Adani Group's Infrastructure Businesses — Infravisioning With Vinayak Chatterjee

Vinayak Chatterjee: The current situation is complex, and is amenable to all kinds of interpretation and perspectives, and different people looking at it from different lenses, depending on where you are coming from.

So, I have tried to collect my thoughts around four buckets. Bucket one is a perspective on the infrastructure space, and the Adani Group’s ongoing projects and investments.

Bucket two is a take on the Hindenburg allegations, a short discussion of that.

Bucket three is what now, going forward, and Bucket four is I want to spend some time on the Indian context of big ticket, private capital and private entrepreneurship, because there is a strong bearing on the discussions.

Vinayak Chatterjee: Bucket number one seeks to answer your question on the size and scale of Adani’s involvement and investment in Indian infrastructure projects.

Broadly, they are grouped in five investment groups. The first is energy and utility. The second is transport and logistics. The third is intermediate manufacturing. Fourth is natural resources and the fifth is not infra but it is FMCG, with one of their companies in the food business. So, here are the five buckets or the five groupings.

Let's look at energy and utility, which is group number one for the infra. Adani Group is one of the largest players in electricity generation, transmission and distribution across the full value chain. It is present in both conventional as well as renewable sectors, and it also has a vibrant investment programme for the manufacture of solar, wind and green hydrogen components. So, it has a significant presence in the energy and utility space.

The second group is transport and logistics. It is common knowledge that in the private sector, Adani Group is the largest owner operator of ports and airports. Increasingly, it is building a sizable portfolio in roads also, both as an investor and as an EPC contractor, and very few are aware of the fact that it is a significant player in warehousing. About 30% of India's grain storage is stored in Adani warehouses, whether in Punjab or at the ports. So, in transport and logistics, ports, airports, roads and warehouses, that's a very interesting and dominant cluster.

The third group is intermediate manufacturing. It is the second largest player in the cement business, with the acquisition of ACC Ltd. and Ambuja Cements Ltd. It also has projects in the intermediate space, which is green PVC, etc. So, after cement, it also has projects in the intermediate space.

Then, it has a group called natural resources. It is well-known that Gautam Adani’s entrepreneurial journey started in many sectors and in many senses in and, in fact, in coal mining and coal trading. Now, they have coal mines in Australia and Indonesia; there is a vibrant coal trading business. So, that's the natural resources, and with cement, you will have to be industrial resources with stuff like mining limestone, limestone quarries and all that. 

All four form part of what would be called the natural resources mining space. Finally, in the non-infra space, there is a very interesting player in India’s FMCG market, which is the operation of this firm called Adani Wilmar Ltd., which manufactures and supplies this fairly famous brand of 'Fortune' oils. But it has gone far beyond oils to supply a lot of food staples into Indian households. ...Its turnover has overtaken that of Unilever India, which says quite a lot.

Therefore, having laid out this play of infrastructure, investments and projects, what is the common link? The common link is very simple. In practically every segment, it is the market leader.

It's interesting, it's not easy for a group to be a market leader in this wide span: in energy utility, transport logistics, intermediate, natural resources and FMCG, it is a market leader. In all, these businesses address very fast-growing domestic demand. If India is the fastest growing economy in the world, that gives energy to Fortune oil; it has an insatiable appetite to consume such outputs. It faces fast growing domestic demand. It has all these entities.

...I will see newspaper reports saying that the entire group is family dominated, but interestingly, all these businesses are headed by fairly reputed professional managers. It has all these businesses that have strong cash flows.

In the Infra side of it, they have long concession periods, fully operating assets and good operating results in cash through. In fact, the banks, NBFCs and others have all commented from SBI to LIC to others that they really didn't have any concern on their lending to their operating projects.

After this discourse on bucket one, which seeks to answer the question on the breadth and depth of its operations and what is the common thread linking all of that.  So, the bottom line is very clear, the operating businesses are domestic demand facing, protected from the vagaries of international trade, have very strong professional managements running them on a day-to-day basis, and has strong operating reserves and cash flows, and the banks and others have publicly stated that there doesn't seem to be any concern on these operating companies.

Vinayak Chatterjee: There are basically two types of capital deployment. One is where you own the project. For example, in Adani’s case in Mundra, the asset is on the balance sheet of the Adani Group. It is a company-owned asset, whereas in the case of certain other port terminals, or in the case of airports, these are in PPP frameworks where you don't own the asset, but you have a right or a concession, as it is called in infra jargon. You have the right to operate these assets from 30 to 60 years. So, obviously in those cases again, there is a difference. In some cases, you have to put in the capex and then run it for 30 years, which is called the Greenfield PPP, or the assets are already in place and then the asset is handed over to you for operations and maintenance.

In the case of the airports, for example, the assets are already in place, whether it's Guwahati or Lucknow or Mumbai, and your job is not just to run it, but take a look at incremental capex, so that if there is an expansion etc. So, those are the two kinds of ways.

...They have very long lives. The concession periods range from 50 to 60 years and the ones that you own on your balance sheet, of course, can go on as long as you want to.

It's also interesting that after the initial first 7-10 years, the bulk of the loans that have been repaid, the assets, you have a lesser and lesser burden of servicing the return on loans; the loans get paid back and then the margins start improving significantly. So, that’s the broad play.

Vinayak Chatterjee: That is the norm in infrastructure projects throughout the world, if you see some of the biggest infrastructure projects the world over.

Take the case of the English Channel, where the debt has been reset, I think, three times. It is a norm in infrastructure sector business that the debt equity can go up and is allowed to go up often as high as 1:4. So, broadly, you need to put in 20 of equity to raise 80 of debt; that is the norm.

Why is such a high debt equity allowed in these businesses in infra? Because they are backed with solid assets and, in many cases, the assets are not depreciating but they are rather appreciating because of occasional monopoly advantages. So, a 20/80 gearing or 1:4 gearing is appropriate in infrastructure business, and any gearing between 1.2 to 1.4 is considered safe. So, such a level of debt is required the moment you decide to be in the infrastructure space, and that is recognised by lenders of all shapes and categories. 

Vinayak Chatterjee: Now, you have opened the box on my responses to the Hindenburg allegations. There has been so much flying around from the original, whatever 103-page report to Adani’s 413, and every market commentator commenting on what he or she feels is appropriate or inappropriate.

So, what I tried to do across the last few weeks, since the last 10 days is I have tried to collect my thoughts on what are the fundamental classes of allegations that Hindenburg has made.

In my view, all the allegations can fall into six classes. One, use of shell companies. Now, to my mind, use of shell companies is when you are putting in so much equity and when you are putting in so much debt, it is natural for you to be raising funds from all over the world and many of these funds come in from—and it is called astute tax planning, not tax evasion—to bring in these funds from tax havens or countries which are not tax havens but tax-friendly for international financing, like Singapore or Mauritius or many other places. It is a national practice the world over to route such monies through such financial locations and geographies, which provide very good tax planning, not just for the person receiving the money, but for the person investing; it increases his returns. So, the Adani Group, like many other industrial groups in this country, has shell companies but that is allegation number one of Hindenburg.

Allegation number two is dubious intra-party and related party transactions. Here again, I have no great expertise in commenting on whether this is right or wrong, but funds do tend to move from shell companies to operating entities; operating entities do at times lend either in terms of bridge finance or seed capital to other group entities. Now, it is really not for me to judge but that is really what the second group of allegations is.

The third is unreputed auditors, which in some sense to my mind holds water because a group of this size and complexity and breadth and depth, it would be actually appropriate from a market point of view for the Adani Group to have auditors of international repute. I think it's good for the Adanis and it's good for the Indian industry. So, that's a very valid point.

Point four is the violation of listing requirements. This is a very technical point, and I am not competent to comment on it.

The fifth group of allegations is manipulation of stock prices. Now, to what extent this allegation holds or does not hold, I am no judge of it. As the Finance Minister has said, let the regulators do their job and find out, so we shall wait for the outcome.

The last is that an association of guilt by some members having misconduct charges relating to earlier transaction in the years gone by. I personally think that these need not have been brought in by Hindenburg report because it has no bearing on current operations to cast such allegations.

But here are the six classes of allegations and I have given you my response on all these six. 

Vinayak Chatterjee: It is interesting that people tend to forget that Adani keeps losing projects. It has not won every project and it has participated in bidding because by law, infrastructure PPP projects and concessions can't be handed over in this country; it's not possible.

So, in many cases, the most recent example is last week. Last week, the government put out a tender from the government-owned Kandla Port for a massive container terminal, in a place called Tuna port, which lies midway between Adani’s Mundra port and Kandla port. So, Tuna Port has a tender out for a long-term concession period, to build a world-class, large capacity container terminal. Now, who would not have been interested in this? ...It's got one of the greatest container terminals at Mundra. But guess who won the project? Adani was completely outbid by DP World.

So, I am giving you this freshest example to say that there are cases where the Adanis have lost out to competition and that needs to be correlated also along with the story that things were handed out, whether it is losing out IPL franchise to bids on certain other ports or energy—it wins or it loses.

The few cases where it might have been a single bidder is because a transparent bid was put out. But, if nobody has bids that the government itself has a scheme where everything else being equal, the single bid is considered a valid bid under public law. So, this is an allegation that needs to be substantiated with facts. 

Vinayak Chatterjee: The straight answer your question is yes. But it's a short term yes, because what I have understood from the various pronouncements that have gone from the Adani Group is that, there is going to be in the short-term a slowdown in the rate of spending on the fresh capex commitments. That is not only natural in the current context, but you would also expect it to be. However, my belief is that, like you mentioned about them re-engaging with capital markets, like the recent retirement of bonds before the due date, and various other reengagement in the capital market, the process of rejigging its capital raising plans and consequent capex deployment plans will happen in the course of the next 12 months.

So, I expect a certain slowdown, a significant slowdown in the spending on capex in the next 12 months. After these 12 months are over and that reengagement with the capital markets has played itself out positively, I expect all capex to come back under normal course of events.

But your question is a little larger, and I need to address that beyond capex to say what is now going forward. The two other points I have, I think many analysts from all over the world are saying it would be prudent for the group to allow stock prices to settle down at what would be called conventionally appropriate levels. There is a certain amount of truth in the allegations and many of the stocks, in terms of the price multiples etc., were over the top.  But you can't deny that, so it could be a group switches around the stocks to send it out to, what will be called conventionally appropriate levels, that would inspire a lot of confidence in the market.

Going forward, the sheer breadth and scale of its involvement in the domestic economy is such that it will be a very good practice for the group to have many of their very good professional managers, who have got their nose to the grind wheel now, running their operations to give them far more visibility and market facing, so that the markets understand that while they are certainly an entrepreneurial family but backing them are a group of very strong and reputed professionals. I think these people now need to be given a certain market-facing and public-facing role, in the sense of the coming out of their operational woodwork and get all market-facing and defend the businesses that they run, defend their valuations, defend their profits, etc.

That would be advice that I will certainly leave with a group of admins. So, these are really some of the thoughts that I have.

Vinayak Chatterjee: This is probably the soft side of the entire saga, which requires some explanation. I think the world over, for fast-growing economies, particularly developing economies or economies which are very large today, which were developing earlier—the relationship between the Rockefeller and the U.S. in the days when steel and railroads were being built, the role of the large Japanese corporations with the state, the role of South Korean big businesses with the state, the role of companies in Singapore with the state—you cannot deny that when the state or a developing economy asks for big-ticket investments for private capital and private entrepreneurs, that there will be no linkage between political economy and investment. It will be foolhardy to think so. 

Such leakages should be good for the country and good for the people. So, in my view, the size and scale of Adani’s investments in India are very clearly linked to the growth story, and what is the growth story? It is two Prime Ministers from different political backgrounds. Prime Minister Manmohan Singh from the ramparts of the Red Fort, I remember in the Independence Day speech, urged Indian entrepreneurs to invest in infra and unleash their animal spirits. Current Prime Minister and the Finance Minister and everybody else has been exhorting the private sector to put in capex, not just in manufacturing, but in the larger story of India's infrastructure.

Therefore, you have got this mixed bag. You have got this constant call for big-ticket private entrepreneurship, animal spirits be unleashed, big-ticket investments in Indian infra. You got this constant call of the political establishment to the rest of the world saying come and invest in India’s infrastructure.

So, when you see all of this, you obviously need very large homegrown entrepreneurs, who have the ability to receive much of the foreign capital that can come in.  The foreign capital that cannot come in a vacuum and the foreign companies are investing and do not have the ground feeling of how to create a developed project in India, which everybody knows creating infrastructure in India is probably the most difficult game.

Here, you have got this entrepreneur, Gautam Adani, who has a very interesting bundle of skills for great determination, vision, networking, political positivism to being able to garner capital from the rest of the world and put up world-class, world-scale infra projects. This is a scale of entrepreneurial ability and I am just going to say that it is meant to be India story, and the funny portion is that India probably requires 8 or 10 more Adani Groups and we don't have them.

So, what is the entrepreneurial energy that is going to pull all these very difficult skills of getting private capital, amassing and harnessing private capital, acquiring land, getting all the permissions, putting in the management, managing the regulatory framework and building world-class infrastructure with private capital? It is Gautam Adani, who stands out today as somebody who has demonstrated the art of the puzzle.

So, we require 8-10 more Adani Groups, and therefore, I am saying that all the pricing calculations are done, there is one element called entrepreneurial ability and chutzpah, which cannot be priced; it is priceless.