Gautam Adani puts in place plan to take Group valuation to $1 trillion

• Given the size and scale of its portfolio, Adani Group is targeting a group valuation of $1 trillion.
• Adani Group will play to its strengths and focus on its core verticals – mining, infrastructure and utilities. Businesses that fit well into the group’s overarching superstructure will become adjacencies like cement, copper and aluminum.
• Adani Enterprises will continue to be the group’s incubator that currently houses new businesses. The Group is looking to hive off some of these new businesses like new energy, airports and roads over the next 2-4 years.

The Adani Group’s market capitalisation has been the subject of much conversation in recent times, as the returns have taken many by surprise and propelled Gautam Adani to the third spot on the list of the world’s richest people. The value of the group’s listed entities have zoomed from $16 bn in 2015 to $240 bn in 2022, but billionaire Gautam Adani’s ambition is to take his group’s value to $1 trillion. All the pieces of this strategy were put in place back in 2015.

On 10 October, the group’s Chief Financial Officer Jugeshinder ‘Robbie’ Singh, narrated an incident outlining the group’s gambit to a roomful of high networth individuals in New Delhi. He said: “Whatever you see today, it might look like it has just happened in the last one or two years, but in reality what we have done – both GSA (Gautam Shantilal Adani) and myself – we discussed this in 2015. When the discussion happened, the group’s market cap was around $16 bn in 2015. Given what we had as a set of companies, we believed that if we had assets and companies of that type we should really be a $1 trillion group. So we went through the steps that we needed to take to get to the point.”

Since then, the Adani Group has set about building its infrastructure and logistics portfolio in a manner that it could emerge as the top five globally and not just India’s largest player. To achieve this goal, Singh said they took steps to transform the very way the group functioned at every level. “We came to the conclusion that a lot of the steps could be executed, When we concluded that we could (execute) these steps, both of us knew at the stage that if we didn’t achieve this, at least two people – Gautam Adani and me – would know we failed,” he added.

Building It Brick By Brick

While market experts have at times questioned the Group’s foray into cement, the Group is clear that it will play to its strengths and focus on its core – mining, infrastructure and utilities. And businesses that fit well into the group’s overarching superstructure will become adjacencies.

Given that power and logistics are the largest components of any metals and materials business, the group has seen it fit to enter copper, aluminum and cement businesses. Power continues to be core to the Group’s future growth plans. And to this end, Adani Green is redefining the future of renewable energy. In 2020, Adani Green became the largest solar company in the world. Adani New Industries, which is currently within Adani Enterprises, will focus on the Group’s foray into the new energy business.

Singh went on to explain to investors that for the first time in India’s history, a portfolio of a group has emerged that is the world’s top five in the entire sector. He said: “If you take the infrastructure portfolio of the Adani Group, then the core is among the top 5 in the world. If you take Adani Green, Adani Ports, Adani Total, Adani Transmission and Adani Power are in total among the world’s top five infra portfolios. It is the fastest growing portfolio. Our primary industry vertical materials, metal and mining again sits next to our core infra portfolio.”

Not surprising then that Adani Ports and Special Economic Zones (APSEZ) was the first company to undergo a major transformation from being a mere ports operator to becoming an integrated port services and logistics player. According to Gautam Adani in his AGM speech, “Financial year 2021 was a transformational year. No company runs a port business of such scale and reach.” The company added LNG and LPG business to the portfolio. In all, Adani’s ports business moves $100 bn worth of trade every year.

Why Entering The Materials Business Makes Sense for Adani?

The Adani Group emerged as a surprise bidder for Holcim’s cement business in India earlier this year. While many believe it was a foray into an unrelated business, the Group has compelling reasons behind it. Whether it is building materials like paints and cement or metals, 74% of the cost in these businesses comprise of three things – transport and logistics, power and extraction. Singh believes that the cement industry is like any materials industry, where infra and energy are core components.

Explains Singh, “We never looked at cement as a manufacturing business. We believe that the Indian cement industry is horrifically inefficient. And we can bring efficient logistics and power to it. Anyone who has predicted the EBITDA of ACC and Ambuja will be wrong by a factor in the next 9-12 months. The same thing is true for copper and aluminum.”

Given that Adani Group has all the clearances, it can deliver the key raw materials at a better price.The group already is the largest mining services player in the country and which is why it believes that the development cost of its copper smelter would be a third of the cost of any other developer in the country and aluminum would be the same. “So when you hear we are buying XYZ, I would like you to see in this chart that broadly 100% of our investments are core infra or adjacent areas. We do not do anything outside of this,” said Singh to investors.

Surplus Cash & Credit Rating Higher Than Sovereign: Group is generating cash faster than it can deploy

Most businesses of the Adani Group enjoy the best in class margins. The ports business has reported operating margins of 70%, while its closest competitor’s margins are at 56%. Adani Total Gas has reported margins of 41%, while Adani Tranmission’s operating margin is at 92%. The businesses are profitable and efficient and generate high levels of free cash flows.

The growth, explains Singh, is higher than even some tech companies. The group currently generates earnings before interest, tax, depreciation and amortization of $8 bn. Of this $8 bn, approximately $3.6 bn is spent on servicing debt (interest and principal). Of the remaining $4.4 bn, the group spends $700 mn towards tax. Businesses spend $1.8 bn towards capex, while the remaining the group is unable to deploy.

While in absolute terms the Group’s debt has gone up, but so has its EBITDA, explains Singh. Over the last nine years, the Group’s EBITDA has grown 23% CAGR, while debt has grown by 12%. Nearly 41% of Adani’s portfolio has the same credit rating as that of the Government of India. “We are rated higher than the banks so if we keep the money there, then it is a problem for us,” adds Singh. According to the Group’s CFO Robbie Singh, soon enough the group will have a company in its portfolio, with all its business in India, that will be rated higher than the Government of India.

Global Relationships and Capital Drive Growth

The Group’s portfolio has evoked interest from global partners like TotalEnergies and even global funds like International Holding Company. TotalEnergies has expanded its investment across the portfolio of companies. Total Energies has invested $4 bn across Adani Group companies and it is the French company’s largest single minority position in the world. IHC has also invested $2 bn across group companies.

The Adani Group has deep relationships with most Indian banks, but since they have group exposure limits, Group Adani cannot grow if it is only dependent on Indian banks. Almost the entire European banking system has relationships with Adani Group along with leading investment banks from the US and Japan. The group has not only raised $16 bn capital in the last three years to fuel growth, but has also run one of the largest equity capital programmes, which is almost the same size as that of Reliance Jio.

Adani Enterprises to act as the Group’s Incubator

Adani Enterprises has been positioned as the group’s incubator. The group is currently nurturing several new businesses under the aegis of AEL till they become independent and can fund their own capital expenditure plans. The Group believes that it should not be valued on the basis of P/E multiple as its business is the incubation of new businesses.

For instance, Adani New Industries is the green hydrogen business under AEL for which the Group has committed capex of $50 bn over the next 10 years. Apart from the new energy venture, data centers, airports and the roads businesses will sit inside AEL till they can be independent and support their own growth ambitions. The Group is looking to hive off some of these new businesses over the next 2-4 years.

To be outside of Adani Enterprises, businesses need to meet two conditions: 1) They can sustain their growth on their own and not need money from shareholders. 2) There can be no financial cross holdings. When a business can stand on its feet, it will be demerged from AEL, explains Singh. In the next 2-3 years, hydrogen, airports and transmission businesses can be demerged when they can be independent. But from the look of it, Adani Group’s transformation is a 25-year story of growth and ambition.

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