Adani Group: If you are a high capex, high growth business, your P/E ratio will be high: Adani Group’s CFO
In a free-flowing interaction, Jugeshinder (‘Robbie’) Singh touched upon the group’s leverage issue, high valuations, the strategy to woo retail shareholders, and the secret behind keeping the hydrogen business cost-effective. Edited excerpts:
You could have raised capital through various other means, but what is the principal reason for the FPO?
The core reason is the expansion of the share register. But there is also a continuing reason that flows into our long-term capital planning that’s ongoing for the past 10 years. We started off with governance, then ratings, public market issuances, 144A (global bonds), brought in strategic equity investors, and now we are focusing on public-market equity investors. So, we have raised cash in various forms – be it debt, long-term capital, long-term strategic capital and now this transaction accesses the capital market… Besides long-term strategic investors, the next set of core investors we want to have is the solid domestic retail savers…. If we did a QIP, a smaller base of investors would have participated.
How has been the response from institutional investors until now?
Some of the strategic investors we already have want to take up their share. So, we have two or three institutions which want somewhere between 5% and 15% of the issue. And we have three-four other strategic long-term investors that are part of our companies; they can take all of the rest.
How should one look at the valuations of AEL? The P/E ratio filter used by some funds may prevent them from buying into the FPO…
When the funds see, they just see P/E multiples. If something is above a certain P/E multiple, they will not invest. That is why the majority of them missed investing in Apple, Tesla and the likes. It is not just India-specific; it is a global phenomenon where fund managers have missed all such stocks. So, only specialist funds invest. If you’re a high capex, high growth business, the resultant P/E ratio is the result of accounting only. Because you’re growing fast, your capex is fast, your depreciation is high, so you make no accounting profit, making P/E multiples look high. So, our P/E multiples are trading at 150-plus but the actual cash multiple is only 30 times..
Can you also explain the valuation mechanism for the investors?
The valuation mechanism is straight forward. As a large utility platform, two things are fundamentally important. First, the rate of returns on the assets deployed. The debt equity ratio is not important, it is actually on what you can earn as your return. You can have 100% equity deployed but if you cannot earn returns on it, it is meaningless. Now comes the second part. Once you deploy the capital, what rate you’re growing at, and if you can earn the return that you’re aiming at. In the last nine years, we have grown at just over 22%. Today, we have underlined cash EBIDTA (earnings before interest depreciation, tax and amortization) of $ 8 billion and the market cap at portfolio level is at enterprise value(EV) of around $250 billion. So, we are trading at 31 times enterprise value to cash EBDITA (EV/EBITDA). Now, we are growing at 22% against 3-4% in countries like the US and UK. So, we have excess growth of 18%. Simply adjust the multiple for that growth. At 18% growth, in four years the multiple will become half. So, if you compare our growth, we are priced below our (foreign) peers.
Are you looking at domestic insurance companies, mutual funds and investors or strategic long-term equity partners?
We prefer the strategic long-term partners.
Is there a special strategy that you’re adopting to woo retail investors? Because for many, the discount being offered may also seem not enough…
I think it’s not just a discount. Discount is an element that you want the basic participation to handle the demand curve etc. But the bigger element is that it is a partly paid structure that gives investors a runway to pay over a 12-month period but lock-in the price today.
Are solar and wind energy not big factors to impact growth of your coal business?
No, because the reason that wind and solar don’t directly impact coal is that some base load is required. The base load can shift from coal to natural gas or nuclear. But when gas and nuclear become cheap, it will replace coal first… So tomorrow, if marginal cost of production of nuclear goes below ₹3.50/unit then it competes with coal, and it’s cleaner.
After AEL FPO, are there other group cos that will raise equity?
I think at least five units will be ready to go to the market between 2026 and 2028 – Adani New Industries, Adani Airport Holdings, Adani Road Transport, AdaniConnex Pvt Ltd. and the group’s metals and mining units would become independent units.
Hydrogen business is relatively new for the group and in India. What gives you confidence in the success of it?
The product is new, but the business is not. The solar power generation which is the biggest component in the hydrogen business is an established business for us. What matters here are two factors – source of energy i.e. the sun and we have land equivalent with us for 40 GW of solar power generation. Now comes extraction of that energy at the lowest cost. We will be manufacturing our solar modules at 15-17cents.
How will you be able to keep the cost of green hydrogen low?
Because you want to keep the extraction of the energy cost low, we will extract it at the cheapest cost. We will produce hydrogen at 30 cents per kg operating costs. If we want to earn a 20% return, we sell it for $2. So we get under $1.7 per kg return. Now, once you earn $2 then actually you’re not selling hydrogen because infrastructure is not available… So you are not getting into the hydrogen business, but the energy business… We plan to bring it to the market by the first or second quarter of 2026.
