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Will Gautam Adani get it right?

Despite Adani’s optimism, the story of his flagship firm is the story of the typical large Indian conglomerate
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First Published: Sun, Nov 18 2012. 11 40 PM IST
Gautam Adani says he has a plan that he thinks will set everything right for the group. Photo: India Today Images
Gautam Adani says he has a plan that he thinks will set everything right for the group. Photo: India Today Images
Updated: Mon, Nov 19 2012. 12 03 AM IST
Ahmedabad/Mumbai: Gautam Adani isn’t having it easy.
For long, the first-generation entrepreneur has been to business in the highly developed state of Gujarat what chief minister Narendra Modi is to politics, but nothing has been going right for his flagship company, Adani Enterprises Ltd.
Its subsidiary, Adani Power Ltd, posted its fourth successive quarterly loss in the July-September quarter. In October, the Centre cancelled the licence of Adani Ports and Special Economic Zone Ltd’s (APSEZ’s) 1,840-hectare notified special economic zone (SEZ) in Gujarat (Mundra) for alleged violation of some rules, although APSEZ has the option of seeking permission for the zone again.
The company also faces charges related to governance and operations in the Karnataka illegal iron ore mining case that is under investigation by the Central Bureau of Investigation (CBI), following a directive from the Supreme Court in September. And farmers and activists continue to protest the diversion of water from the Pench dam portion in Madhya Pradesh for the 1300 megawatts (MW) power plant of Adani Power.
Little wonder then, shares of Adani Enterprises have lost 23.02% on BSE Ltd this year while the exchange’s benchmark Sensex has gained 18.47%. Its shares fell 4.07% to Rs.226.05 on Friday while the Sensex lost 0.88% to 18,309.37 points.
Gautam Adani’s rank in Forbes India magazine’s list of richest Indians, largely based on his holding in the company, fell nine places to 16 in the 2012 list released in October.
An infrastructure analyst at a Mumbai-based consulting firm who spoke on condition of anonymity blamed this state of affairs on Adani’s aggressive expansion. “Being very aggressive is not a good idea as the group already has a lot of projects going on. Only Mundra (the port run by Adani) has a steady cash flow, with others still in their initial stages.”
Adani seems aware of that, and he has a plan that he thinks will set everything right.
In an interview to Mint earlier this month, he said the group has chalked out a strategy to focus on its core areas of power, mining and ports. “We will not enter any new businesses, but expand within the existing portfolio till 2015.”
And it will simultaneously work to cut debt of around Rs.58,000 crore.
Adani Enterprises in the first quarter exited its realty business by selling it to the Adani family for about Rs.2,500 crore, including debt. It has also given up plans to enter the capital-intensive cement business, said a company spokesperson with direct knowledge of the matter who spoke on condition of anonymity. Adani had earlier shown an interest in picking up BG Group Plc’s stake in Gujarat Gas Co. Ltd, but eventually pulled out citing high valuation as a cause.
The group is also going slow on oil and gas exploration activity in India and elsewhere where it jointly owns some blocks, although Adani says it remains committed to the business. “We are weighing the option of buying oil and gas assets overseas with proven reserves.”
And it will continue to invest in ports and power, he added.
In ports, the group has revised its plans to achieve 500 million tonnes (mt) of cargo handling capacity by 2020 as compared to its earlier projection of 200 mt.
“Debt is not a worry for us because we have created assets worth at least Rs.1 lakh crore against a debt of about Rs.60,000 crore (Adani Enterprises has a debt of Rs.57113.34 crore). We will be raising more debt and are looking at equity dilution as a way to infuse more funds,” said Adani.
To give its new plans a professional touch, the group has also hired the services of the “best global consultants”, Adani said.
An Adani executive who is working on this “business transformation exercise” said the group is working with Accenture Services Pvt. Ltd, AT Kearney Ltd, Booz and Co. and KPMG India Pvt. Ltd as consulting partners. This executive didn’t want to be identified.
The transformation exercise is expected to help the group double its revenue from the current $8 billion (around Rs.44,000 crore) to $16-17 billion by 2015, said the company spokesperson cited earlier.
Still, despite the turnaround plan and Adani’s own optimism, the story of Adani Enterprises is, in some ways, the story of the typical large Indian conglomerate that expanded and diversified rapidly, powered by debt, in the second half of the 2000s, only to be handed a hefty bill this decade.
“The Adani Group is a classic case of expanding too fast without concern for shareholder returns. The growth has largely been debt-fuelled with little focus on free cash flows. The Adani Group is among the top 10 debt holders in the country right now. The group also needs to work on substantially improving its corporate governance edifice.” said Shriram Subramanian, founder and managing director of InGovern Research Services Pvt. Ltd, a corporate governance advisory firm.
Power struggle
The power business, an analyst says, is largely to blame for Adani’s troubles.
“Adani Port has been scoring well and growth has been very well. On the other hand, Adani Power has all type of concerns like some regulatory concerns and debt is piling up,” said Mumbai-based stock market analyst S.P. Tulsian.
Adani Power’s future depends a lot on the outcome of the case pending with the Central Electricity Regulatory Commission (CERC).
The company runs the world’s largest private thermal power plant at Mundra with a capacity of 4,620MW. In July, it approached CERC to consider a rise in its power tariff after customers declined to pay higher rates for power generated from Mundra. CERC admitted the petition in October after attorney general G.E. Vahanvati said in a legal opinion that the commission had the rights to regulate tariffs for plants selling power to more than one state (Adani Power has signed power purchase pacts power in Gujarat and Haryana).
Tata Power Co. Ltd, too, has approached CERC for a tariff hike.
Adani Power had earlier approached the Gujarat Electricity Regulatory Commission (GERC) to scrap the agreement with Gujarat Urja Vikas Nigam Ltd (GUVNL) after it failed to sign a fuel supply agreement (FSA) with Gujarat Mineral Development Corp. Ltd and had to rely on costly imported coal instead.
GERC had ruled in GUVNL’s favour. The matter is now in the Supreme Court.
A change in law by the Indonesian government earlier this year brought about a rise in imported prices of coal in India. The generation cost for Adani Power has increased to Rs.3.30 per unit, while it earns about Rs.2.35 per unit, the company said in its petition.
Adani Power is also facing transmission problems for its power plants in Mundra and Tiroda, and this has made the Mundra project, which is fully operational, run at only 65%
capacity. A Mumbai-based analyst, who requested anonymity, said, “Getting coal from Coal India Ltd is only one part of the solution and a tariff hike is crucial.”
Edelweiss Financial Services Ltd in a report published on 22 October said “Coal India Ltd commencing coal supply for Mundra IV and signing off the fuel supply agreement for the Tiroda project (3,300MW) will improve the fuel situation going ahead.”
“While the transmission problems will be resolved by March 2013, we are also hopeful of an outcome of the CERC case by then. We would like to begin work on another 6,600MW of power plants after the CERC decision,” said Adani.
He added that Adani Enterprises is raising its stake in Adani Power from 68% to 75% for Rs.800-900 crore. Sourcing coal, he implied, would not be an issue. Adani pointed out that the company has mining and trading rights for a coal mine in Queensland, Australia, with 10.4 billion tonnes of reserves with peak capacity of 100 million tonnes per annum (mtpa). Beside, the Adani Group also has mining rights at Bunyu Island, Indonesia, for captive use, which has reserves of 180 mt with peak capacity of 11 mtpa.
Port of success
Unlike Adani Power, APSEZ makes money.
With a total cargo handling capacity of 78 mt, APSEZ is the largest private sector port developer in the country with a market share of 7%; it aims to be the country’s largest port operator in a year’s time, Adani said. “Our port business has been performing above our expectations. In the next few years, we will be further investRs.25,000 crore for expansion of our existing ports and developing new ports.”
APSEZ currently operates two ports in Mundra and Dahej. Besides, it is also in the process of setting up a multi-cargo port at Hazira with a capacity of 75 mtpa and a dry bulk terminal at Kandla (20 mtpa). It is developing coal berths at Mormugao and Visakhapatnam. The company has also bid for a mega container terminal at Chennai Port.
The company is also looking to expand its existing coal terminal at Abbot Point in Australia that can handle 50 mt to handle 120 mt in two phases, over the next three years. APSEZ has also chalked out an expansion plan for its coal terminal at Dudgeon Point (Australia) from 90 mtpa to 200 mtpa.
There are also new Indian ports in the company’s development pipeline.
“We are looking at acquiring or developing one minor port in Andhra Pradesh and another one in Orissa as part of our India plans. This would require investment of Rs.6,000-10,000 crore,” according to Adani.
Edelweiss Securities in an October report said a key risk for the company could be “uncertainty in tariff at ports”. With cargo at ports controlled by international trade, any slowdown in it could affect Mudra port, the report added.
APSEZ received a shot in the arm when the Supreme Court recently upheld the Gujarat government’s decision to allocate 1,000 acres of pastures in Mundra for the development of an SEZ, dismissing a special
leave petition challenging the allocation on grounds of lack of merit.
JP Morgan India Pvt. Ltd in an October report on the infrastructure company said Mundra port will be in a better position over the next five years with spare capacity in the high-growth coal and container cargo segments.
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First Published: Sun, Nov 18 2012. 11 40 PM IST
More Topics: Gautam Adani | Adani Power | Adani Ports | SEZ | debt |