Adani Group Is Slowly And Steadily Riding Out The Storm But What Next For Embattled Conglomerate?

Short-seller Hindenburg Research's report on the ports-to-power conglomerate Adani group caused a massive decline in the group's share price. The group's flagship company Adani Enterprises had seen its stock price decline by around 71 per cent from its peak to the bottom.

The investor sentiment is now changing, with the share price rising 57 per cent from the bottom they hit on February 27. While the shares are still 55 per cent lower than the peak, the increase in stock price suggests that investors have begun warming up to the shares. Even the group's bonds traded have come back from the distressed levels.

Why Has Investor Sentiment Changed?

There could be several reasons for the change in investor sentiment.

The Adani group's debt has been a topic of discussion and intense scrutiny for some time.

According to reports, the promoter family has repaid nearly $2.65 billion worth of, of which $2.15 billion worth of share-backed loans were repaid before the deadline of March 31. The balance of $ 500 million had been taken up to pay up for the Ambuja Cement acquisition.

In the first week of March, the group said it had prepaid debt worth Rs 7374 crores (over $900 million) backed by shares.

The repayments made by the company within a short period after the Hindenburg crisis would have helped in sending out the message that the group was not in financial distress after the company returned follow on public offer (FPO) funds after the Hindenburg crisis.

The group promoters also sold shares of some group companies to GQG Capital, which manages $ 88 billion in assets. The group hasn't disclosed whether these funds were used to repay debt. But, since the conglomerate's lack of significant institutional ownership has been a topic of discussion for a while, the entry by a large asset manager like GQG might alleviate these concerns.

Cuts in Capex Plans

The group has also cut down on its growth capex plans after returning investor funds it had garnered during the FPO.

Since the group is focused on the infrastructure sector, it has to invest heavily in capital expenditure to build projects.

The group has been an exception in some ways since many companies in the infrastructure sector fail due to delays, lack of funds, long gestation periods, or an inability to monetise assets and recoup the invested money.

So far, the Adani group's assets have been steady cash flow machines. Yet, heavy capital expenditure requires significant debt and equity funding.

The group had been on an expansion spree with forays planned in airports, green energy, hydrogen, refineries, super-apps, data centres and several other areas. But now, the company has shelved some of these expansion plans as it focuses on reducing its debt load and conserving cash.

According to reports, it has called off its Rs 7,017 crore acquisition of DB Power and has suspended work on its Rs 34,000 crore coal to PVC project in Mudhra. The group reportedly suspended work on a Rs 34,900-crore petrochemical project at Mundra in Gujarat.

Adani Enterprises will also not make fresh investments in new road projects until its share price volatility settles. The embattled conglomerate will focus on completing existing projects, including Ganga Expressway, before embarking on any fresh capital expenditure.

The company's third-quarter results are also positive, with a 42 per cent rise in revenues of the flagship company Adani Enterprises year-over-year from Rs 18,758 crores in Q3 FY22 to Rs 26,612 in Q3 FY23. The company's earnings before interest, taxes, depreciation and amortisation (EBITDA) rose by 101 per cent in Q3FY23 to Rs 1,968 crores.

Nevertheless, regulatory authorities have been asked by the Supreme Court to investigate any regulatory failures on the part of the group. So far, the group isn't facing any pressing financial troubles despite returning investor funds raised during the FPO.

While the group's image has undoubtedly taken a hit, it has employed Watchell, Lipton, Rosen and Katz to help it control the crisis. It looks like the group will survive the crisis, but whether it can regain investor confidence like it had earlier remains to be seen.