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Adani Enterprises FPO: Should you subscribe or skip?

by Tavaga Invest

One of India’s largest conglomerate firms, the Adani Group operates a wide range of industries, including ports and transportation, agribusiness, power generation, renewable energy, and real estate. Gautam Adani founded the business in 1988, and it has expanded tremendously over the last three decades making Mr. Adani the richest man in Asia.

The current focus is on Adani Enterprises Ltd. (AEL), a subsidiary of Adan Group which plans to raise Rs 20,000 crore via an FPO (Follow on Public Offer). An issue of shares by a public corporation whose shares are already listed on an exchange is known as a follow-on public offer (FPO).

Details of FPO:

Dates27 January – 31 January 2023
Price BandRs. 3112 – Rs 3276
Issue SizeRs. 20,000 crore
AllocationQIB 50% Retail 35% NII 15%
Minimum InvestmentRs. 13,104
Maximum InvestmentRs. 1,96,560
Bid Lot4 shares, and in multiples of 4 shares

The FPO being floated includes part payments made in stages. Only 50% of the amount is to be paid along with the application and the rest according to one or more calls from the company in the future. 

Where will the 20,000 Crores be deployed?

Amount Use
Rs 10,869 croreCapital Expenditure: green hydrogen projects, construction of a greenfield expressway, and work at the existing airports’
Rs 4,165 croreReducing debt: Debt Repayment for itself and its units such as Adani Airport Holdings Ltd, Adani Road Transport Ltd, and Mundra Solar Ltd.
Remaining amount General Corporate purposes

Let us look at different parameters to understand this FPO.

The Hindenburg Research Report Controversy:

It has been quite a tumultuous week for the Adani Group. 

The group was the subject of negative news prior to the FPO, which caused its stocks to decline generally. 

On January 24, US-based Hindenburg Research published a study in which it accused the organization of irregularities and expressed concern about the growing debt. The report stated that the group’s seven most important publicly traded companies are “85%+ overvalued even if you disregard our analysis and take the companies’ financials at face value.” 

According to the research company, it has short holdings in the companies of the Adani Group through derivatives traded outside of India and US-listed bonds. 

Following Wednesday’s significant decline in share prices for listed Adani Group companies, the group issued a statement denouncing the article as “baseless” and “malicious” while questioning the timing of the article.

Legal action against the US short-seller is being considered, according to Adani Group, which also questioned the timing of the article. On Thursday, a domestic market holiday, Hindenburg Research promptly issued another statement, saying it stands by its conclusions and would “welcome legal action.” This back and forth has put Adani’s financials under a lens and we can expect more vigilance from investors going forward. 

Fall in Adani share prices below FPO price band due to negative sentiment

As on 27th January 2023, Adani Enterprises’ share price has fallen below Rs. 2800 which is at around a 10% discount to the lower price band value. Hence, an investor will receive no discount benefit if he/she subscribes to this FPO. 

Adani’s debt problem:

The most notable characteristic of AEL is its meteoric increase in share value, which went from roughly Rs. 500 in 2021 to reach Rs. 4000 in November 2022, a return of over 700% or 200% annualized in just over two years.

This increase can be linked to the Adani Group’s recent diversification drive, which included the acquisition of ACC and Ambuja Cement from Holcim for $10.5 billion (about Rs 80,800 crore) and the group’s entry into the media industry with AMG Media Networks. 

This diversification was marked by the massive amount of debt taken by the company as shown in the table below. 

Name2020-21 2021-22Increase (YoY)
Adani GroupRs. 1.57 lakh crores2.2 lakh crores40%
Adani EnterprisesRs. 16,051 crores41,024 crores155%

In September 2022, CreditSights, a division of the Fitch Group, labeled the Adani Group as “overleveraged” and stated that it had “concerns” regarding its debt.

Conventional wisdom would suggest that the stock is overpriced with a price-to-earnings ratio of over 300 and an operating profit-to-interest ratio being around 1.5. 

Shareholding concern:

The company plans to dilute a 3.5 percent stake through the FPO. Nevertheless, a significant percentage of the company is in the hands of promoters and FIIs which makes it a high beta stock (high volatility). A small transaction undertaken by promoters/FIIs can significantly move share prices. Hence, investors should reflect upon their risk appetite before entering into this stock.

Pricing of the FPO:

Comparing different discounts to market price given by previous FPOs by other companies:

CompanyDiscount to MPYear
Adani Enterprises Ltd.No discount as of 27th January2023
Ruchi SoyaApprox. 40%2022
Yes BankApprox. 50%2020

Hence, the FPO pricing doesn’t look attractive at these valuations. 

What should you do with Adani’s FPO?

AEL is regarded as the organization’s incubator. Businesses including ports, power, and city gas were initially nurtured by AEL throughout the years before being split off or demerged into distinct public corporations. 

After achieving a specific investment profile, the firm intends to spin off assets including hydrogen, airports, and data centers between 2025 and 2028, according to its CFO. Hence, the Adani FPO offers an opportunity for investors to participate in the growth of the Adani Group’s various business ventures.

Though the exceptional rally in Adani stocks in the last 2 years might make the FPO enticing for retail investors, it is important to understand the risk of high debt levels and concentration of shareholding with promoters before investing in the company. 

Even though the anchor investor book of the FPO of Adani Enterprises (AEL) was subscribed by 1.5 times by 33 funds and investors and successfully raised Rs 5,985 crore, the share may remain under pressure because of the recent negative publicity.  

At a fundamental level, the company seems overpriced and suitable for investors with a higher risk appetite.  

Disclaimer: Above piece is only for information purposes. Please consult a SEBI Registered Investment advisor before taking any investment decision. 

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Ruchi Mehta



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