Adani Power

He is Adani’s top finance person. But his AIF did not choose Adani shares | Rare Techy


Can you share your experience as chief financial officer of the Adani group?

My first major work in the Adani group was working with Adani’s port business, which we used to call Mundra Port and Special Economic Zone, understanding its operations, bringing some of the best information management practices and creating a strong organization in financial management. side

We have foreign private equity investors in the company. I joined in 2005 and we achieved this in 2006 with investment from GIC and 3i. This is followed by 1,700 crore IPO. Our internal target is to do it in 2007, which ends in November 2007.

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The plan, vision and direction of Gautam bhai (Gautam Adani) is to bring the company to the public market. We are preparing ourselves to go public in terms of compliance. So, we have one of the Big Four auditors. We have some of the most well-known people on our board, the right advisors to prepare for the IPO.

In hindsight, if you wait another year, will it be very different for the IPO?

Yes, it would have been very different. And as a group, we have built a power generation business. We were caught in the crossfire of the global financial crisis of 2008. Our Adani Power IPO, which was actually planned for 2008, was postponed. So, we need to organize alternative sources of medium-term funding.

Therefore, the projects continue to be implemented. And when the market gave us a window of opportunity in 2009, we brought Adani Power IPO to the market 3,100 crore issue size, and the market once again acknowledged the group’s ability to execute projects. So, the issue was also heavily oversubscribed.

Before that, 3i has reposed big faith in the power business by taking almost 9% of the company in December 2007.

So, which Adani companies are you responsible for listing in the public market?

The four companies I was instrumental in, where I took major responsibility, are Adani Ports, Adani Power, Adani Transmission (the listing was made during the demerger of Adani Enterprises in 2014-2015). I am also responsible for the Adani Green Energy list. So, out of the seven entities listed by Adani, I am responsible for four. Now, there are two more after the acquisition of Ambuja Cements and ACC.

You will see a lot of interest rate cycles in your tenure, and that is very important for the expansion of the company. So, how can you navigate that cycle?

When you work with infrastructure projects, which by definition are long-gestation and very capital-intensive projects, you always look for the right mix of equity and debt. You try to take debt hopefully at the bottom end of the cost cycle, but you will not always be able to catch it.

You always look for long term debt, linked to repo rate, marginal cost of funds based lending rate (MCLR) or SBI lending rate (PLR). Infrastructural projects cannot even afford medium duration levels.

At first in the early part of the first decade of the twentieth century, banks are not very inclined to give more than eight-nine years of debt. In 2014 and 2015, the Reserve Bank of India (RBI) changed that.

But in India, there is still a little inconsistency. This is because between 18-year or 20-year cycles will still require you to make annual amortization of your outstanding amount. While in the international bond market, where we first got an investment grade rating in the port company and the current transmission company, the group has a stronger track record.

That’s where you get 10-15-year-money, where you repay with a bullet at the end of the tenure and hopefully, you refinance all outstanding parts. It is the most suitable structure for infra projects and India is still far from it.

You manage the Adani family office. Can you tell us a little about that?

So, the family office is made more to ensure that compliance practices and information systems are brought almost in line with the practices of public companies, separate teams, which will manage projects in the private domain – investments in the private sector. domain on a comprehensive basis — which is unrelated to the listed group companies.

And, this is how the promoter imagines it. Eventually, they will look at creating a family corpus, which is removed from the company’s main set. Even if it is smaller, because the only income the promoter receives is the dividend income.

Then, whatever investment decisions they make, whether on the private side or the public side, not a group effort, they will be carried out by a group of people through a defined process. So, in the early days when I set up the office, we talked to some other family offices in India, and established some of these practices, being a group of people who manage family office affairs in a different process than how a company would normally be managed.

Tell us about your foray into alternative investment funds, with Anubhuti AIF.

So, we started this in December 2019. At that time, we had hoped that our main thesis was to buy the company, which offered the highest income growth during the previous 12 months compared to its book value. If a company has a book value of 225 and earned 40, it is almost 20% growth and we will juxtapose that with the price-to-earning (P / E) of some companies for example. So, we created a G/PE model, and looked for companies with the highest G/PE ratio.

We will take one stock from each sector eventually after passing all rejection criteria. Leverage would be one such rejection criteria. Therefore, if the debt-to-Ebitda (earnings before interest, tax, depreciation and amortization) of the company is more than 2.5 times, we will not invest, if the promoter’s holding is less than 26%, we will not invest in the company. .

We have added two more dimensions to our investment philosophy because at G/PE, you end up with companies that necessarily trade at a low P/E. This will eliminate all companies that have high growth prospects or high earnings growth, but trade at some higher P/E and have a cycle of 12-24 months ahead.

So, to solve this, we are now carving out another bucket in our portfolio, which we call basic. So, G/PE is about 50% of our portfolio, 25% is not fundamental and the remaining 25% is what we call opportunistic investment bets, where certain catalysts can potentially lead to a re-rating of the stock.

For example, the promoter may take an additional preferential stake in the company given its improved prospects. That could be one of the indicators. Or a large capex has been announced, which is likely to be financed from current and future earnings, and the equity value is so large that it is created, which is like a once in a lifetime opportunity. Or an acquisition that is so value-accretive that the current comparison does not seem to reflect the same, but will be justified in the future comparison. We use the last 25% of the portfolio for such special situations.

You have a debt filter that avoids high leverage. At the same time, you have been part of a business group that has seen tremendous growth over the years and taken on debt and leveraged its books. Do you think the debt filter should be tweaked?

Debt-to-Ebitda in infrastructure companies can be as high as 3.5-to-4 times. In all other normal businesses, which are not capital intensive like infra businesses, it will be 2.5-3-times. So, the philosophy you have when you have some kind of project, where your ability to manage debt comes from the fact that you have a fairly high Ebitda margin. In infrastructure businesses, Ebitda margins can be very high. Like in the port company, it is always mid-high, 60s-70%. Most normal business, will not have that.

So, the reason infrastructure businesses support high debt-to-Ebitda is because they have high operating margins, but that doesn’t match the G/PE portfolio that we do. Because, here you have the role of asset manager, there you play the role of risk manager and the risk is formulated according to the business strategy. Here you manage assets, which are third party assets. So, this is a different situation that you have to keep in mind.

So, given your current model, many of Adani’s shares will not fit into it?

Why only Adani shares; high P / E stocks like FMCG companies, IT companies will not fit into the model. We have to fish for value all the time. And there, the growth can be more than 12-24 months and widely can multiply, but you have to wait and make a choice now.

How many stocks are in your portfolio?

Our total shares will not exceed 15, as we are currently structured. About 50% of our portfolio will be in stocks based on our G/PE model, followed by 25% on fundamentals and the remaining 25% on opportunistic specials. Our G/PE model runs on the universe of NSE 500. It throws up two-three large-cap stocks, another two-three mid-caps and another three small-caps. The fundamental bucket is mostly from the Nifty 50 universe, so you have large cap stocks there. The opportunistic bucket is a mix of large and mid cap stocks. The overall split will be 20% large cap, 18% mid cap and 15% small cap.

Which sector are you bullish on?

We are mostly sector-agnostic. But over the next 12 months, we love financial services and banking. We like automatic and automatic ancillaries. And we also like cement.

What kind of AUM do you have now and what kind of AUM are you targeting?

We are now more 200 crore in our AUM (assets under management), because we are less than three years old.

We have also worked on another dimension of asset management, which is an advisory investment role, where we have modeled a portfolio consisting of large-mid-cap and small-cap stocks, with an average holding period of about eight months over a 12-month period. So, that will be our second offering that we will bring to prospective clients in the next quarter. We will provide this under our RIA (registered investment advisor) license.

What are your fees for AIF investors?

We charge only 1% of the management fee on the contributed capital. We have an 11% hurdle rate, after which the profit sharing comes into the queue. Our hurdle rate is exceptionally high compared to other peers in the industry, who offer 8-10% hurdle rates. After the barrier-level threshold, we have a 15% profit sharing structure.

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