Adani's big exit: What went wrong with Adani Wilmar and what it means for the stock

Fortune oil might have earned its spot as a household name but it surely hasn't done much for Adani Wilmar's fortune, and that of its shareholders. The stock that more than tripled investor wealth within a short span of its listing two years ago has witnessed a steep decline thereafter, eroding shareholder wealth by 31 per cent each year.

It's no surprise the Adani Group is now exiting the business, partly through an offer-for-sale where promoters are selling up to 20 per cent, half the stake they hold in the company. The rest will be bought by majority shareholder Wilmar International.

While this move frees up resources for the Adani Group to focus on its more rewarding infrastructure business, it also signals limited confidence in the edible oil and FMCG segments' growth potential. Something that the market has perhaps already been privy to. Let's look at the reasons why the promoter thought it better to prune away the company.

Adani Wilmar: Losing its edge

• Dampening financials: Over the past two years, Adani Wilmar's revenue has declined at an annualised rate of 3 per cent—a worrying sign for a business that relies heavily on volume-driven growth. Profit declined by 41 per cent during the same period led by decline in sales and eroding margins.
  Further, the company's current return on equity (ROE) and return on capital employed (ROCE) stand at a meagre 4 and 10.4 per cent respectively, as of Q2 FY25.
  
• Slim margins in primary business: Adani Wilmar earns more than 80 per cent of its revenue from edible oil, which continues to operate on thin margins of 4-5 per cent, given its vulnerability to volatile raw material prices. Moreover, the company has historically struggled to break past its capacity utilisation of 60 per cent.
  
• Weak FMCG business: The smaller FMCG segment shares a similar fate. Posting an EBIT (earnings before interest and taxes) margin of just 1.5 per cent in H1 FY25, the segment remains low on profitability.

The outlook

The stock's P/E of 34 times seems unjustified given the weak financials and the commodity-based nature of the business. The edible oil industry itself is pegged to grow by an unexciting 8 per cent per annum. The company, meanwhile, is on a decline. Its stagnant margins, which are already at peak levels, with a higher possibility of contraction in line with industry cyclicality, further worsen the risk-reward equation. If the promoter group has lost faith in the growth story, there's no reason why investors should stay put.

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