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A goose that lays golden eggs

On 9th Dec 2021, we initiated coverage on the listed business units of Adani Group which included Adani Enterprises Ltd (AEL). Post our coverage, AEL has undertaken several initiatives that warrant detailed coverage. Through Adani New Industries Ltd (ANIL), the group’s recent incubator in the production of renewable energy, green H2 and downstream products (ammonia, urea & methanol), AEL will emerge as the world’s primary leader in the green H2 ecosystem. ANIL has a vision to be the lowest cost producer of green H2 and in partnership with TotalEnergies, we expect this platform to be extended to the global theatre in the forthcoming future. ANIL will be leveraging TotalEnergies balance sheet to help lower cost of funds.

Apart from ANIL, AEL’s other incubating businesses, in the domains of Airports, Data Centers, Roads and Defence are on the verge of gaining traction and should be value accretive in the short to medium term. AEL’s new incubating forays into copper and green PVC have significant drivers in place to ensure long-term profitability and the equity contribution is expected to be funded from internal accruals.

The existing coal ecosystem (captive mines, IRM and MDO) has favourable tailwinds which will endure the already appreciated energy pricing (post the Russia-Ukraine conflict). The favourable pricing environment has ensured that the break-even for the Carmichael mine is upended and profitability should be realized sooner.

Given the favourable outlook across all business segments, we value AEL at INR 2,821 per share based on our SOTP valuation methodology. This represents an upside of 25.7% from the current CMP of INR 2,245. We believe that a demerger of the incubating business can result in significant value unlocking and is an upside risk to our estimates. A case in point is the 153% appreciation in the stock price of Adani Wilmar Ltd post-IPO. We expect the airport business to be the next value-unlocking story that should play out over the next couple of years.

Risks to our upside thesis are (i) unexpected downturn in the economy, (ii) delay in project execution and (iii) project finance. Historically, AEL has proven adequately its project execution skills with timely delivery and capital management discipline. Hence in our view, the risk factors are significantly diluted.

Valuation

We value AEL on a SOTP basis for a price target of INR 2,821 per share# (FY25 EV/EBITDA of 21.9X) and recommend a BUY at a CMP of INR 2,245, representing an upside of 25.7% over the next 24 months.

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