Adani Enterprises - Restructuring Exercise :: Edelweiss, report

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As per media reports, Adani Enterprises (AEL) will shortly announce an equity restructuring scheme whereby Adani Power (APL, 69% subsidiary) and Adani Port & SEZ (APSEZ, 75% subsidiary) will cease to be its subsidiaries. Consequently, the existing shareholders of AEL (including the promoters) will have direct ownership in these subsidiaries. The share swap ratio for Adani Power is expected to be 20 shares for every 11 shares of AEL and for Adani Port 10 shares for every 7 shares of AEL. Apparently, the objective is to deleverage the consolidated balance sheet and eliminate the holding company discount in AEL. This could also facilitate fund raising for AEL’s coal business. The share swap ratios imply ~15% upside for AEL shareholders from current levels.

Event: Media reports indicate the AEL board is expected to shortly announce its shareholding restructuring exercise whereby it’s holding in two of its subsidiaries (APSEZ and APL) will be held directly by the existing shareholders of AEL (including the promoters & directors). Hence, the promoters (Mr Gautam Adani and family/associates) will now directly own 56.3% in Adani Port and 51.8% in Adani Power. Earlier, the promoters held 75% stake in AEL, which in turn held 75% stake in Adani Port and 69% in Adani Power. As of Sep 2014, of the consolidated gross debt of INR 840bn, ~INR600bn was accounted by the two subsidiaries.

Our take: We believe the exercise has been undertaken to largely deleverage the balance sheet of AEL and eliminate the holding company discount, which was built in the AEL stock (At CMPs we estimate it to be around 20% for APSEZ and APL). Further, this could potentially pave the way for fund raising to finance mining related activities of the flagship company. The CMP of Adani Power (INR50) and Adani Port & SEZ (INR340), our existing value for coal trading business and cash value of ~INR90/share (~INR100bn) implies ~15% upside for AEL shareholders from current levels. We maintain ‘BUY/SP’ owing to the coal mining opportunity being pursued by management.

LINK
https://www.edelweiss.in/research/EdelFlash-Adani-Enterprises--Restructuring-Exercise/28155.html