Rajiv Jain Portfolio | Adani Stocks: Classic PE not the correct gauge to value Adani stocks: Rajiv Jain

“Although as we started peeling the onion, we thought that this was kind of old rehashed story and from our perspective, the substance was not as meaningful here. But that triggered this leg which took it down and I think the other part is that the technicalities of the index players involved kind of made it worse,” says Rajiv Jain, Founder & CIO, GQG Partners

What really is the thinking behind this Rs 15,000 crore commitment in Adani Group of Companies.
We have followed this group for a while and we had never done anything because this infrastructure has been a tough space. In general, we have been underweight, in fact we barely owned anything in infra for the longest time. But I think the recent events kind of made it very-very attractive in general and the other aspect is that the group itself from a fundamental bottom-up perspective is better positioned. If you look at Adani Enterprise, for example — them getting Mumbai Airport two, two-and-a-half years ago, that was a kind of game changer but the stock ran away. If you look at the Adani Ports and therefore into the more sort of hinterland as such, it could make it very powerful. So, I think every name had its own unique elements which made it very attractive. And as you know, we have significant investments on the utility type businesses. In fact, if I look at it globally, outside of India, we have almost $5 billion invested in utility type assets, pipeline, airports. So, we do understand those businesses and I thought there was a kind of a mismatch between how people look at classic PE type stuff, which is not really that sort of relevant in the stage these companies are so that was kind of the genesis of how we thought about the whole group. What to your mind led to the sell-off in Adani Group of stocks and what gives you the commitment that despite the erosion in the equity value, the group is in fine fettle?
The stock first of all did run up quite aggressively last year and year-a-half and some of them were Adani Green that ran up along with the other similar names in Europe and other places. So, there was a big influx of ESG money whether index or active into these kind of names and that obviously made some of these stocks a bit expensive versus their own history and then this short-sale report came out which obviously was very strongly worded in my opinion.

Although as we started peeling the onion, we thought that this was kind of old rehashed story and from our perspective, the substance was not as meaningful here. But that triggered this leg which took it down and I think the other part is that the technicalities of the index players involved kind of made it worse.

The fact that Adani Group of stocks by traditional yard stick are expensive and their debt levels are high. As a fund manager, as an investor, what gives you the conviction that both the concerns which historically have been big concerns for Adani Group of stocks, those concerns according to you in your playbook is something which is manageable.
If you look at vast majority of the assets they are regulated assets. They tend to a very-very long tail. So, you cannot have financial leverage along with the operating leverage. These companies have predictable long-term trajectory even if you slow down the growth so that is the first part of it. When you adjust for the leverage, in fact if you look at the US utilities and you own a bunch of them, on an average debt to EBITDA levels in US utilities then these are some of the best of the breed around six to seven times debt to EBITDA.

If you look at the leverage here, it is around three, three-and-a-half times but the growth capex is why the negative free cash flow kicks in. So, I think they have predictable earning stream that has 20 plus year visibility. These are regulated assets and in growth utilities they tend to have negative free cash flow that is the norm, that is, in fact you want to have them have negative free cash flow, that means because they are able to deploy capital on a longer-term basis with fairly attractive returns.

So, the debt levels when you look from a utility perspective is actually on lower side not on higher side. But if they lower the capex plans which they have already announced, I think it becomes a fairly attractive sort of risk reward.
The fact that Adani Enterprises’ FPO did not go through, that means the proposed capital in the company will not come in and that will have impact on the growth plan. Are you conscious of that?
Yes, of course, we are and that again is a growth capex issue rather than maintenance capex because a lot of these businesses do not have a lot of maintenance capex. So, I think from that perspective we feel it is perfectly fine. They just have to tune down the growth rates but it becomes a lot more stable and hence arguably higher valuation.

Rajiv Jain has always maintained that the way he invests is that good news and good prices never come together and he never wastes a crisis. So, is this some kind of crisis where you are investing the classic Rajiv Jain way, never waste a crisis?
Yes I think that is an important part of what we do because if you think about investing it is nothing but an arbitrage between perception and reality. If there is a perfect company, the chances are the prices would be so expensive that it actually becomes an imperfect stock and I will give you a couple of examples. I remember first time when we bought ITC in a meaningful way it was 1996 when there was a tax liability risk on them and the stock declined, I believe this was early 1996. And as you know, we ended up owning ITC for over two decades, I believe almost 21 years. Then if I go back to actually 2004 election, we bought significantly during the election, the market was down almost 25-30% in a matter of days and then the last one would be the US sanctions against India in 1998 and the market was down almost 35-40% in a matter of six-seven months.

So yes, in general if you buy fundamentally sound businesses with a very high barriers to entry, because think about it, you cannot replicate Mumbai Airport. Can you predict earnings growth of Microsoft which is a fantastic franchise 12 months out? They have gone from 20% revenue growth to 5-6% revenue growth, that is, in other words, compared to Mumbai Airport it is actually much more predictable long term story. The question is, you got to buy it cheap enough.

So why did you shy away from buying Adani Group of stocks earlier? They still had the airport. They still had the infrastructure projects in place. And they did not have any kind of concerns which a lot of analysts have raised about high valuations and high leverage. What stopped you from buying them in 2020, 2021 or even 2022?
I think if you look at the ports, for example, the regulatory changes have been much more recent by the way. So, I think that the fundamentals of business today are better in the last two years than they were before at the margin. Number two is, look, we deploy a lot of capital. You cannot simply be chasing because you cannot execute in two days or something. When you talk about hundreds of millions of dollars, I mean, half a billion dollars kind of stuff, we would move the price so we do need some sort of a shake out for us to enter and these things had such a strong momentum and the valuations were getting expensive so we could not have executed them in a proper manner, versus, let us say in my opinion a mini crisis like what we are seeing now.