Buy, Hold or Sell? What to Do in Adani Group Stocks?

In recent months, Adani Group stocks have seen a considerable volatility. Stocks started 2021 year with a huge jump from lower levels and many of them even turned into multibaggers in a very short period of time. Market Capital of most of the Adani Companies had reached ₹1.5 lakh crore.

Till 10th June, most of the adani companies were enjoying a great momentum. But then on some day, an unverified report came in the public domain that few Foreign Investors (who had bought a considerable Equity stake in adani companies) have been blocked from trading shares. Later, Adani Group has clarified that reports are wrong and no investor has been blocked due to specific investments made in Adani shares. However, since that event, there has been some considerable decline in the momentum of Adani Shares. In fact, few of the stocks are seeing back to back lower circuits too.

In this article

Shareholding Pattern of Adani Companies

Growth in Businesses of Adani Group

Low Free Float and MSCI Rebalancing

Conclusion

Can Adani Stocks shows a Strong Come Back again?

 

Let’s first see the possible reasons that were driving the share prices of Adani Group Stocks higher.

Shareholding Pattern of Adani Companies

Except Adani Ports, Adani Family in all other Adani companies owns nearly 75% shares. Nearly 20% shares are with Foreign Investors and remaining 5% shares are with DIIs and Public Investors.

Those companies where Promoters owns nearly 75% shares generally have an good impact on the supply of shares. When nearly 75% shares or 3/4 of the total shares issued by a company are with Promoters who are not going to sell the shares in normal course, only 25% shares are left with the investors to trade. In many cases, it has been seen that when the Promoters held 3/4 (75%) shares of the company, buying by some Big Investor has a bigger impact on the share price.

As we seen above, Foreign Investors hold nearly 20% shares in Adani companies (except Adani Ports). Out of this, 10-15% shares are with those Foreign Investors who doesn’t seems to be much active as compared to rally in Adani Shares. I am talking about Elara India, Cresta Fund, Albula Investment, Apms Investment, Vespera Fund, Ats Investment.

Most of these Foreign Investors hold significant stake in every Adani company. Some of them have reduced the holding along with the rise in prices of Adani shares. But few of them have instead increased their holding in same period.

It completely depends on the investor’s will and decision on how long they want to hold shares and what price they see as a best price for complete exit. So, we can’t question on why these Foreign Investors still holding huge quantities when share prices of Adani Companies have seen a huge rally in 2021 despite of no major change in valuations. But as these investors have still not reduced their holdings much by selling their shares in open market which could increase the supply of adani shares in market, that is one of the reasons why Adani Shares are able to see great rally.

Growth in Businesses of Adani Companies

Most of the Adani Companies have seen a good growth in the financials.

• Adani Green Energy has seen a growth of over 40% annually in Revenues from 2017 to 2021.
• Revenues of Adani Transmission too have witnessed growth of over 40% annually from 2016 to 2020, primarily achieved by Inorganic Growth (Acquisitions).
• In last 10 years, Adani Port’s Revenue rose over 20% annually. This company is also a Cash Cow (generates lots of free Cash) for the Adani Group because of its healthy Profit margins.

Adani Group through Organic and Inorganic Growth Opportunities have achieved an amazing growth in financials. Growth companies generally tend to trade at a high valuations in stock market. But where the growth is primarily achieved with using Debt, stocks are not able to gather much interest of the investors.

However, it is true that Adani Group due to rapid expansion plans are seeing good growth in the businesses. And that is one of the reasons (not primary) why Adani Shares have high prices.

Low Free Float and MSCI Rebalancing

If you keep checking latest news on Adani Group Stocks, then you might have heard about the Low Free Float in them.

Free Float means the amount of shares that are freely available in the stock market for sale and purchase. These shares can come into market for sale anytime.

As we discussed above, nearly 75% shares are with Promoters. Around 15% shares are with those foreign Investors who seems to be less active regarding share price movement and huge stretch in valuations. Some of the shares are held by other Institutional Investors.

As per shareholding pattern, only 2-3% shares are available with Public Investors who keeps trading shares regularly in Stock Market. Due to these facts, free float of Adani Group shares (except Adani Ports) seems quite low.

When the free Float is low in a stock, even small buying in that stock by someone is able to bring high jumps in the share price. In other words, due to low free float, share prices tend to get inflated on the back of even small purchases.

How a Low Free Float can affect Share Price?

To understand how it affects, let’s see an example.

Suppose there are two stocks named A Stock and B Stock. A Stock has around 20 crore as a Free Float shares. While B Stock has a Free float shares around 5 crore.

Share prices of both stocks are trading at same price of ₹100. Now, take it as a condition that if someone wants to raise the price of any stock either A or B upto ₹200, the person will have to purchase half of the free float shares.

In other words, upto ₹200, nearly half of the free float shares would come into stock market for sale. So, whoever wants to lift the share price upto ₹200, he will have to buy this quantity.

Let’s assume another condition that if the person buys all the shares of A or B Stock upto ₹200, the average price would come half of the total rise in share price. It will be equal to ₹150 per share (₹100 rise ÷ 2).

In case of A Stock, total free float is 20 crore shares. And as we know, half of the shares would come for the sale i.e 10 crore shares. Average price of purchasing would be ₹150 per share. So, if the person wants to lift the share price of A Stock upto ₹200, he will incur a total cost of ₹1,500 crore ( ₹150 average price ×  10 crore quantity of shares purchased).

In case of B Stock, total free float is 5 crore shares. As we know, if someone also wants to raise the share price of B stock upto ₹200, half of the free float shares would come for the sale that he will have to purchase. And the average price of that purchased shares would come ₹150. In B Stock, half of the free float shares is equal to 2.5 crore shares (5÷2). So, if the person lift the share price of B Stock upto ₹200, here he will incur a total cost of ₹375 crore ( ₹150 average price × 2.5 crore quantity of shares purchased).

As you can see through above example, we took all the things same in A and B Stock. We just changed the free float numbers of both but the total cost arrived is so different in these two stocks. In B stock where free float is low, person will incur a cost of ₹375 crore if he lifts the share price upto ₹200. Whereas in A Stock where the free float is high, person will incur the cost of ₹1500 if lifted the share to same price i.e ₹200.

Now, suppose, if the person has only ₹375 crore then he will be able to raise the price of B Stock upto ₹200. But with same amount, he will not be able to raise the price of A Stock upto ₹200. Most probably, he will get short of money when the A stock would have reached only ₹125!

So, that is the difference that High Free Float and Low Free Float brings in a share. And as we discussed, several facts indicates that adani shares have a very low free float.

Recently, MSCI Rebalancing had taken place. In rebalancing, MSCI had added Adani Transmission, Adani Total Gas, Adani Enterprises in its Index. Many Fund Managers follow the Index and therefore, when MSCI added these stocks in its Index, funds managers were also expected to add these stocks in their investment portfolios. Because of this, many analysts of stock market had predicted that nearly ₹1500 crore would have been received by each these Adani stocks.

For the Adani companies where market capital is ₹1,00,000 crore, this kind of inflow may not look much big. However, as we discussed earlier, free float of the adani companies is quite low. Therefore, ₹1500 crore inflows in each adani company (Adani Transmission, Enterprises, Total Gas) had a much bigger impact on shares prices than it may look.

It is possible that before these inflows, someone or few group of investors accumulated the shares of these three Adani companies and took a smart exit when these inflows came in the stocks due to MSCI Rebalancing. Rub off affect of rally in these 3 stocks might have come in other Adani Stocks too.

Conclusion

Overall, low Free Float in most of the Adani Shares seems to be the primary reasons behind recent rally in them. In Adani Ports, investors seems to be much active than other Group stocks and therefore this stock appears to have a better Free Float picture than others.

Some of the Group Stocks are continuously hitting lower circuit. If we look at what can stop them further from hitting these circuits, then I think this will completely depend on the current sellers that are selling their shares at every price.

In Adani Green Energy, Transmission, Total Gas stocks, financial picture is not enough good as compared to current valuations and therefore they are unlikely to give any support to the share prices. Either current sellers stops selling the shares, or operators of Adani Stocks comes out to support the prices or entry of any Big Investor in them (which is hard to happen given very high valuations) could only help the shares to take a break from current falling streak.

Compared to above 3 stocks, Adani Enterprises has a little better picture as this company owns some valuable businesses and is house to generation of new businesses for Adani Group. However, it is still prone to selling as financials of company lacks to support current high valuations. Adani Ports and Adani Power are in a much better scenario.

Adani Ports has a good growth in business + Healthy Profit Margin + Comparatively Higher Free float. These things reduces the risks in this stock. Valuations also doesn’t seems as stretched as other Adani companies have.

Adani Power has a Bigger Balance Sheet. Like Adani Ports, valuations of Adani Power too doesn’t seems much stretched like other Group companies. Secondly, Power Stocks are currently trading at Rich Valuations in Stock Market. Therefore, Adani Power seems to be less prone to any Big Risk.

For any investment purpose in Adani Group stocks, Adani Power and Adani Ports appears less risky than other group stocks.

Can Adani Stocks shows a Strong Come Back again?

For near term, valuations of Adani Group Shares (except Adani Ports, Adani Power) seems stretched. Therefore, fundamentals are unlikely to drive the rally. As I discussed above, either sellers stops selling their shares considering the big crack down in prices, or Operators comes out to increase prices or entry of a Big Investor in them (which is hard to happen) can only help these 4 stocks to see any recovery or new buying.

For long term, if Adani Group Businesses continued to grow at a good pace, then it is possible that stocks might see a new and another strong rise in future.

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That is the end of this article.

Good Luck : )