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How Adani became the richest billionaire in Asia

The Nutgraf is a 10-min newsletter sent at 10 AM IST every Saturday. It connects the dots and synthesizes one big event in business, technology and finance that happened over the week in India. In a way you’ll never forget.

This is a paid newsletter that’s available exclusively to The Ken’s premium subscribers.

Just 10 mins long Synthesis not analysis Sometimes memes

21 May, 2022

It’s a four-step playbook

Read this edition online
A paid 🔒 weekly emailer that explains fundamental shifts in business, technology and finance that happened over the last seven days in India. In a way you’ll never forget. Someone sent you this? Sign up here
Good Morning Dear Reader,
 

If you are Gautam Adani, you’ve had an action-packed week. 

 

On 13 May, in a regulatory filing, the Adani Group announced that it was taking a 49% stake in Quintillion Business Media Pvt Ltd for an undisclosed sum. Quintillion owns and operates BloombergQuint, a business news publication. 

 

Then, two days later, the Adani Group took a majority stake in not one but two of India’s leading cement companies—Ambuja Cements and ACC. These stakes were earlier held by a Switzerland-based company called Holcim. Adani basically went up to them and said, hey, we’ll buy this from you for US$10.5 billion. And Holcim said sure, go ahead. 

 

The Adani Group became India’s second largest cement manufacturer. Not slowly, or incrementally, but overnight. On Sunday morning, Adani had a token presence in cement. By Monday, it was an industry leader.

 

And it still wasn’t done. 

 

By Thursday, the Adani Group was in another new industry—healthcare. It created a subsidiary called Adani Health Ventures. It’s not operational right now, but if you can build a cement empire overnight, I expect time is not really Adani’s adversary. 

 

Three entries into three completely different industries. 

 

All in a week. 

 

You may think that this is an exception for the Adani Group, except it isn’t. The Adani Group has been on an explosive growth trajectory for a while now, with most of the action happening in the last few months. Companies are being created (or acquired). Funds are being raised. And a formidable empire is being built right before our eyes. In the past, whenever companies have done this in India, it usually takes decades and multiple generations of families are involved. 

 

Adani is the exception. In just a matter of a few short years, it has exploded into the scene, becoming one of the most powerful and valuable conglomerates in the country, and its founder Gautam Adani is now the richest billionaire in Asia. 

 

Move over, Ambanis and Tatas. 

 

Adani is the new king. 

 

In today’s edition, I’ll take a closer look at how this happened. 

 

Let’s dive in.

The four-step playbook
 
There are two ways to tell the Adani growth story. The first is a series of events, which is well-documented. Gautam Adani was a self-made businessman in Gujarat, with a company that did some manufacturing and imported plastics. Then, he got a chance to operate the Mundra port, which he used to develop more ports. After this, he got into the coal importing business. Then power generation. Then infrastructure. 
 

A couple of years ago, the Adani Group, which was going along at a steady pace, turned on the boosters, and skyrocketed. It created the largest renewable energy company in India, with ambitions of making it the biggest in the world. The enterprise value of all the portfolio companies of the Adani Group rose rapidly. Funding poured in. And in the blink of an eye, Gautam Adani became the richest person in Asia. 

 

That’s one way to tell the story. Told as a series of events. First, this happened, then this, then this, and boom, richest man in Asia. 

 

However, the second way to tell the story is to step back a bit, and look at things structurally. 

 

When we do this, the events start to form a broader pattern, and I think this is far more revelatory about how Adani got where he did so quickly. Also, there’s another reason why Adani’s rise is an exception. Over the last decade or two, almost exclusively, the way to become a billionaire in record time has been to create a high-growth technology company. Instead, Adani got there by building companies in legacy, boring non-tech sectors. Even with all the resources at your disposal, it’s practically impossible to disrupt areas like cement, power, energy, and infrastructure. To disrupt all of them, and to displace companies that have been around for decades in a matter of months, is the corporate version of science fiction. 

 

So how did this happen? 

 

Well, basically, it’s a four-step playbook. 

 

First, India took a policy decision to go all-in on liberalisation

 

Look, we all know what happened. The state had tight controls over lots of key sectors. Then in the early 1990s, it let private companies invest and take over some areas, which led to an economic boom, etc, etc. Over the next few decades, multiple governments decided that this move was not the exception, but the rule. And over time, slowly, the state withdrew from sector after sector, and invited private companies to take their place. 

 

The assumption was that private players could do a great job at what public companies used to do, with greater efficiency, and presumably better results. Around a decade ago, the big buzzword going around in policy circles was PPP, i.e., public private partnership. And very quickly, private companies came in and did what the government used to do, and the state, in turn, collected a share from them. 

 

Essentially, the state went from an owner to a rent-seeker. In sector after sector. 

 

In some areas, this was fabulous. Take cement. For a long time, cement was an item listed under the Essential Commodities Act of 1955. This placed significant restrictions and centralised control on the production, sale, and distribution of cement. Then in the early 2000s, it removed cement from this list, paving the way (heh!) for companies to change the way they manufactured and distributed cement. Freed of state control, infrastructure projects exploded, and cement companies became prosperous. 

 

But in other areas, liberalisation made things worse. The most affected are areas like education and healthcare, which led to a steep decline in public schools and the health system. And the most affected are the ones who cannot afford to read this newsletter. 

 

But one area where everyone believed in PPPs was infrastructure. 

 

Want to build a road? Put out a tender. Metro line? Tender. A port? Tender. 

 

Then, in 2019, the government decided that managing airports, ostensibly a public good, was too cumbersome, and put out a tender asking for private companies to operate, develop, and manage airports in India. 

 

Till date, eight airports have been leased out. 

 

Seven of them to the Adani Group. 

 

This is a consistent theme and a major contributing factor to the rise of Adani. The state decides to liberalise a sector, essentially walking away from the burden of building and managing it. It decides to do a private public partnership. And in a surprising number of instances, the private player is… the Adani Group. There’s airports. 

 

Then ports.

Adani’s Mundra port is the starkest example of a silent shift in cargo traffic growth from government-run to private ports. This rebalancing comes at a crucial moment: India has announced a slew of production-linked incentive (PLI) schemes which are expected to give a boost to exports as well as the import of intermediate goods. The big-ticket goal of doubling India’s gross domestic product (GDP) is also not possible without a significant ramp up in exports. Thus, if things go according to plan, private ports are uniquely placed to reap a windfall. And one entity stands to benefit more than anyone else: the Adani Group.
 
India’s port ecosystem is broadly divided into 12 major ports (controlled by the central government via the ministry of ports, shipping and waterways), a handful that are run as public-private partnerships, and countless minor ports, owned privately or by state governments, which dot the country’s 7,500-km long coastline. It is in these smaller, nimbler minor ports that much of the action lies. And the Adani Group has managed—in the span of just a few years—to corner nearly half of India’s minor ports capacity.
The Silent Rise Of India’s Private Ports, Livemint
The same thing happened again and again. Sector is liberalised. Government withdraws. Private players are invited to participate. 
 

Ports. Airports. Roads and highways. Railways. 

 

In sector after sector, when the smoke clears, more often than not, the Adani Group is the winner.

 

Second, access to capital seems to be endless 

 

The thing about most infrastructure projects is that they are ridiculously capital-intensive. This is one of the reasons why many private companies hesitate to take part in them. Winning tenders is one thing, but getting the money to deliver is another thing altogether. And then to make money off it is another bridge to cross. 

 

However, the Adani Group seems to manage this through a seemingly limitless stream of capital. They access everyone from local banks to foreign investors, and raise debt to fund their projects. 

 

And this has been worrying observers for a while. 

 

Take Credit Suisse, for instance, which released three annual reports titled ‘House of Debt’ between the years 2012 and 2015. The Adani Group was highlighted in all three editions of the report. Most companies, and creditors, would use this knowledge and tread with caution. But not Adani’s creditors. They seem to be still raising billions from foreign investors, and from other financial entities. 

 

And their debt? Have they brought it under control? 

 

Well, here’s the latest update, as of last week. 

The Adani group continues to use debt financing to grow its existing businesses and enter new industries. The combined gross debt of the group companies reached a new high of Rs 2.22 trillion at the end of March this year, up 42 per cent from Rs 1.57 trillion a year ago, according to data from Capitaline. As a result, the group’s gross debt-to-equity ratio was at a four-year high of 2.36 at the end of March, up from 2.02 a year ago and a low of 1.98 at the end of FY19.
 
Adjusted for cash and bank balance available with various group companies, the group’s net debt-to-equity ratio rose to 2.07 at the end of FY22, the highest since FY18. As of March-end, the Adani group companies were sitting on cash and bank balance worth Rs 26,989 crore.
 
This makes the Adani group one of the most indebted among India’s top business groups.
Adani group firms' gross debt rises to Rs 2.2 trillion, shows data, Livemint
For some strange reason, the Adani Group is deep in debt, and there are still people who are willing to lend them more money. 
 

And what happens with this money? 

 

Third, acquisitions to buy revenue

 

There are two ways you can deploy capital. You can build with it, or you can buy.

 

And if you are the Adani Group, well, buying is always a priority.  

 

We already wrote about cement at the beginning, and this has always been Adani’s playbook. Get lots of capital. Buy companies and entities. According to a report by Moneycontrol, the Adani Group has acquired 30 companies since 2014 across four key areas—cement, ports, airports, and energy. 

 

The best part about acquisitions is that it allows you to grow rapidly, practically overnight. Saves you decades of building.

 

Fourth, stock prices are disconnected from earnings 

 

All of the factors above lead to something really strange and peculiar about the Adani Group. Its stock prices operate in a world of their own, and seemingly have no bearing on things like earnings, revenue, or profits of the companies themselves. 

 

In many ways, in 2020, the Adani Group was the most successful business group in India if you just looked at the stock performance. 

 

But in terms of earnings? 

 

Well, not exactly. 

 

So what’s going on? 

The group companies now lead the market capitalisation league table in sectors such as ports, power generation, gas distribution and transmission, and power transmission and distribution, ahead of incumbents in both public and private sector.
 
But the group’s finances are still to catch up. The group reported consolidated revenues of Rs 1.02 trillion and net profits of Rs 3,781 crore during FY20. This makes Adani the sixth largest industrial group in terms of revenues behind Mahindra and eighth largest in terms of profits behind Hindujas. At Rs 2.12 trillion at the end of FY20, Adani group assets were eighth biggest in the country behind L&T group but ahead of Mahindra’s.
 
However, the stratospheric rise in the Adani companies’ market capitalisation has little to do with the companies’ financial performance; it’s more a bet on growth potential. “Many analysts expect a sharp jump in group revenues and profits by FY25 or FY26, thanks to a slew of licences and infrastructure assets won by the group companies in the last three years,” said an analyst on the condition of anonymity.
 
…
 
Many analysts feel that the sharp rally in Adani stocks is a classic case of irrational exuberance amplified by the group’s ability to bag large infrastructure assets in recent years. For example, at Rs 1.28 trillion, Adani Total Gas market capitalisation is just a notch below the combined market capitalisation of the five biggest gas companies in India — Indraprastha Gas, Petronet LNG, Gujarat Gas, Mahanagar Gas and Gujarat State Petronet. However, Adani Total Gas net profits in FY20 was just 5 percent of the combined net profit of these five companies. In August 2018, Adani Gas won rights to retail piped natural gas in 11 circles in the country — the most among all the bidders.
What's behind Adani group's meteoric rise on the stock exchanges?, Business Standard
Even today, when stock markets across the world are being ravaged, by comparison, Adani seems to be relatively less impacted.
 

But guess what’s another advantage of a high stock price? It makes it easier for you to raise debt. Because in many cases, the amount that you can raise is closely tied to the stock price of the company, creating leverage. A higher price means you can borrow more, at more favourable terms. 

 

This is the virtuous cycle where the Adani Group finds itself. Sectors get liberalised. Private players with deep pockets are sought in order to fund huge capital expenses. The Adani Group enters, flush with money from an endless supply of capital. Contract is won. Stock price goes up, which in turn increases its ability to raise more debt. 

 

And that’s how Adani became the richest billionaire in Asia in record time. 

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