The Only Adani Stock Worth Looking At

Adani and Pathan were the two things which dominated everyone's mind space over the weekend.

While Pathan broke all box office records and is on its way to create history, on the flip side, the Adani group has lost 5 trillion (tn) in market cap in less than 5 days. And mind you, the number is changing every day as new information emerges from both sides.

On a lighter note, Adani Gas has no gas left while Adani Green is in the red...

There was this joke on What'sApp which said... The way the Adani stocks are falling, the owner of Hindenburg will become the 3rd richest person in the world replacing Gautam Adani.

On a serious note, losing 5 tn like more than half of HDFC Bank or the combined market cap of Maruti, Hero, Bajaj, and TVS, and Eicher Motors... all in a week.

Such is the intensity of this notional loss.

Anyway, the point is not to give you 'gyaan' on what has happened with the Adani group or to point out who is right or who is wrong.

I am sure you have read plenty of stuff regarding the same with the calling off the FPO being the latest mega news in the Adani-Hindenburg saga.

As an investor it is our business to find out opportunities based on data and news.

So, to cut the long story short, let me try to answer some questions on everyone's minds.

Should You Look at Adani Stocks After the Fall or Are They Falling Knifes to be Avoided?

When we talk about the Adani group, let me first list out the group companies along with basic data.

The table below lists out the major Adani group companies and their valuation metrics.

Adani Group Companies	Marketcap*	Debt:Equity	P/B Value	EV/EBITDA	Comments on Valuations (P/B, EV/EBITDA)
Adani Enterprise	2,300	1.3	7.0	40.0	Outrageous
Adani Transmission	1,737	3.1	16.0	39.0	Outrageous
Adani Total Gas	1,882	0.5	72.0	235.0	Insane
Adani Green Energy	1,645	7.7	32.0	51.0	Outrageous
Adani Power	780	1.9	3.3	6.1	Fair
Adani Ports	1,070	1	2.4	12.5	Fair
Adani Wilmar	547	0.4	7.2	30.5	Very High
Ambuja Cements	725	0.0	2.8	14.5	Fair
Total	13,249

*Marketcap in Rs bn; Data as on 02/02/2023;
Source: Screener

I have not even considered P/E ratios for some of the companies as they mean nothing when companies like Adani Green, Adani Total Gas, and Adani Transmission have miniscule earnings.

Probably the right way to look at them would be via the price to book value or EV/EBITDA as they are asset heavy business.

If you look at the valuations, there is no rationality in the numbers of Adani Transmission, Adani Total Gas, and Adani Green.

As these are fast growing companies, for example Adani Green Energy is a company of the future, we should not measure it and few others on the P/E ratio as it can be misleading at times.

However, as these companies are asset heavy companies, even if you value them on a price to book or Enterprise Value to EBITDA, the valuations are still insane.

For example, even after a massive 40% correction, the price to book and EV/EBITDA of Adani Total Gas comes to 72 times and 235 times.

Adani transmission and Adani Green also fall in the same category of insanity.

Some of this insanity is also due to limited free float as public shareholding is very low in most of the Adani group stocks. That in my view is the prime reason of the razy up move in these stocks over the past couple of years without any justification of fundamentals.

You will be shocked to know that the public shareholding in Adani Total Gas is barely 1-2 % of the equity base. The same is the case with Adani Transmission.

In terms of institutional shareholding too, LIC is the largest shareholder which is more like a strategic financial advisor and will not sell.

That is the reason why the stocks go up insanely and come down with the same intensity as you might have observed.

From a fundamental perspective, there is nothing wrong with the growth numbers, but how can we pay an infinite valuation?

Even if earnings double every 3 years, which in case of companies like Adani Green is possible, the valuations still don't add up.

This in my opinion is all a function of liquidity.

Out of the Adani stable, the only 2 companies which makes sense on valuations and fundamentals are Adani Ports and Ambuja Cements.

Adani Ports - A Giant in the Making

Imagine you can get India's largest private port operator with 13 state of the art ports and 538 MMT (Mn metric tonnes) of volume capacity at a throwaway valuations.

Yes, Adani Ports is available at 2.4x P/B valuations and a P/E ratio of little less than 20 times.

The country's largest port at such cheap valuations.

Adani Ports commands a 60% plus market share of India's port infrastructure and has the largest container handling facility in India.

The company through its subsidiary operates 6 logistics parks in the country.

Under a concession from Food Corporation of India and various state government agri-commodity warehousing departments, it owns, operates or is in the process of developing silo bases for the storage of food grain and facilitate the transportation of grain.

Besides the company owns and operates India's largest multi-product SEZ.

If you glance through the financials, the company has an impressive track record on how efficiently it manages capital along with superb return ratios, revenue, and profitability growth numbers.

Best in Class ROCE and ROE of Adani Ports

Efficiency Ratios	Adani Ports
ROCE	11%
ROE	15%
3 Year ROE	16%
3 Year ROCE	13%

Source: Screener

While Gross Debt is High, it Generates Massive Operating Cashflows

Business Metrics	Adani Ports
Operating cash Flow (Rs in bn)	98
Gross Borrowings as on Sept-22 (Rs in bn)	452
Free Cashflow (Rs in bn)	60
Cash position (Rs bn)	58

Source: Screener

Decent Leverage Ratios for an Asset Heavy Company

Leverage Metrics	Adani Ports
Debt: Equity	1.04
Pledged Percentage	17%

Source: Screener

What Should Investors Do?

The problem with human behaviour is that they buy stocks when they are going up and not when they are available at a discount.

While I agree that Adani group is plagued with slew of negative news flows, big money is made when you cut the noise and focus on fundamentals.

I believe the ship is not going down.... this is not a Yes Bank or a DHFL in my view. Adani Ports has hard assets which contribute to the economy of the country.

Its gross block has grown 10 times in 10 years and profits have multiplied 6 times over the past 10 years while the company is available at its 10-year average PE multiple.

While I agree the volatility is going to be extreme over the next few weeks, diamonds are found in the rubble and not in the sky.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure