🤨 Why Mutual Funds aren't Funding Adani's Empire
Adani Group stocks are all the rage but mutual funds don't seem to care. Here's why.
Adani is everywhere: from the Bloomberg's Billionaire List to the newspapers.
But one place where he hasn't been able to make much headway is mutual funds. Confused? ReadOn!
🤔 Mutual Funds Not Interested in Adani?
Adani stocks have been all the rage for the last two years.
Thanks to the government and the public betting heavily on the Adani Group, its stocks have risen 3,000% since April 2020.
Just this year, the company's stocks rose 127%, while the Nifty only rose 1%.
Although the stocks have been witnessing a downturn right now due to fears of recession, they have given investors crazy returns.
But why aren't mutual funds betting on Adani stocks?
Mutual funds currently hold 0.76% of the market cap of Adani Group.
Don't mutual funds like insane gains?
Well, they do. What they don't like is insane valuations.
Adani Group stocks are currently trading much above what their actual price should be. How do we know that? Well, one way to evaluate whether a stock is overvalued or not is by comparing its P/E (price to earnings) ratio with its peers.
Here are the price to earnings ratio of Adani Group stocks compared to their peers:
In comparison, RIL stock trades at a P/E ratio of 23.58. Even Berkshire Hathaway trades at a P/E ratio of 21.
What the P/E ratio highlights is the price that people are willing to pay for a stock.
So, for every one rupee profit that Adani Total Gas makes, people are willing to pay Rs. 730.
But mutual funds are not willing to do so.
You see, if your personal investments fail, you are answerable only to yourself. But if mutual funds fail, the fund managers have to be answerable to a lot of people. So, they usually stay away from such highly valued stocks as they pose a risk.
What's more, companies like Adani Power and Adani Green have a long gestation period.
That means right now the company is like a hit Bollywood debutant. A lot of investments, a lot of acquisitions and a lot of changes need to happen before the company becomes a superstar.
And of course, the superstar status isn't guaranteed. So, mutual funds don't want to pay an arm and a leg for a company that may flop out in just a couple of years.
Also, Adani businesses are focusing a lot on infrastructure. And while that is great news, it also makes for a very risky bet.
You see, infrastructure companies have to burn a lot of money upfront to apply for government contracts. And how and when they can realise this money back from stakeholders is also up to government rules and regulations, opening this sector up to a huge risk.
Adani Group's massive Rs. 2.2 trillion debt also makes the company a huge risk for mutual funds.
What if Adani Group fails to pay back the loans?
Mutual fund managers have seen several debt-backed empires crumble. And so they are less keen on investing in a company that is so deeply over-leveraged.
And it isn't just mutual funds that are wary of Adani Group's debt. Its massive borrowings have also scared off a lot of bond investors.
Yes, Gautam Adani may have overtaken the likes of Warren Buffet and Bill Gates on the billionaire index, but the common public doesn't want to lend his company money.
Which is why Adani Ports' bonds have dropped 14%, while Adani Transmission's Step-One notes have declined 17% this year.
Both numbers are much higher than the overall 10% decline in the Indian debt market.
This could be bad for Adani because the conglomerate probably needs a lot more debt.
🔍 Why Adani Group May be Taking on More Debt
Remember how much Ross loved dinosaurs? That's how much Adani loves infrastructure.
In fact, he can't get enough of it.
So, first he entered the cement space with his acquisition of Ambuja and ACC cement.
Now he wants to expand into the aluminium and steel industry.
He is set to buy the state-owned Rashtriya Ispat Nigam Ltd. to enter the steel space.
And he isn't going to be manufacturing any steel. No, he is planning on tying up his green energy business to steel production and create green steel and aluminium (green metals are those that don't use coal in production).
This focus on infrastructure and more importantly green infrastructure is why a lot of investors are betting big on Adani.
These are the two sectors that the government is going big on now. And though a lot of giants do exist in this space (especially the metal space) Adani seems to have a knack for disrupting sectors.
Right now, Adani seems to be playing the long game. In fact, the conglomerate is kind of working like a startup. It is trying to scale up fast, but instead of taking VC money, it is taking on PSU debt.
But will Adani manage to scale up and become the undefeated king of India? Or will his debt catch up with him first?
⚡ In a line: Adani may be stock market investors' favourite but mutual funds and bond investors don't quite agree which could pose a problem for the company's future expansion plans.
💡 Quick question: Will Adani Group manage to disrupt the Indian markets or will its debt hinder its growth?
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Nice simple article that gives insight on the other side of Adani's tremendous growth
Debt is a genuine concern but Adanis ties with the incumbent govt are strong so naturally people feel they'll not default because they'll not lose out on the projects they're after