 "Adani Enterprises de-merger to create value for shareholders: CLSA")
Adani Enterprises’ de-merger plan has received a thumbs-up from global brokerage firm CLSA. The brokerage said the plan to de-merge the businesses into four listed entities will create value by eliminating holding company discount and bring focus on some of its under-appreciated businesses. The brokerage sees a 20% upside to Adani Enterprises share price after the demerger and has set a target price of Rs 750 a share for AEL.
“The de-merger will also aid in fund raising for Adani Enterprises' growth businesses on a leaner balance-sheet. We model across–the-board pick-up in businesses to drive 33 per cent earnings CAGR over FY15-17 led by economic recovery and turn-around in power business. Apart from regulatory risk to the proposed de-merger, we see losses in power and weak seaborne coal markets as key risk to its resources business,” CLSA said.
On Monday, Adani Enterprises shares were trading 2% higher at Rs 645 a share.
CLSA said Adani’s plan value of its current listed investments in Adani Port and Power at current market price is Rs 570 or 91% of its current stock price. Further, the de-merger will sharpen the on some of AEL’s under-appreciated businesses such as Adani Transmission, which is 8% of SoTP (sum of the parts) and mine developer and operator Adani Power. “In worst-case scenario, if we writing-off the Carmichael Coal mine investments our SoTP falls to Rs 694, leaving 11% upside on current stock price,” CLSA said.
CLSA said the group has had a great track record of promoting businesses that create wealth for its owners. For example, on Adani Ports and SEZ, the group has made 39 times its investment. Similarly, in the IPP business, the group multiplied its investments 3 times despite macro and micro challenges. Currently, ADE is incubating highly scalable businesses – coal mine developer-cum-operator, which is a play on coal reforms, Carmichael coal mine concession, city gas distribution, integrated agriculture value chain, and branded edible oils, which could potentially be value drivers, apart from its free-cash generating coal trading business.
The brokerage said Adani’s core coal trading and logistics business, in which it is a market leader, volumes grew 42% YTD (year to date) with third quarter volumes up 61% on a year-on-year basis on the back of improved viability of imported coal. The EBITDA (earnings before interest, tax, depreciation and amortization) per tonne has also improved to $5.5 a tonne, up 23% in the third quarter of FY-2015 on lower volatility in currency & commodity.
“We expect that its de-merged balance-sheet shall be much healthier to raise resources to fund nascent businesses of MDO in India & coal mining in Indonesia and Australia,” CLSA said. “We see a robust pick-up in consolidated earnings pre-demerger led by robust ports volumes, turn in power losses and steady coal trading growth.”