WITH the Supreme Court cancelling the allocations of coal mines allotted to companies since 1993, Adani Enterprises (AEL) lost four of the five mines it operated in Odisha and Jharkhand. That was a body blow but there was little any of the allottees could do. Now that the auctions have been announced, Adani Power has bid for all six coal blocks reserved for the power sector since it’s critical for the company to reclaim some of these mines.
In the meanwhile, with the de-merger of the power and ports businesses from AEL, there’s an opportunity for investors in a company that imports and trades in coal and develops and operates coal mines in India. AEL was the primary holding company of the Gautam Adani-led business house, through which the conglomerate controlled its flagship power and ports business. On January 30, AEL announced that Adani Power Ltd (APL) and Adani Ports and SEZ Ltd (APSEZ) will be demerged from itself and AEL’s shareholders will get direct stakes in the two respective companies. The Adani Group’s power transmission business will also be demerged and listed as a separate entity on the bourses.
Simultaneously, AEL will merge the group’s coal mining business with itself and consequently, coal trading and mining will become its main revenue driver after the proposed scheme of arrangement is implemented. The Ahmedabad-based conglomerate whose interests span from power and ports to coal and logistics, is India’s largest homegrown coal importer and trader, commanding nearly half of the market share with respect to traded volume. So far in fiscal 2014-15, the company has reported a 42% year-on-year rise in trading volume to 44 million tonnes (mt). Revenues from the coal trading business amounted to R20,000 crore in FY14, forming the chunk of Adani Enterprises’ revenues of R55,067 crore.
As the coal trading business will now be a part of AEL’s own income statement and its full details would be available to investors, it is expected that the valuation of the company will significantly improve with elimination of the so-called holding company discount. The complete separation of APL from AEL will also ensure that the latter is not impacted by any weakness or adverse developments at its power business.
Most holding companies trade at a discount to the value they could have otherwise realised. This is due to several factors. One of them is the financials of some of the holding company’s unlisted businesses may not be adequately available to investors. Also, in such firms promoters have the power to effect a merger or demerger to retrieve a disproportionate share of profits from the operational subsidiaries.
The demerger of the power business also helps AEL improve its valuations since the high leverage and operational uncertainties associated with APL were impacting the former’s sum-of-the-parts valuation. APL had a net debt of R42,328 crore as on December 31, which accounted for 58% of AEL’s overall debt burden. APL had reported losses in fiscals 2012 and 2013 and would have done so in FY2014 as well, but for a tax writeback.
The other potential investment opportunity that Adani’s business restructuring will create is in the space of power transmission. ATL comprises 5,000km of power transmission lines and as the government seeks to encourage the participation of private companies in creating a more efficient power grid in India, opportunities are immense. Meanwhile, the fate of its $16 billion-mining project in Australia, which is delayed amidst opposition on environmental concerns, is uncertain.