- 2 years ago
U.S.-based brokerage Cantor Fitzgerald sees 50% upside for #AdaniEnterprises and has initiated coverage with an ‘overweight’ rating.
Analyst Brett Knoblauch explains the rationale, in conversation with Tamanna Inamdar. Watch
Analyst Brett Knoblauch explains the rationale, in conversation with Tamanna Inamdar. Watch
Category
📺
TVTranscript
00:00 We're speaking with Brett Noblock, he's CFA Research Analyst at Cantor Fitzgerald.
00:04 They came out with a report on Adani Enterprises and it's an interesting one.
00:10 They've initiated coverage and the rating is overweight with a 4,368 12-month target price.
00:18 We're trying to understand the rationale behind the report and some of the points mentioned there.
00:23 Very good morning, Brett. Great to speak with you here on NDTV Profit.
00:27 Glad to have you here with us.
00:29 Thank you for having me.
00:30 All right. Let's begin with how you've titled your report,
00:33 India's Path to Self-Reliance Runs Through Adani.
00:37 And through that 47-page report, you have time and again sort of connected where India is right now
00:45 and where the Adani group is positioned in terms of its infrastructure play
00:51 and India's policy initiative to be more self-reliant.
00:55 Can you just give us an overview of why you initiated coverage and why you see this connection?
01:00 Yeah, I think we initiated coverage for a lot of reasons.
01:07 First, just from Cantor's point of view, we think India is a big growth opportunity for us.
01:12 This might just be one name, but I think it's a start of a much larger global push for our
01:18 franchise, but especially in India.
01:21 And with the Adani group and its self, I guess, helping India on its path to self-reliance,
01:29 I think if you just look at everything that they have built over the last
01:32 several decades and have spun out and emerged from gas, ports, Adani, Walmart, food,
01:39 utility energies, you name it, it's giving India the infrastructure that they need so that they
01:49 can be self-reliant and not so reliant on other countries, whether it be China or the US or
01:56 other big trading partners.
01:57 When we look at what initiatives are currently going on in India that is going to benefit
02:05 Adani group, we first just look at the segments that Adani is operating, then look at the policies
02:10 that are being implemented, like just on the roads and look at how much roads that they're
02:15 building, just that Adani alone is looking to build over 6,000 kilometers of roads over the
02:20 next several years.
02:22 And with roads come more transportation, same thing with airports.
02:26 Adani is now the largest operator of airports in India, and the airline industry is relatively
02:33 unpenetrated relative to more developed economies.
02:37 So you increase air traffic, it all helps drive economic growth.
02:43 And if you look at just the portfolio of companies within Adani Enterprises, they're going to
02:48 benefit from a larger India, and I don't think there's any other way to look at it besides
02:53 that.
02:53 Yeah.
02:55 Brett, can you hear me?
02:59 Yeah.
02:59 All right.
03:00 So you also go on to say that, in a sense, because it is a holding company, Adani Enterprises
03:09 holds many of the businesses that the group is doing, investors are getting at least five
03:15 to six companies free, in a sense.
03:19 Does that explain why your target price is at 4,368?
03:23 Can you break that down for us?
03:24 Yeah.
03:27 So I guess, as you know, Adani Enterprises is effectively a publicly traded incubator.
03:33 It's part of the strategies to build and then demerge businesses, which we believe makes
03:38 sense to now value those businesses as a standalone entity.
03:43 Now, Adani does a good job disclosing revenue, profitability, debt, and assets for each segment,
03:48 which is helpful for us to-- it's given the valuation framework that we use.
03:53 Now, whether it's data centers, airports, road construction, renewable energy, or mining,
03:57 there are many publicly traded businesses out there that we can use to help determine
04:03 the appropriate multiple.
04:04 So we look at what those comps are doing from a growth and profitability standpoint, compare
04:08 that to Adani's business.
04:10 And in many instances, Adani's business is growing faster, just as profitable.
04:14 So we just think it deserves a trade at a premium multiple to those comps that we came
04:20 across.
04:22 Now, we think our valuation is really driven by three segments.
04:26 That's airports, roads, and ports.
04:29 If we look at the airports business, there's a handful of publicly traded airports.
04:34 And we think they're the largest airport operators.
04:37 The two fastest growing are airports in Thailand and Auckland International Airports.
04:42 They trade on about 20 times 2025 EDA.
04:45 You compare them to Adani's airport segment.
04:48 And we think Adani has the advantage there just because it's the largest airport operator
04:53 in India, which is the most populous country.
04:55 And if you look at airline penetration rates in their core market, 3% to 4% now, we think
05:01 it's a few decades.
05:02 So you're going to get growth from that.
05:03 And on top of that, you have Adani completing their Navi Mumbai airport, which gives them
05:09 capacity of about 90 million passengers.
05:10 That's two times as big as the largest airport in the US.
05:14 So we value that on a 30x multiple, which we think is kind of easily justified.
05:20 And then go to the roads business.
05:22 There's two very close comps there in Atlas, Artarian, Transurban Group.
05:26 They're trading about 24 times 25 EDA, which is fiscal year 26 for Adani.
05:32 We forecast Adani's group to grow faster and it's just as profitable.
05:36 So again, we think a premium multiple applied to that segment makes sense.
05:42 At I believe we're at 25 times that.
05:45 And then the last segment is renewable energy.
05:47 And this one is a mixture of, I would say, relatively more established businesses and
05:53 some, I don't say moonshots, but incubating businesses.
05:58 So on the more established side, you have your solar manufacturing, your wind manufacturing,
06:01 and then you'll have electrolyzer manufacturing.
06:04 And those three will be fully operational within 24, 36 months.
06:10 We're looking at just those three.
06:13 We think they can do about a billion dollars in EBITDA in three to four years.
06:18 And given we have them growing revenue in that segment at upwards of a 65% CAGR over
06:24 the next three years, we think that itself could also be trading at a 20 times multiple.
06:29 So now you have three different segments that could be doing a billion dollars in EBITDA
06:32 in three years that could be trading on a multiple north of 20 times.
06:35 That in itself gives you a $60 billion enterprise value right now, where the current enterprise
06:42 value of Adani is just $40 billion.
06:44 So you can see how you can get meaningful upside just from those three segments.
06:48 And those three segments, when you compare to the total business in their most recent
06:53 fiscal year, didn't even account for 20% of the total revenue or EBITDA.
06:59 So that just means you're getting your very high margin mining services business, your
07:07 coal mining, commercial mining blocks, they have seven blocks in Australia, the Carmichael
07:13 mine, and a handful of other, their digital business, their data center business, their
07:20 Adani, Wilmore stakes worth 170 rupees right now.
07:24 So yeah, we think just those three segments give you meaningful upside right now, which
07:29 implies everything else is kind of free.
07:30 - Greg, from what I firstly, good evening.
07:33 Thanks for staying up for us late evening in the US.
07:38 Samina on the side, you believe that airports and energy is the big bet in the Adani enterprise.
07:46 You've also maintained that in the last seven years, what the incubator has done is hyped
07:52 off or demerged its businesses for value unlocking.
07:55 In terms of timelines, when do you think, or what are you expecting or working with
08:00 in terms of a demerger maybe?
08:02 Is that the game you're playing?
08:03 And if yes, what is the time horizon that we're working with, or you're working with
08:07 rather?
08:07 - Yeah, I don't think the company has gone out and kind of put anything on paper yet.
08:13 But if we had to guess what the next business that would be to be demerged, we think it
08:18 would be the airports business.
08:20 There are seven operational right now, the Navi Mumbai airport is gonna be their first
08:25 phase is gonna be completed and call it within a year.
08:27 We think within three years time, that will be completed.
08:32 It'll be at capacity.
08:33 It's still gonna be growing extremely fast.
08:35 That's when it'll probably look to think about demerging that airport business.
08:38 And at that time, it could be doing, as I said, close to, if not more than a billion
08:44 of EBITDA, probably growing high teens-ish, if not more rates.
08:49 So we think it would probably make sense to look to demerge that business around them.
08:53 Outside of that, there's a lot of options.
08:57 At that point, your data center business could be reaching much better scale.
09:03 We have that by 2030, probably doing close to $600 million in US revenue.
09:08 The renewable energy side, we think is probably a bit longer term, just because what they're
09:15 doing there is really trying to build a huge ecosystem.
09:20 You have renewable energy from wind and solar.
09:22 They're using that to power the electrolyzers, which they are also manufacturing.
09:26 They're using that to then make green hydrogen.
09:29 And then they're using that to convert it into ammonia and urea, building pipelines
09:34 that connect into ports.
09:35 And that is a 10-year play.
09:38 So I don't think we're going to see them look to demerge that business until you probably
09:43 at least get phase one of that green hydrogen plant completed, which is going to be fiscal
09:47 year '27, but most likely not until probably several years after that.
09:51 But I guess that was a long answer, but airports is, in our view, the best bet to be demerged
09:56 first.
09:59 Is this the first Indian company you're covering currently?
10:02 And is this the only Indian company that you're covering?
10:05 This is the only one and the first one.
10:08 And we look to be launching on a lot more.
10:11 And what's led to that, Brett?
10:14 Is it a request from your clients?
10:16 What has made you sit up and notice not just India, but Adani as well?
10:21 I do understand that we are being talked about with the kind of recent gains the markets
10:25 have seen and policy continuity.
10:27 And there's so many things working in our favor.
10:29 But what's made you pick Adani?
10:31 Is it just a proxy play?
10:33 Is there anything else that is coming in from your clients that's encouraged you to take
10:38 notice?
10:38 It's some client driven.
10:42 It's some kind of on my own due diligence.
10:45 And I'm lucky enough to have support from the higher ups giving me the freedom to go
10:51 out and launch on what I think is interesting.
10:53 And we look for, call it, companies where we think there's very attractive risk reward
11:00 that would appeal to our clients that are relatively undercovered.
11:03 And when you look at Adani, I think it's safe to say it is extremely undercovered, especially
11:09 given how big it is.
11:10 So from being a first company to launch on in India, I think it makes a lot of sense
11:17 not just as one company, but it's actually a lot more than one company given all the
11:21 different businesses operating within it.
11:24 So we think it is kind of a perfect first company to launch on as we kind of enter the
11:29 Indian market.
11:30 Yeah.
11:31 And we look forward to more coverage out there to Brett.
11:34 But just one quick follow up to that.
11:35 In your note, you mentioned about how India's ambitions for becoming the third largest GDP
11:42 go through becoming an infrastructure powerhouse.
11:46 And therefore, in some sense, is this conglomerate?
11:50 And by virtue of that, Adani Enterprises becomes the entity, the best way to play that
11:56 infrastructure proxy story.
11:58 And therefore, part two of my question is, would you believe that the story runs much
12:03 longer than the two, three, four year target that or one year target that you may have
12:08 on Adani Enterprises currently?
12:10 Because infrastructure businesses are such long gestation businesses.
12:13 Yeah, I think that's a good way to put it, right?
12:20 I think you could look at this over a 20 year view if you really wanted to.
12:24 Obviously, you can identify very notable near term catalysts where you can kind of recognize
12:32 or return value to shareholders through these demergers.
12:36 But there's also a handful of other businesses that they have that won't pay off for maybe
12:41 another 10 years if you're looking at the green hydrogen business.
12:43 But that business itself could be doing almost $8 billion a year in EBITDA in 10 years.
12:50 You put that on a 10x, 10 times multiple, you can see how that would be worth more than
12:58 two times the current value.
12:59 So what we like is you don't need all these different things to hit.
13:04 You just need one or two of these to hit.
13:05 So it comes with a good diversification from that.
13:09 And if you look at just India as a whole, it's grown at a CAGR 2x out of the US over
13:15 the last 20 years.
13:16 They just came out expecting 7% growth this year.
13:18 The biggest gap right now between India and China is the GDP per capita, where they're
13:24 5, 6x less than.
13:26 And I think the investments that the country is making right now is going to be very fruitful
13:32 in closing that gap.
13:33 And with that comes a lot more discretionary income for consumers.
13:37 And you can know Adani is getting more into consumer businesses.
13:40 They're going to have more money to spend on travel, which benefits their airports.
13:44 They're going to need more energy, which benefits their commodity training.
13:47 They're mining their renewable energy business.
13:49 So it seems like everything that India is doing to become a much larger economy has
13:56 some indirect benefit to where Adani's businesses are currently at.
13:59 Yeah, or just that the promoters thought it the right way to go about and build the business
14:05 around this India growth story.
14:06 Just one quick follow up, Brett.
14:08 Did I hear you say that your current valuation that you ascribe to enterprises captures only
14:14 20% of the revenue or slash EBITDA that comes in from the three businesses and everything
14:21 else is over and above that?
14:23 So I'm just trying to understand, is that what you said?
14:26 And if so, what's the optionality value that you are attaching to some of the others, if
14:30 not formally, then informally?
14:32 Yeah, so our valuation is based on a, call it a calendar year 2025 or their fiscal year
14:39 2026.
14:40 So if you look at last year to going from last year to then the business is going to
14:45 be a bit different, right?
14:46 Their largest business last year was integrated resource management, which was over 70% of
14:50 gross revenue.
14:52 And now it's just because it was a very high volume year and coal prices are very high
14:55 and it's very correlated to coal prices.
14:56 Coal prices have come down a lot year over year.
15:00 So you've seen that business come down from 70 to 50%, give or take of it.
15:04 And we expect that's going to continue to decline as some of your newer higher end
15:08 or newer higher growth segments take more, I guess, mix of total gross revenue.
15:14 So I guess my state is a bit misleading, given how high IRM was last year.
15:20 And our 26 numbers call for very high growth of these three segments.
15:25 But the mix of those businesses, if we look out in three, four years, is still probably
15:32 going to be less than, I would say maybe 40% of revenue.
15:38 That's just because IRM is very big, but we value IRM and the mining business on 10 times
15:44 the amount, which is in line with some other where the coal miners currently trade.
15:49 So we don't use any, I think, crazy multiples for those segments.
15:53 But our valuation is really driven by airports, roads and the renewable energy.
16:00 - Brett, one quick question, in fact, last question from me.
16:05 You indicated that you've started coverage and of course, Adani Enterprises proxy to
16:10 the India growth story.
16:11 Are you also studying the other Adani Group stocks at this stage, or have you studied
16:16 those stocks and decided to pick an Adani Enterprise?
16:18 - So we've only launched on Adani Enterprises.
16:22 I think with that comes some, you kind of need to look at the other businesses, right,
16:26 to know the full Adani story.
16:27 You need to know that they've demerged three in 2015, two in 2018.
16:33 Adani more recently spun out.
16:34 So I think you need to be a bit more cognizant of the entire kind of portfolio of companies
16:40 or Adani named companies.
16:42 But we really just started with Adani Enterprises.
16:45 We liked the publicly traded incubator approach that it is.
16:49 So I would say we haven't looked extremely deeply into all of the other Adani named companies,
16:56 but again, potentially something in the future.
16:59 - Okay, so something in the future, perhaps.
17:03 Just one last point, Brett, is you've spoken in detail about what you find exciting about
17:09 Adani Enterprises and the Group, but in your note, you also talk about risks and downside
17:14 risks as we do when we analyze companies.
17:17 What do you think the key risks are?
17:18 And if I come to your number one risk in your list, which is the political environment,
17:25 the relationship with Government of India, as you've named it, do you think that that
17:29 risk is now minimized considering the expectations being projected for the next general election?
17:35 - I do.
17:37 Obviously, elections are always difficult to call.
17:43 I don't really know what's going to happen, but I think you can draw some correlation
17:48 to, I don't want to say the rise of India, but I'm sorry, the rise of Adani and Prime
17:54 Minister Modi's ascension to power, but they've clearly benefited each other.
17:59 And India has benefited as well.
18:00 So it's more of an unknown than I would say risk if there is a change in leadership.
18:10 But I would say with the way things are looking out right now, that risk does look a bit minimized.
18:14 - All right.
18:17 Thank you for that, Brett.
18:19 Fantastic conversation there.
18:21 Cantor Fitzgerald has begun its India coverage and its Indian company coverage with Adani
18:28 Enterprises.
18:30 They seem very, very bullish on the company and see it in a sense as a proxy for the India
18:35 story.
18:35 So a good conversation, Brett.
18:37 Hope to have you back when your next report is out.
Comments