Reliance Power, Reliance Infra: ADAG stocks on a roll. What's driving them?

Analysts attribute sudden interest in ADAG stocks to the anticipation of the company becoming more proactive and aggressive to prune its debt obligations

Shares of Anil Dhirubhai Ambani Group (ADAG) companies have massively outperformed the market thus far in fiscal 2021-22 (FY22). Reliance Power, for instance, has surged a massive 192 per cent thus far in FY22 compared to 6 per cent rise in the S&P BSE Sensex during this period. The S&P BSE Mid-cap and the S&P BSE Small-cap indices have surged around 14 per cent and 22 per cent thus far in FY22, data show.

Besides Reliance Power, other ADAG stocks such as Reliance Infrastructure, Reliance Communications, Reliance Capital, Reliance Home Finance and Reliance Naval and Engineering have rallied in the range of 63 per cent and 193 per cent during this period, ACE Equity data show.

Analysts attribute this sudden interest in ADAG stocks to the anticipation of the company becoming more proactive and aggressive to prune its debt obligations in order to get the business back on track.

“Investors have been mindful of how the ADAG companies have performed since the past few years and the debt they have on their books. Since the past few months, there could have been expectations of the company becoming proactive in managing its debt obligations and hence the stocks may have reacted accordingly. The recent rally could be news and anticipation-driven,” says Amarjeet Maurya, assistant vice-president for mid-cap research at Angel Broking.

Last week, Reliance Power announced plans to raise Rs 1,325 crore by issuing preferential shares and warrants to its parent, Reliance Infrastructure. It will issue up to 59.5 crore equity shares and up to 73 crore warrants convertible into equivalent number of equity shares at Rs. 10 each by conversion of debt, to Reliance Infrastructure. With this, Reliance Power's standalone debt will reduce by Rs 1,325 crore and along with its other planned debt reduction in subsidiaries, its consolidated debt will further fall by Rs 3,200 crore in FY22, which will reduce its debt-equity ratio to 1.80:1, the company said in a statement. READ ABOUT IT HERE

The power sector, according to Ambareesh Baliga, an independent market analyst, has done well in the past few months. This has had a rub-off effect on all power sector stocks, including Reliance Power, he said. “Investors must be careful now and not chase the frenzy,” he cautions.

That said, analysts advise against investing in these stocks given the run up and suggest investors instead park their money in fundamentally sound companies where they see revenue visibility, clean balance-sheet and a good track record of the promoter.

 

“There have been a number of instances where people have lost money chasing momentum and the stocks of companies that have weak balance-sheet and not much coming their way in terms of revenue. Though the momentum can lift ADAG stocks higher as the company embarks on a debt reduction mission, investors must be careful and do their homework diligently before putting in money now,” says A K Prabhakar, head of research at IDBI Capital.

ADAG companies, including Reliance Communications and Reliance Naval and Engineering Ltd have been dragged to the bankruptcy courts by lenders after they failed to repay their debt. Reliance Communications, for instance, said in December that the group owes around Rs 26,000 crore to Indian banks and financial institutions. READ HERE Indians banks, vendors and other creditors, reports suggest, have made claims of around Rs 86,000 crore on the company which is currently going through insolvency proceedings.

In May, HDFC sold shares of Reliance Infrastructure worth over Rs 43 crore, which were held by it through the invocation of pledged shares. READ ABOUT IT HERE The move comes after selling 52,88,507 shares, equivalent to 2.01 per cent, of Reliance Infrastructure for over Rs 22.86 crore earlier in that month.