Adani Enterprises Ltd. (AEL) is the flagship company of Adani Group. In the initial years of its operation, it focused on trading activities, chiefly in agro products, mineral oils, metal scrap, precious metals, textile products, and fertilisers. As infrastructure development began on a massive scale within the country in the earlier part of the last decade, AEL moved away from being a pure trader to becoming an infrastructure asset developer. This move was also prompted by the desire to reduce the risk arising from fluctuations in trading volumes. In addition, the company has also diversified into trading of coal (it imports coal into India) and power.
Strengths.
Unlike most peers in the infrastructure developer space, several of AEL’s businesses are cash cows, such as trading and real estate. Hence, its asset-heavy businesses such as power and ports are able to finance their expansion through internal accruals.
Growth strategy.
Recently Mundra Ports and SEZ, which was a separate company, was amalgamated into AEL. Mundra’s strategy of reducing geographical risk through expansion abroad (in Indonesia and Australia) is expected to lead to foreign assets contributing nearly 15 per cent of earnings by FY16 and nearly 30 per cent by FY20.
Concerns.
Difficulty in getting clearances (especially environment and forest-related) within the country over the last 12-18 months for sizable projects has proved to be a dampener for AEL’s coal mining business. Difficulty in land acquisition has further compounded the troubles of its mining business.
Financials.
A debt-to-equity level (which has been declining over the last three years) of 1.91 is a bit of a concern. Moreover, between FY09 and FY11, the company has enjoyed a relatively low level of return on capital employed (RoCE). For FY11 this figure stood at 9.8 per cent.
Valuation.
The stock is currently trading at a price-to-earnings (P/E) ratio of 21.54, which is lower than its five-year median P/E of 34.73. Over the last five years, its earnings per share (EPS) has grown at a compounded annual growth rate (CAGR) of 49.9 per cent (albeit on a low base). This gives it a price-earnings to growth (PEG) ratio of 0.43 times. Buy this stock with an investment horizon of at least three years.
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