Will Adani Enterprises' latest diversification into aviation pay off?

Jitendra Kumar Gupta Moneycontrol Research

Adani Enterprises, which groomed many of its flagship businesses such as Adani Power, Adani Transmission and Adani Ports and SEZ, has the tradition of early stage grooming and once the businesses mature they are separated to thrive on their own.

It recently announced divestment in one such business, Adani Agri Logistics for a cash consideration of close to Rs 1,000 crore to its group company Adani Ports and SEZ at a very attractive valuation close to 18 times FY18 EBIDTA. This time, it did not list it separately but made a quick arrangement, which is perhaps due to the cash required by Adani Enterprise for its aviation ambitions.

Adani Enterprises has emerged the highest bidder and won the right to operate and maintain all six airports it bid for. Hopefully, at some point in time, this too could be separated into a listed entity.

Cash cow

Adani Enterprises is largely a trading company earning its bread and butter from trading activities and mining. Close to 90 percent of its revenue comes from these two activities accounting for a similar proportion of its capital employed in the business.

These businesses include trading and mining of coal, agro products and supply of bunkers in the international market. Last year, the company generated close to Rs 3,000 crore cash from operations. These businesses do not require much capex.

The cash generated becomes capital for other starving new and emerging businesses. Even after the divestment of Adani Transmission and Adani Agri Logistics, it will be left with businesses such as green energy or solar business, city gas distribution and now the new entry into airport management business.

While markets question the focus of Adani Enterprises and its frequent entry into unrelated businesses without much prior knowledge, Adani Group as such has been able to manage this divergence and build scalable businesses.

For instance, Adani Green Energy in the past had executed the largest single location solar project of 648 MW costing close to Rs 4,500 crore.

Mantra for growth

What is important, by operating in this way, the risk is segregated or rests with the one single company and the group as a whole is able to experiment.

New businesses require risk-taking ability, growth capital and ability to groom, which is strategically fulfilled by Adani Enterprises. Moreover, promoters hold 74.92 percent in the company, which is again a big plus in terms of operations and taking strategic decisions.

Like power and other businesses that it has groomed, the entry into aviation is similarly appraised. Adani Group has very little experience and knowledge of managing airports. And emerging as the highest bidder outbidding some of the veterans of the aviation industry like GMR could backfire in the times to come. But that’s always been the case, which is why Adani Enterprises becomes a risky but yet highly rewarding business.

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