2022 was not a great year for the Indian share markets; they were marked with significant volatility. However, if one group’s stocks scored an overall upward trend, were the Adani Group stocks. In fact, they were the biggest gainers.
Of late, it is the Adani Enterprises that have risen as a major contributor to India’s growth story, moving over The Ambani’s and Tata’s, and Adani’s had a fantastic run in 2022 with all their ventures delivering a positive return.
Even during the Covid crash, the Adani companies’ share price performance with several of their ventures emerged at the top of the list.
Adani Stock Facts
It is a known fact in the market that the share price movement of Adani stocks has been known to be volatile. With the announcement of each new project, changes in regulations and policies, and overall market sentiments, the fluctuations in their share price are more significant.
Hence, in the current, one company, which is also the group’s flagship firm – Adani Enterprises, has shown a notable downward trend.
Adani Enterprises’ share price fell around 10% in the past month.
How Adani Enterprises has performed recently
The stock has fallen around 10% in the past month, and the company lost about $10.6 billion in Market Cap.
On 21 December, Adani Enterprises had a 52-week high of ₹4,189 and a 52-week low of ₹1,529, touched on 24 February 2022.
About Adani Enterprises
Adani Group’s flagship company is Adani Enterprises. It predominantly operates in the natural resources, transport and logistics, and utility and strategy segments.
It has broadened its presence across many industries, which include integrated resource management (IRM), mining, solar manufacturing, airports, edible oil, defence, and aerospace.
Most Recently, it has ventured into new businesses such as airports, data centres, and water treatment plants.
Why is Adani Enterprises’ share price falling?
1. The current fall in the Adani group’s shares is owed to MSCI’s semi-annual index review, the MSCI India Index, which consists of Large cap and Mid-cap stocks from the Indian markets.
MSCI indices include securities from 23 nations; we have the MSCI India index, which measures the performance of large and mid-cap companies in India.
It has around 106 constituents. They recently added four new stocks to their Index: Tata Elxsi, Adani Power, Jindal Steel & Power and AU Small finance bank.
Subsequently, they decreased the weightage of Adani green in the Index after these additions.
MSCI published additions and deletions from its Index last month. At the same time, they mentioned the changes in the stocks but did not mention the differences in the weighting assigned to them.
However, on Tuesday, they revealed that they have cut down the weighting assigned to Adani green, and due to that, the shares of the Adani group have plummeted.
Why MSCI affected the Adani group stocks?
Foreign investors generally use this Index to invest in the international markets because inclusion in this Index typically reflects the stability and volatility of the stock.
If the weightage of a company is reduced, foreign investors are likely to withdraw money.
While this fall may seem small and appear to be just the daily volatility in the markets, there are deep-rooted reasons why Adani group stocks are highly volatile.
2. In the last week of November 2022, the Adani group announced its plans to raise ₹200 billion via an FPO – follow-on public offer.
According to media reports, the FPO may happen in January 2023 in the next 10 to 15 days.
Now when a company raises fresh equity capital, it mainly does so by issuing new shares. But the issuance of new shares dilutes the existing shareholder’s ownership stakes, which can, in turn, lead to a fall in the value of the company’s shares.
With its current market cap, Adani Enterprises may see a dilution of roughly 3.5-4% of its equity. This could be the second reason the stock has recently come under pressure.
3. Additionally, the issuance of new shares increases the total number of outstanding shares, which can decrease the company’s EPS, earnings per share.
A decrease in EPS may lead to a share price fall, as investors value a company based on its earnings power.
Hence, the dilution of existing shareholders’ ownership stake and the decrease in EPS can all lead to a fall in share price following the infusion of fresh equity capital.
Once a company successfully raises funds via FPO, it can use it to repay debt and, thus, bring down its debt-to-equity ratio. This is a big positive for Adani Enterprises, but the company and the entire group have often come under the scanner owing to its high debt.
4. Insanely high valuations
The fact is that Adani stocks have been buzzing in the markets for a long time now, and they have ridiculous valuations; for example, Adani Green, even after the fall, is trading at a Price/Earning ratio of 672.
While its peer, Tata power, is trading at a P/E of 42, this even though the revenue of Tata power is 8x more than the revenue of Adani green, and its profit is thrice that of Adani green.
Adani Gas trades at a P/E of 502, while Gujrat gas is trading at a P/E of 30.
Hence, clearly, the valuation of Adani companies is absurdly high, and no way the company can justify these valuations; hence a correction is expected in these stocks.
5. Higher interest rates remain a concern
After several years of easy money policies and low-interest rates, inflation has started to rise, resulting in the US Fed embarking on a series of interest rate hikes.
This, in turn, took the air out of growth stocks. Such a rising interest rate environment is a big negative for growth stocks like Adani.
6. Dubious Shareholding pattern
One reason for the high valuations could be its shareholding pattern. Adani company stocks have high shareholding by FPI; most of these FPI have smaller stakes in the company, as investors aren’t required to disclose their holdings if they don’t cross the 1% threshold limit.
These Foreign investors are mainly unknown companies with a major holding in Adani stocks. Surprisingly, these companies have investments in all Adani stocks and negligible investments outside them.
These suspicious holdings did raise concerns in 2020, causing its stocks to fall by 25%.
For example, FPI—Asia Investment Corporation (Mauritius)—is heavily invested in the Adani Group, with 93% of its holdings in Adani companies.
FPIs such as Elara India Opportunities Fund, Albula Investment Fund, Cresta Fund, Lts Investment Fund, and Vespera Fund all held a stake in Adani Total Gas as of December 2020 while also holding many other Adani stocks.
High Shareholding by Foreign investors could imply that fewer shares are available for trading, and the stock price is influenced easily.
Adani Group: Path Ahead
The Adani group operates in various segments with the motto of growth with goodness. It started its business with iron ore and coal mining, then transitioned to port services, and from there, it has been betting heavily on growth sectors.
The group has plans to invest over US$100 bn ( ₹8 tn) over the next ten years, eyeing a big play in energy transition and digital transition within India and abroad.
It has earmarked 70% of this investment for the energy transition space and has already committed US$70 bn towards an integrated hydrogen-based value chain.
Under Adani New Industries, it plans to augment the additional gigawatts (GWs) over 100,000 hectares of land, 1.4 times the size of Singapore. This move will lead to three million metric tons of green hydrogen commercialisation.
The next priority for the group is Digital Transformation. It intends to interconnect green data centres through terrestrial and globally linked undersea cables drawn at its ports and build consumer-based super-apps.
Conclusion: Investors should consider High FPI holding, Insane valuations and less coverage by analysts on the stock while investing in Adani stocks.
Further, most of the Adani companies cater to just one predominant sector, that is, infrastructure, which is highly cyclical, and therefore any downturn would affect all Adani stocks even though the company is now foraying into other sectors.
While the market fall may be slight, investors should look beyond it. The insane valuations, dubious shareholding pattern, and fewer holdings by DIIs should definitely concern investors.