Let’s look at another example.
Nestle India’s market-capitalisation is only a tad higher than that of Adani Green Energy. Still, the food and beverage company is tracked by brokerages such as Axis Direct, HDFC Securities, ICICI Securities, Motilal Oswal Securities, Geojit BNP Paribas, and Prabhudas Lilladhar, among others.
So, what gives?
One vital reason market participants attribute to the modest analyst coverage is the low free float in most of the Adani companies.
The Free Float Angle
A low free float means that promoters hold a high stake in the company that leaves less shares for public shareholders like foreign portfolio investors (FPIs) or the domestic institutional ones like insurance players or mutual funds.
In the case of Adani Green Energy, promoters’ stake was constant at 74.9% for many quarters before falling to 56.3% in the quarter ended March 31, 2021. Both Adani Enterprises and Adani Transmission, have promoter stake pegged at 74.9% while promoters hold 74.8% and 63.7% stake in Adani Total Gas and Adani Ports, respectively.
“The promoter holding in the group companies is quite high and hence the free float is quite low. There is not much interest from many foreign investors and domestic institutional investors and hence analyst coverage is very low,” said Shriram Subramanian, founder and managing Director, InGovern Research Services, a proxy advisory firm.
The frequent restructuring of companies has also made institutional investors wary of investing in the group. Brokerages do not find value in initiating coverage, according to market players.
The Ahmedabad-based conglomerate hived off its port business being from the flagship Adani Enterprises and listed its transmission business as a separate company, carved out from the power generation vertical.
While the intent of the restructuring was to enhance the valuation of the various business verticals by listing them as separate entities, the move seems to have made the analyst community wary of initiating coverage on the firms despite the significant surge in the valuations.
Garg said may be that’s the reason the group moved nearly 600% in the current rally while Nifty has given a return of 110% from the low of 7,500. But he said analysts are possibly staying away from covering the group stocks because prices are trading above 100x PE multiple and the group has a high debt of around ₹1.50 trillion. “The valuation is very high.”
The widely-held perception that the group is highly politically connected also acts as a catalyst for the reluctance of analysts, according to market participants.
“Investors and analysts are aware that it is a politically connected group. There have been regular spin-offs in terms of demerging certain businesses, making institutional investors wary of investing in the companies,” said Subramanian.
The Other Side
A section of market participants isn’t too concerned by the low free float. That is just the group’s way of doing business and does not necessarily reflect the quality of the listed firms, they say.
Arun Kejriwal of Kejriwal Research and Investment Services said Adani’s business approach is to have high group ownership and this is witnessed in almost all their companies. “Secondly, they believe in doing their work and not necessarily keeping the investing world aware on a day-to-day basis. While some people consider this as good and some as bad, this is their style,” he said.
Kejriwal said the largest float in an Adani company is in Adani Ports where being a part of futures (derivatives segment) there is substantial activity in the share and the nature of business makes it well covered by research reports. “While this makes investors happy, this is also the reason why they are unhappy with other group companies on information.”