Incubating Diversified Businesses For Better Returns

Adani Enterprises Ltd 

INCUBATING DIVERSIFIED BUSINESSES FOR BETTER RETURNS 

Adani Enterprises Ltd (AEL), incorporated in the year 1993, is the flagship company of the Adani group. The company has primary interests in energy and logistics sectors. The company’s segments include trading, power, port, agri products, real estate and others. AEL also has diversified interests in power, mining, oil and gas explorations, natural gas distribution businesses supported by port, shipping and trading activities. 

The company’s coal mining business involves mining, processing, acquisition,exploration and development of mining assets. AEL’s city gas distribution business is undertaken through its wholly-owned subsidiary, Adani Gas Ltd, whereas it operates the real estate business through its subsidiary, Adani Infrastructure and Developers Pvt Ltd. The company has recently announced demerger of gas sourcing and distribution business into Adani Gas Limited (AGL). AGL will issue fresh shares to the shareholders of AEL and it will be listed on BSE and NSE. AEL shareholders will receive one equity share of AGL (Face Value of Rs1) for every one equity share held in AEL. The transaction is expected to be concluded by the second quarter of FY19. 

Over the years, AEL has acted as a unique incubator of Indian infrastructure start-ups. An investment of Rs1 lakh in AEL in 2003 would have multiplied over 25 times by 2017, which is among the highest returns generated by an infrastructure company in India. Over the past few years, AEL has spawned Adani Ports and Special Economic Zone Limited (market capitalisation of about Rs74,500 crore); Adani Power (market capitalisation of about Rs9800 crore); and Adani Transmission (market capitalisation of about Rs21,500 crore). 

Business Highlights 

a) Coal Trading : 

AEL is among the top three coal traders globally. The company is also the largest coal handling merchant in India for nearly a decade. AEL enjoys a long term contract as mine developer and operator for coal mining in the Parsa Kente coal mines. In mine development and operations business at Parsa Kente coal mines in Chattisgarh, the company supplied washed coal of 1.75 MMT to RRVUNL in Q3 FY 18 as compared to 1.92 MMT in Q3 FY 17. The company, along with its 100 per cent subsidiary Gare Pelma III Collieries, has entered into coal mine services agreement with Chhattisgarh State Power Generation Company Limited for development, operation and mining of coal from Gare Pelma Sector III coal block. 

b) Renewable Energy : 

The company has operationalised renewable projects of 1648 MW with a further pipeline of 550 MW of projects under various stages of implementation across the country. On account of operationalisation of projects, the company generated 364 MU KwH in Q3 FY 18 as compared to 145 MU KwH in Q3 FY 17.

c) Agro : 

In edible oil business, AEL has the leadership position with its ‘Fortune’ brand. The company leads the refined edible oil market with 21 per cent market share. In agro storage business, the company has operationalized storage facility with capacity of 25K MT at Kotkapura. The company recently won 6 projects from the Punjab government with a capacity of 3 lakh MT and the commissioning of all these projects is expected to be by March 2019. 

d) City Gas Distribution : 

The company provides piped natural gas to households, industrial and commercial consumers and compressed natural gas for automobiles in four cities, namely, Ahmedabad, Vadodara, Faridabad and Khurja, through its 100 per cent subsidiary and in Chandigarh, Allahabad and Daman through a 50:50 joint venture with Indian Oil Corporation. The company envisages future growth through the joint venture, which has been awarded the city gas projects in Ernakulum, Panipat, Udham Singh Nagar, Dharwad, South Goa and Bulandshahr. These projects are at various stages of implementation. 

REBRANDING THE GROUP IMAGE 

For the first time ever, Adani Group has set up a team of professionals to coordinate and interact with the media and for dialogue with the government in Delhi. The group is redesigning its communication strategy and planning a redo of its brand image. As a part of this strategy, it has recently hired Suhel Seth, a known name in this segment, to be brand consultant. Seth had also been consulted by Tata Group during its management crisis in 2016 to help rebuild their brand. The group has faced a lot of criticism for its coal mining and railways project at Queensland, Australia. Adani has struggled to find financiers for its Australia project.

FINANCIALS 

In Q3FY18, the company’s revenue increased by 9.42 per cent QoQ to Rs9938.37 crore and 15.48 per cent YoY. The company’s sales have been increasing in the last two quarters after being on a downward trend between Q3FY17 and Q2FY18. The EBITDA for the company increased by 11.97 per cent YoY and 35.5 per cent QoQ to Rs1,048.55 crore in the third quarter of FY18. 

Due to the drop in employee and raw material expenses as a proportion of sales, the EBITDA margin increased to 10.55 per cent in the quarter, a rise of 204 bps compared to the last quarter, whereas, the EBITDA margin was 10.88 per cent in the same quarter last year. The PAT for the quarter was Rs217.6 crore, as against a loss of Rs77.49 crore in the previous quarter, whereas the PAT

decreased 28 per cent YoY from Rs302.26 crore in Q3FY17. Due to the rise in the EBITDA margin, interest and depreciation, the PAT margin for the quarter rose to 2.89 per cent from a negative PAT margin of 0.17 per cent in Q2FY18. The EPS grew from Rs0.99 in Q3FY17 to Rs3.19 this quarter. 

On an annual basis, the company's total income grew by 8.32 per cent to close at Rs38,056.44 crore in FY17, up from Rs35,130.66 crore a year ago. The company reported a 17.40 per cent decrease in net profit to Rs807.71 crore in FY17 as against a net profit of Rs977.84 crore in FY16. 

On the valuation front, the company has a PE ratio of 22.74x. The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 7.08 per cent and 6.61 per cent, respectively. 

The company has a low return on equity of 7.14 per cent for the last three years. AEL has a debt-to-equity ratio of 1.47x. It has delivered a poor growth of -1.06 per cent over the last five years. The promoters have pledged 28.91 per cent of their holdings. The dividend payout has been 6.13 per cent of profits over the last three years. We recommend our readerinvestors to HOLD the stock for now.