The Adani Group’s reported decision to exit its joint venture with the Singapore-based Wilmar Group marks a definitive inflection point in the history of India’s fastest-growing conglomerate.
The Adani Group reportedly wants to offload its 43.97% stake in the branded edible oils and packaged groceries company. Wilmar holds an equal 43.97% stake in the JV, with the balance held by the public.
The exit, as and when it happens, will mark the completion of the Adani Group’s shift over the past decade from its roots in trade and bulk imports to the core infrastructure sector, spanning ports, airports, cement and the emerging areas of new and green energy.
Adani Enterprises Limited, the holding company that now acts as an incubator for new ventures, began its journey in 1988 as Adani Exports, a partnership trading company. It was initially engaged in the business of exporting frozen foods, dyes and intermediates, plastic products, agricultural products and so on to about 28 countries.
It was incorporated in March 1993 with the conversion of the original partnership firm into a limited company. It listed on the bourses in 1994, marking the start of a dizzying ride for listed Adani Group companies on the stock markets. This culminated in Gautam Adani briefly becoming Asia’s richest man before revelations from Hindenburg Research in early 2023 brought group stocks crashing down.
That great fall may be one of the reasons why the Adanis are looking to exit the FMCG space. Hindenburg’s revelations, which the Adani Group has consistently denied, caused a $153 billion meltdown in the market value of its companies. It also cast a shadow over dollar bonds issued by the group, with some lenders halting loans on the bonds. ESG concerns also caused JP Morgan to drop Adani stocks from its portfolio in the aftermath of the report. An Adani family firm sold shares worth $1.9 billion to GQG partners to raise cash.
All this happened in February and March this year. The stocks have since rebounded, and the group has managed to complete some significant fundraises to fund its ports and cement expansions. Nevertheless, the projected valuation of $2.5 billion to $3 billion for Adani Wilmar means the stake sale will provide handy cash to the group as it ramps up infrastructure business.
There are other reasons why the Adanis may be looking to exit the FMCG space. For starters, the bulk of Adani Wilmar’s business is in edible oils, which account for 84% of its revenues (with industrial fats adding another 11%). Packaged groceries account for a mere 5% and it is not a significant player in branded basmati rice, which accounts for the bulk of food FMCG revenue.
This heavy dependence on edible oil is a double-edged sword. India is the world’s largest producer and consumer of edible oils, which means there is a readymade market for the product. India’s edible-oil market stood at $4.2 billion in FY23 and is projected to grow at a compound annual growth rate (CAGR) of 1.5% through to 2029, according to a Techsci Research report.
However, demand far outstrips supply, making domestic players heavily dependent on imports. The edible-oil marketing year in India starts in November. India imported an estimated 16.6 million metric tonnes in the previous marketing year (which ended on October 31, 2023), according to provisional estimates.
The global edible-oil market is volatile, subject as it is to the vagaries of climate change, as well as demand from importing countries led by India. Prices can fluctuate greatly in a year. Add to this the weakening rupee, which hit a historic low of 83.29 against the US dollar in October 2022 and has remained around that level ever since, despite repeated interventions by the RBI.
The edible-oil market is also subject to a lot of policy risk. Since edible oils are an essential item and have an effect on food inflation, the government intervenes often to check prices through import or export controls, as well as by bulk importing and releasing through co-operative marketing channels.
It is also a high-volume, low-margin business in India. In FY23 Adani Wilmar logged a net profit of just ₹607 crore on revenue of ₹55,262 crore. This year the company has fared even worse. Adani Wilmar reported a net loss of ₹131 crore for the September quarter. For the same period last year, the company had reported a net profit of ₹48.76 crore. Revenues also fell 13% to ₹12,267 crore, from ₹14,150 crore a year ago.
Given the trend, the choice before the group was clear – remain in a high-volume, low-margin, hyper-competitive and volatile market, or free up money and mind space to focus on infrastructure. It appears to have chosen the latter.