Jitendra Kumar Gupta Moneycontrol Research
Adani Ports and SEZ, the cash cow of the Adani Group, is not presenting a pretty picture financially. It handed out close to Rs 6,240 crore of loans to the subsidiaries and group companies in fiscal 2018. Last fiscal, the company recorded an impairment of close to Rs 300 crore related to such loans.
Investors have also expressed their apprehensions about promoters pledging of shares, which last stood close to 45.51 percent.
All this assumes importance in light of the recent acquisition of a group company Adani Agri Logistics for a consideration of nearly Rs 1,000 crore. Concerns over the acquisition took a toll on its shares yesterday, which closed with a loss of over 8 percent.
Here's why investors are worried. Adani Logistics, which is a subsidiary of Adani Port and SEZ will acquire the entire stake from Adani Enterprise. Thus, the deal would not require minority shareholders’ approval.
The second question is about valuation. Adani Agri Logistics is valued at Rs 1,662 crore on an enterprise valuations basis, which is equal to 18 times its FY18 consolidated annual EBITDA of Rs 92 crore.
Our calculations suggest that to earn its current valuation (enterprise value of Rs 1,662 crore), the company will have to grow EBITDA by 78.39 percent in five years, or 51 percent over seven years.
Its own estimated total EBIDTA (mentioned in presentation till 2025) for the next five fiscal is close to Rs 693 crore, which is 42 percent of its enterprise value. Its standalone revenues have grown from Rs 99.84 crore in FY16 to Rs 105 crore in FY18.
More than just economic benefit
Possibly valuations do not fully reflect the future economic benefits and synergies, which could accrue post the acquisition.
The company claims a market share of about 45 percent in the agri logistics space, and has some worthy long term agreements with Food Corporation of India and other state government bodies.
It has 1.58 million metric tonne fully contracted capacity (55 percent operational) along with 7 trains and 28 storage & handling infrastructure facilities (only 14 operational).
The company also says that post-acquisition the combined EBITDA of Adani Logistics would double and there are several synergistic benefits with Adani Agri Logistics looking to double the capacity.
Reading between the lines
While an opportunity exists, the additional capacity would come as a result ploughing back of post-acquisition profits. Such capacity addition would only add value if these assets earn more than what they are acquired for.
That apart, one would read the numbers offered by the company with a pinch of salt in the light of the fact that they were silent about the net profit and net worth of Adani Agri Logistics.
Instead, it repeatedly highlighted an EBITDA margin of 72 percent. In an asset-heavy business funded with debt, EBITDA margins are of lesser importance compared to return on capital or return on equity.
Similarly, the enterprise value including equity valuation as presented by the company in its documents includes the current value of surplus land of 96 acres based on market benchmarks.
While the deal may have merit, it left investors with lot more homework to do before looking at the much-talked about benefits.
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