Adani Stocks Alert: Is The Group's Largest Holding, Adani Enterprises Share Price Worth Watching?

Among many famous and inspirational quotes for market lovers, Warren Buffett once said, "Whether we're talking about socks or stocks, I like buying quality merchandise when it's marked down." From the Oracle Of Omaha's quote, two things stand out "quality merchandise" and "marked down", the latter being somewhat the case for the 30-year-old Adani Enterprises which is trading lower by 41% from its 52-week high levels. But does this flagship firm of Adani Group qualify for being a quality stock?

Pulled into one of the biggest scandals, Adani Enterprises has seen its glorious days turned into the largest market routs, wiping off billions of dollars in a flash. In recent times, the core problem that Adani Group-backed stocks including Adani Enterprises face are the allegations of brazen stock manipulation, accounting fraud schemes, and opaque funds from foreign investors of tax-haven countries by US short seller Hindenburg report which was released in late January this year.

The allegations are yet to be proven and the case is being heard at the Supreme Court. The verdict is yet to be given! But billionaire Gautam Adani-backed group has denied all the accusations.

But the damage was already done irrespective of whether who is wrong or right! Adani Enterprises stock which traded near Rs 3,840 levels at the start of January, is currently down by nearly 36% year-to-date.

The stock is even lower by 41% from its 52-week high of Rs 4,189.55 apiece on BSE which was recorded just a little over a month before the bombshell report of Hindenburg, on December 12, 2022.

Just a day before the full-fledged first lockdown owing to the COVID-19 pandemic breakout, Adani Enterprises was near Rs 129 levels on March 24, 2020. Since then till December 12, 2022, the stock skyrocketed by a mind-boggling 3,139% on BSE.

The Hindenburg sure did leave a scar on Adani Enterprises and other Adani stocks including the wealth of Gautam Adnai. The stock touched its 52-week low of Rs 1,017.10 on March 2, 2023, following the allegations.

So what makes Adani Enterprises different and special going forward?

Some of the basic parameters one can look into before picking up equity shares are --- the company's fundamentals, products or services, debt levels, management's efficiency and qualifications, its measures against peers, and its past track records to examine its growth levers.

Simply Wall St's latest report identified two key reasons that make Adani Enterprises share price worth watching. These would be the company's improving profits and governance more specifically the salary of CEO Rajesh Adani.

Improved profits:

According to Simply Wall St's report, Adani Enterprises has undergone a massive growth in earnings per share over the last three years. So much so that this three-year growth rate wouldn't be a fair assessment of the company's future. Thus, it makes sense to focus on more recent growth rates, instead. Impressively, Adani Enterprises' EPS catapulted from ₹8.81 to ₹23.12, over the last year. It's not often a company can achieve year-on-year growth of 162%.

In the June 2023 quarter, Adani Enterprises total income declined by 37% YoY to Rs 25,809.94 crore on account of a correction in coal prices. However, EBITA increased by 47% YoY to Rs 2,896 crore due to strong operational growth. While PAT soared by 44% YoY to Rs 674 crore in line with increased EBITDA. Earnings per share (EPS) increased over 41% as well to Rs 5.91 per share as against Rs 4.18 per share in Q1FY23.

Further, the company's profit margins were at 2.6% in Q1FY24 from 1.1% in Q1FY23. While operating margins stood at 9.92%, higher from 4.27% in Q1FY23.

In this case, Simply Wall St's note said, "Over the last 3 years on average, earnings per share has increased by 45% per year but the company's share price has increased by 136% per year, which means it is tracking significantly ahead of earnings growth."

But before getting too excited, one should also take a closer look at the balance sheet of a company. By the end of the June 2023 quarter, the company's debt-to-equity ratio inched lower to 1.05 from 1.19 in Q1FY23, however, the debt services coverage ratio more than doubled to 4.87 as compared to 2.40 in Q1FY23. A higher debt services coverage ratio signals that a company has a greater ability to service its debts and also makes it easier to obtain loan.

Meanwhile, the company's current ratio (Current Assets/ Current liabilities) stood less than 1 to 0.78 in Q1FY24 from 1.01 in Q1FY23. A less than 1 current ratio typically hints at the company's potential inability to use current resources for funding short-term requirements.

As of June 30, 2023, the company's total assets have jumped to Rs 143,191,39 crore versus Rs 120,058.70 crore in the June 2022 quarter. While liabilities too have climbed to Rs 104,673.93 crore from Rs 84,791.56 crore in Q1FY23.

Signs of good governance:

Further, Simply Wall St's report pointed out that it's worth considering how much the CEO is paid since unreasonably high rates could be considered against the interests of shareholders. It's data highlighted that the total compensation for CEOs of companies similar in size to Adani Enterprises with market caps over Rs 666 billion, is around Rs 96 million.

As per the annual report FY23, the CEO and MD, Rajesh S. Adani took home a salary of Rs 56 million in the financial year, which as per the report, is below the average for similar-sized companies and seems pretty reasonable. Although the level of CEO compensation is not seen as the biggest factor in viewing a company, however, modest remuneration comes as a positive factor, because it indicates that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally, the report said.

In FY23, the founder Gautam Adani earned Rs 23.9 million.

From FY20 to FY23, both Gautam Adani, the executive chairman, and Rajesh Adani's remuneration have seen modest gains.

In FY22, Gautam's salary was at Rs 23.2 million, while in FY21, the payout stood at Rs 22.4 million and in FY20, it was at Rs 21.7 million. Meanwhile, Rajesh's salary has increased to Rs 52.4 million in FY22, Rs 45 million in FY21 and a package of Rs 42.6 million in FY20.

Rajesh Adani in the annual report FY23 said, "Going forward, we will continue to grow our business with the mission of nation building and creating more value for our stakeholders. We also endeavour to maintain our volume growth in our core business while delivering robust performances in our strategic businesses."

And Adani Enterprises shares have shown significant recovery after hitting a 1-year low in the early days of March due to back-to-back block deals as major investors showed optimism in the key fundamentals of the company.

In six months, Adani Enterprises stock has rallied by 35.5% to date. On September 20, 2023, this Adani stock stood at Rs 2471.40 apiece with a market cap of Rs 2,81,739.88 crore.

Since March 2023, Adani shares have seen robust block deals with GQG Partners making one of the biggest buying in the history of the Indian market. So far, GQG's investment in Adani firms has reached at least Rs 38,700 crore. The leading US-based Global Equity investment boutique bought Rs 5,460 worth of shares in Adani Enterprises in the first tranche in March.

When GQG Partners showed interest in Adani Group, its chairman Rajiv Jain pointed out that Adani companies own and operate some of the largest and most important infrastructure assets throughout India and around the world. Gautam Adani is widely regarded as among the best entrepreneurs of his generation. Hence, he believes that the long-term growth prospects for these companies are substantial in Adani Group companies.

Adani Enterprises (AEL) is the flagship company of Adani Group, one of India's largest business organisations. Over the years, Adani Enterprises has focused on building emerging infrastructure businesses, contributing to nation-building and divesting them into separate listed entities.

Having successfully built unicorns like Adani Ports & SEZ, Adani Energy Solutions, Adani Power, Adani Green Energy, Adani Total Gas and Adani Wilmar, the company has contributed significantly to making the country self-reliant with our portfolio of robust businesses. This has also led to significant returns to our shareholders over 28+ years.

Disclaimer:

The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.