FPO Analysis: Adani Enterprises FPO

FPO Rating: Avoid

About the issue: 

Adani Enterprises, a part of the Adani Group is coming out with its follow-on public offer (FPO) of equity shares of the face value of Rs 1 per equity share. There could not have been a worse time than now for the company to come out with FPO, given a recent report by Hindenburg Research accusing company of fraud.  

The price band of the issue has been fixed at Rs 3112 to Rs 3276 per equity share. A retail investor will get a retail discount of Rs 64 per share with a price on application of Rs 1638 (50 per cent of cap price). Post retail discount, an investor will have a net bidding price of Rs 1574. A retail-individual investor can apply up to a maximum of 15 lots (60 shares or Rs 196,560) at upper price band. The issue size is Rs 20,000 crore at higher price band.  

The FPO opening date is January 27, 2023, and it will be closing on January 31, 2023. The issue is likely to be listed on the exchange on February 8, 2023. The FPO market lot size is 4 shares and in multiple thereof.  

FPO Details: 

*At Upper Price Band 

Objects of the Issue : 

The company intends to use the net proceeds to fund the following objects: 

1. Funding capital expenditure requirements of some Subsidiaries in regard to (a) certain projects of the green hydrogen ecosystem; improvement works on certain existing airport facilities; and construction of greenfield expressways. 

2. Repayment, in full or in part, of certain borrowings of the company and three of its subsidiaries, Adani Airport Holding Limited, Adani Road Transport Limited, and Mundra Solar Limited; and General corporate purposes. 

About the company: 

Adani Enterprises Ltd (AEL) is a subsidiary of the Adani Group, one of India's leading commercial conglomerates with an integrated energy and infrastructure platform. In terms of market capitalization, AEL is one of India's largest listed business incubators. 

It is an effective addition to current and developing enterprises that serve India's needs. It has seeded new business interests for the Adani Group over the years, growing them into sizable and self-sustaining business verticals, and then demerged them into independently listed and scalable platforms, unlocking value for its shareholders. Since 1993, the company has a proven track record of developing sustainable infrastructure businesses. 

AEL has established itself as an incubator by investing in, maturing, and eventually demerging a diverse range of firms. Since its founding, it has successfully nurtured six decacorn businesses and successfully listed them as Adani Ports and Special Economic Zone Limited, Adani Power Limited, Adani Transmission Limited, Adani Green Energy Limited, Adani Total Gas Limited, and Adani Wilmar Limited, among others. The Adani Group had a market valuation of Rs 18402 billion (about USD222 billion) as of December 31, 2022, making it one of India's largest listed groups by market capitalisation. It had 1454 employees on its payroll as of September 30, 2022. 

Financial :

On the financial performance front, for the last three fiscals, AEL has (on a consolidated basis) posted a turnover/net profit of Rs 44086.21 crore /Rs 798.00 crore (FY20), Rs 40290.93 crore/ Rs 74632 crore (FY21), and Rs 70432.69 crore/Rs 475.37 crore (FY22). For H1 of FY23, the company earned a net profit of Rs 849.63 crore on a turnover of Rs 79507.89 crore. While it suffered a setback for FY21 on account of the pandemic in line with the general trends, the company posted excellent results for the H1 of FY23 indicating its future growth prospects. 

Below are the topline and the bottomline of the company for the last 5 years: 

Valuation and Outlook :

For the last three fiscals, AEL has posted an average ROE and ROCE of 14.89 per cent and 18.92 per cent, respectively. Its net debts to EBITDA (on an annualized basis) were 3.61x (H1 FY23), 5.20 (FY22), 3.01x (FY21), and 2.18x (FY20). If we annualize FY23 earnings and attribute it to post-FPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 231.52x. Thus, the FPO appears to be highly over-priced. 

Adani stocks have been under heavy selling pressure over the last two days following a report by the US-based research company Hindenburg Research raising concerns about the debt positions of Adani group firms. However, the Adani Group responded by denying the charges made by the US-based research team, but Hindenburg Research countered by claiming that they did not address any "substantive point" mentioned in their analysis. The news, which was followed by the research, is likely to have an impact on the FPO, which opened today. As a result, we advise investors to avoid the issue until any clarity emerges.