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As investors digest the adverse Supreme Court ruling on compensation for Adani Power Ltd, a pall of uncertainty looms over the Adani group—group companies have collectively lost Rs7,819 crore, or 6.9% of market capitalization, since the verdict denying compensation for fuel cost under-recovery for Adani Power. The BSE 500 index is little changed during the period.
To be sure, Adani Enterprises Ltd has rallied 21.6% since the verdict. But shares of the rest of the group companies—Adani Power, Adani Transmission Ltd, and Adani Ports and Special Economic Zone Ltd—fell, negating the gains in Adani Enterprises shares.
Importantly, Adani Ports, which contributes three-fifths of the group’s market capitalization, lost 7%. Comparatively, its peer Gujarat Pipavav Port Ltd is little changed. Neither was there any overtly negative news for Adani Ports during the period. In fact, the company is forecast to register robust performance for the March quarter.
Clearly, external events are having a rub-off effect on the stock. The major one is the adverse ruling for Adani Power. Without compensation, Adani Power would not be able to support itself or meet its debt obligations, analysts say. “Adani Power’s FY16 debt:equity post this judgement will be 10.9X, with an interest coverage ratio of barely 1X. This implies that of the Rs530 billion debt, Rs100-160 billion could potentially be at risk if one assumes Adani Power sustains its FY16 cash flows for 17-20 years. A rise in coal prices will further stress its financials, as was evident in FY15 when PAT+depreciation was negative,” Jefferies India Pvt. Ltd said in a note. One billion equals 100 crore. X denotes number of times. PAT is profit after tax.
According to an analyst with a domestic broking firm, based on the current situation, one can visualize two scenarios for Adani Power. One is fund infusion by the promoter. The second is a steep fall in international coal prices, so that the troubled power plant will become viable again.
One cannot debate the second option. Also, it is not clear if the promoter has the financial wherewithal to fund Adani Power privately. In the absence of a clear articulation of strategy, the Street is concerned how the group will fund Adani Power. There are fears the promoters may tap Adani Ports, the biggest earnings generator of the group.
The group has done this earlier through related-party transactions and loans to group firms. But the move attracted investors’ ire and the Adani Ports management began reducing related-party loans. While the measures propped up Adani Ports stock, the concerns have resurfaced after the recent Supreme Court verdict.
According to Jefferies, the Adani Ports management is clear it will not bail out Adani Power. But as the broking firm points out, in the absence of clear remedial strategy, it is tough to wean away the concerns.
“A fund infusion from the promoter group is a possibility, which will then mean Adani Ports’ cash flows are not touched for this transaction. Until clarity emerges, we believe this overhang will remain, and it is anybody’s guess on whether the promoter group steps in or not,” Jefferies adds. According to the broking firm, the issue can cap any upside for the Adani Ports stock. That would be unfortunate for the firm which is doing well currently and has generated an average annual return of 17% in the past three years for investors.