Fundamental Analysis And Intrinsic Value of Adani Enterprises Ltd.

 

Dated: 11 Apr 23
Company: Adani Enterprises Ltd.
CMP: Rs. 1803.15

Introduction

In this article we will try to analyze Adani Enterprises Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.

Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.

Leverage Ratios

Adani Enterprises Ltd. - Fundamental Analysis And Intrinsic Value Calculated Using Discounted Cash Flow Method

Observations:

  1. Company is operating with high debt as can be seen from debt-to-equity ratio.
  2. EBIT has not improved during the period as the Interest coverage ratio has declined and is just enough to cover the interest expenses. This is not pointing towards a very healthy financial situation of the company.

Operating Ratios

Adani Enterprises Ltd. - Fundamental Analysis And Intrinsic Value Calculated Using Discounted Cash Flow Method

Observations:

  1. Fixed assets turnover ratio has seen improvement till 2021, however in 2022 it has seen a shart decline. In 2022 the company has added assets in the category of Property, Plant and Equipment which apparantly has not started contributing to the revenue. This has caused the ratio to dip.
  2. Company has operated with negative working capital for three years during the last six years. A negative working capital is worrisome as it indicates that the company may face liquidity crunch for its operational needs for which it may have to resort to additional loans which may further worsen the situation.
  3. Receivable turnover ratio has seen improvement during this period.

Profitability Ratios

Adani Enterprises Ltd. - Fundamental Analysis And Intrinsic Value Calculated Using Discounted Cash Flow Method

Observations:

  1. Company is operating with very thin PAT margins and it has seen a decline during the period. It may appear to be because of the interest paid out on the heavy debts which the company is operating with, however when we observe EBITDA margins, we note that these are also on a lower side. We can conclude that the company has to improve its overall efficiency and work towards improvement of profitability margins.
  2. A low ROE indicates that there are lot of assets that are either underutilised or unutilised.

Intrinsic Value

There were multiple occurrences of negative free cash flow during the period under observation. This is due to heavy capex incurred as a part of company’s planned expansion into Airport operations and solar energy etc. Here we have relied on revenue growth and shareholder’s equity growth to figure out the expected free cash flow for future and thus the intrinsic value of the company.

Assumptions:

  • The increase in Shareholder’s equity is assumed to be Rs. 1059.74 Crores per year for the first five years and then Rs 529.87 Crores from sixth to tenth year. The growth rate is projected based on the past growth of Shareholder’s equity (refer to figure below). In the past Shareholder’s equity has increased at the rate of Rs. 2119.48 Crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
Adani Enterprises Ltd. - Fundamental Analysis And Intrinsic Value Calculated Using Discounted Cash Flow Method
  • Terminal growth rate is assumed to be 0%.
  • Discount rate is assumed to be 12%.
  • Increase in Revenue is assumed to be Rs.2479.49 Crores per year for the first five years and then Rs 1239.64 Crores per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of Rs. 4958.57 Crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
Adani Enterprises Ltd. - Fundamental Analysis And Intrinsic Value Calculated Using Discounted Cash Flow Method
  • Free cash flow will be 4% of revenues in future as the capex reduces after the initial outlay.

Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free cash flows derived from growth in Shareholder’s Equity and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.

Shareholder’s Equity Growth Model

Intrinsic Value: Rs.102.91

Stock Entry price with 25% margin of safety: Rs.77.19

Revenue Growth Model

Intrinsic Value: Rs.203.80

Stock Entry price with 25% margin of safety: Rs.152.85

The average of the above two stock entry prices works out to be Rs.115.02. When the stock starts trading below this price it becomes attractive for long term investment.

Author

Jibu Dharmapalan

Fundamental Analyst
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Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.

References:

https://www.bseindia.com/stock-share-price/adani-enterprises-ltd/adanient/512599/financials-annual-reports/

https://www.adanienterprises.com/investors/investor-downloads

More about the Company:

Board Of Directors

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