recently. Several factors have prompted this sudden bullishness. Media reports indicated that during the US International Development Finance Corp’s (DFC) due diligence investigation, prior to extending a USD 553 million loan for a container terminal in Sri Lanka, did not find relevance in short seller Hindenburg Research’s allegations of corporate fraud against the conglomerate.
 

Additionally, Adani Green Energy securing a substantial USD 1.36 billion loan from an international bank consortium further fuelled positive sentiments. Moreover, recently the Supreme Court concluded hearings in a regulatory probe investigating the American short seller’s allegations. While reserving its order on the probe, the apex court stated it would not take media reports on the conglomerate as the “gospel truth”. The recent majority win of the BJP-led government in three state elections also contributed to the prevailing market optimism. 

The market interpreted these occurrences as a form of exoneration, notably significant following Hindenburg’s report, which previously led to a staggering USD 100 billion decline in the Adani Group’s market capitalisation in January 2023. At the beginning of the year, it took a little over seven days for Gautam Adani, then the world’s third richest man, to suffer substantial losses after a short seller raised concerns about his company’s financial standing. On January 24, Hindenburg Research, an American short seller, published a report alleging that opaque entities in Mauritius linked to the Adani family were manipulating the group’s stock price. 

Investors reacted swiftly, resulting in the disappearance of USD 100 billion in market value of its stocks. This downturn significantly impacted the tycoon’s personal wealth. Adani’s extensive empire oversees some of the country’s largest ports, stores a third of the nation’s grain, manages a fifth of its power transmission lines, and contributes to a fifth of its cement production. The conglomerate held a position among India’s top ten largest non-financial firms based on assets. The combined market capitalisation of all the listed companies of Adani Group is still lower by 30 per cent from its peak before the report was published.
 

Is This Rally Sustainable?

The remarkable surge in Adani Group’s stock prices has reignited the attention of both traders and investors. Many are now pondering whether these stocks still have potential for further growth and whether it’s the right time to enter the market. Some institutional investors have revised upward the target price of a few companies within the group, prompting others to contemplate taking a leap into these stocks. The recent positive developments certainly bode well for the Adani Group stocks, addressing uncertainties stemming from earlier concerns raised in reports this year. 
 

However, while some clarity has emerged, uncertainties linger as the Supreme Court has yet to deliver its verdict, and the clearance from DFC pertains only to a specific company within the group, not encompassing all. Hence, the decision to invest in these companies should now solely be based on their individual merits. Companies exhibiting strong cash flows and fair valuations could be viable options for investors. In the upcoming pages, we will delve into an in-depth review of most companies within this group to assess their current investment potential. 
 

Adani Power
 

Adani Power Limited had delivered more than 80 per cent returns six months prior to the Hindenburg report. Nevertheless, after the report it fell by more than 45 per cent. Nonetheless, from its low, it is up by almost four times. One of the reasons for this is better Quarterly Results by the company. The company posted strong half-yearly results. The revenue of the company for H1FY24 stood at ₹ 23,996.12 crore which increased by 15.55 per cent YoY. 

The company's operating profit stood at ₹ 17,734.19 crore, while the PAT of the company stood at ₹ 15,353.59 crore, which increased by 180.41 per cent on a YoY basis. The significant increase in net profit is due to an increase in other income. Since the release of the Hindenburg report, the valuation of Adani Power has dropped slightly from a P/E of 10.2x to 9.9x. With the growing power consumption in India, Adani Power can be one of the candidates to benefit from the increased power sector demand. However, clear signs of investing in the company can only be taken after the 2024 elections. 

Adani Wilmar



Adani Wilmar had been falling before the Hindenburg report and the report only accentuated the fall. It is down by more than 50 per cent from its peak currently. The company posted weak half-yearly results. The revenue of the company for H1FY24 stood at ₹ 25,195.23 crore which decreased by 12.76 per cent YoY. The company's operating profit stood at ₹ 404.22 crore, which also declined by 50 per cent. The company posted a loss of ₹ 189.94 crore compared to a profit of ₹ 229.70 crore last year same period. The operating margins too declined by 42.68 per cent. This was mainly due to the increase in raw material cost. Adani Wilmar has been historically operating at a very low margin of about 2-4 per cent. Given, that the business is operating at a very low margin and PE in triple digits, we would like to suggest our investors to avoid such stocks.
 

ACC



ACC, one of the strongest companies in Adani’s group was dropped by almost 40 per cent post the report. Nevertheless, it has gained a lot of ground since then. The company posted strong quarterly results. The revenue of the company for Q2FY24 stood at ₹ 4434.73 crore which increased by 11.22 per cent YoY. The company's operating profit stood at ₹ 759.33 crore which increased by 781.71 per cent. The PAT of the company stood at ₹ 386.15 crore, which increased by 427 per cent on a YoY basis. The company also plans to add 40 million tons of new clinker capacity and 35 new grinding units to reach a cement production capacity of 140 million tons by FY '28. The acquisition of Sanghi Industries is expected to close in Q3 of the current year, accelerating ACC's goal of reaching 140 million tons of capacity. Since the release of the Hindenburg report, the valuation of ACC has dropped drastically from a P/E of 50x to 31x between when the report came and now. These valuations are still higher than their long-term average.
 

Adani Ports & Special Economic Zone (APSEZ)



After the Adani-Hindenburg case unfolded on January 24, 2023, the stock plunged from ₹ 760.85 to its 52-week low of ₹ 394.95 on February 03, 2023. From this low, the share price of the company is already up by 125 per cent and is currently in four digits. The company has generated better results first half of FY24. For the half year ended September 30, 2023, revenue rose by 25.56 per cent to ₹ 12,893.96 crore. Net profit rose by 33.13 per cent to ₹ 3,881.01 crore. EBITDA margin improved by 168 bps to 59.20 per cent. On an operational basis, the ports business recorded its highest-ever six-month cargo volumes at 202.6 MMT in H1FY24, a YoY growth of 14 per cent. Before the Adani- Hindenburg row, the stock was trading at a TTM P/E of around 30x. Its 3-year historical median P/E stands at 27.7x. As of December 08, 2023, it is trading at a P/E of 28.0x which is in moderation with its median and Hindenburg row. 

The company concluded the buy-back of two tranches of USD-denominated bonds worth USD 325 million, exhibiting 50 per cent of the principal repayment due on July 24. The company is constructing India’s largest transhipment hub in Vizinjham Port, which berthed its first vessel in October 2023. The port will start commercial operations by the end of FY24. Considering these factors, it may be currently in a fair zone and no sharp spike upside is visible.
 

Ambuja Cements



When the Hindenburg report was out, Ambuja Cements was trading at ₹ 517.2 with a TTM P/E of 56.1x. In H1FY24, Ambuja Cements posted a revenue of ₹ 16,137 crore, up by 6.33 per cent compared to ₹ 15,176 crore in H1FY23. EBITDA jumped 123.40 per cent to ₹ 1,781.86 crore in H1FY24 from ₹ 1,664 crore. Net profit stood at ₹ 2,123 crore from ₹ 917 crore, a YoY growth of 131.55 per cent. EBITDA margin improved by 1207 bps to 23.04 per cent in H1FY24. As the case unfolded, the stock dipped to its 52-week low of ₹ 315.30 on February 02, 2023, and had a P/E of 40.5x. Currently, the stock is trading at a P/E of 33.0x which is lower post Adani-Hindenburg row. 

The company is planning to double its cement production capacity from 67.5 MTPA to 140 MTPA by FY28. The company also plans to add around 40 MTPA of new clinker capacity, thereby implying around 10 new cement kilns. On August 2023, the company announced the acquisition of Sanghi Industries Ltd at an Enterprise Value of ₹ 5,000 crore which will be funded through internal accruals. The stock is available at a cheaper valuation. Furthermore, given the strong capacity expansion plans, we believe still some juice is left in this stock.
 

Adani Green Energy



The company reported revenue of ₹ 4,382 core in H1FY24, compared to ₹ 3,219 crore in H1FY23, signifying a YoY growth of 36.13 per cent. Net profit rose by 56.20 per cent to ₹ 567 crore in H1 FY24 from ₹ 363 crore in H1 FY23. Net profit margin improved by 166 bps to 12.94 per cent in H1FY24. In FY23, the company commissioned the world’s largest Hybrid RE Cluster of 2.1 GW at a single location. The company is also planning to set up 15 GW Hybrid renewable energy projects in Gujarat. Before the Adani-Hindenburg, the stock was trading at ₹ 1930.85 with a P/E of over 430x. Post correction, it was trading at 121x. Currently, it is trading at a P/E of 165x which is significantly higher compared to the industry average (28.8x). Furthermore, the stock trades at 30.4 times its book value. Hence, looking at the expensive valuation, we recommend avoiding the scrip.
 

Adani Enterprises



Adani Enterprises saw its share price increase by 13 per cent from six months prior to the Hindenburg report. Looking at the financial performance for H1FY24 the company reported revenue of ₹ 47,955.78 crore which declined by 39 per cent from ₹ 79,019.48 crore in H1FY23, while EBITDA grew by 37 per cent and stood at ₹ 4,954.12 crore as compared to ₹ 3,611.74 crore in H1FY23. Similarly, the net profit of the company jumped by 31 per cent and stood at ₹ 1,111.38 crore as against ₹ 849.63 crore in H1FY23. 

Additionally, since the release of the Hindenburg report on the Adani Group, the valuation of Adani Enterprises has dramatically changed, as the company currently trades at a P/E multiple of 126x as compared to the previous P/E multiple of 348x, which was just before when the Hindenburg report was published. However, due to concerns regarding overvaluation based on its one-year historical median P/E multiple of 103x, it is advisable to avoid the scrip. 

Adani Total Gas



Adani Total Gas Ltd has delivered negative returns of almost 60 per cent from six months prior to the Hindenburg report. Looking at the financial performance for H1FY24 the company reported revenue of ₹ 2,314.12 crore which marginally increased by 1 per cent from ₹ 2,300.58 crore in H1FY23, while EBITDA grew by 19 per cent and stood at ₹ 527.67 crore as compared to ₹ 444.76 crore in H1FY23. Similarly, the net profit of the company jumped by 14 per cent and stood at ₹ 314.59 crore as against ₹ 277.17 crore in H1FY23. 

Moreover, after the release of the Hindenburg report on the Adani Group, the valuation of Adani Total Gas Ltd drastically fell, as indicated by its P/E multiple of 805x, which was before January 24, 2023, and currently it trades at a P/E multiple of 225x. However, due to concerns regarding corporate governance and overvaluation based on its one-year historical P/E multiple of 135x, we recommend avoiding the stock.
 

New Delhi Television (NDTV)


New Delhi Television was also not spared with the Hindenburg report it fell by almost 40 per cent post the report and fell from ₹ 360 to around ₹ 170. Looking at the financial performance for H1FY24 the company reported revenue of ₹ 165.54 crore which declined by 22 per cent from ₹ 213.54 crore in H1FY23, while EBITDA plunged significantly and stood at a negative of ₹ 4.77 crore as compared to a positive EBITDA of ₹ 49.21 crore in H1FY23. Similarly, the company reported a net loss of ₹ 2.36 crore as compared to a net profit of ₹ 38.38 crore in H1FY23. 

Additionally, before the Hindenburg report was published the company traded at an EV/EBITDA multiple of 13.8x, which fell significantly from that level to a low of 9.2x and currently the company trades at an EV/EBITDA multiple of 99.6x which is substantially higher than the previous. Hence, we recommend avoiding the scrip.

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