ADAG stocks and magic of debt reduction; share price up 55% since mid-Dec

On an average, the share price of group firms is up over 55% since mid-December

The Murphy’s Law says “you will always find something in the last place you look”. This was true with Anil Ambani’s group companies when a long-awaited turnaround for the group (Anil Dhirubhai Ambani Group, or ADAG) came from eye of the problems itself — Reliance Communications (RCom). From mid-December last year, when the word was ripe that the group’s telecom arm would finally monetise assets to cut debt, the RCom stock has appreciated almost 182 per cent. Indeed, the telecom company underwent a massive restructuring which ensured that lenders may not take a haircut on their exposure to RCom as feared earlier, as it sold most of its telecom assets to Reliance Jio in a deal estimated at Rs 250 billion. The turn of events has helped ADAG stocks scale to new peaks in less than a fortnight. Debt-laden companies, in particular Reliance Naval, are up 66 per cent since December 18, 2017. Barring the newly listed Reliance Home Finance, other group stocks have also benefited. In all, the seven listed companies of the group saw their combined market value rise by Rs 238.86 billion, with non-promoters gaining Rs 95 billion.

But does this stock action really hint at a turnaround for the ADAG pack? 

For one, those saddled with huge debt stand to gain from RCom’s debt recast as they may be in a stronger footing while negotiating with bankers henceforth. “Anil Ambani’s assurance that his group companies may not face RCom’s situation while announcing the debt restructuring plan is an assurance for lenders and the group’s investors,” says a market expert who didn’t want to be quoted. 

 

A few days earlier, even Reliance Infrastructure had announced closure of a deal with Adani Transmission to sells its integrated Mumbai power generation, distribution and transmission business for almost Rs 130 billion. This company, too, is expected to become virtually debt free, and should gain from as working capital for its EPC (engineering-procurement-construction) projects may be available at competitive rates. Experts suggest that Reliance Nippon Life’s stock price gain is also justified as the recent events could improve its brand appeal and help tap the bond market more competitively.

But is this enough for investors to take fresh exposure to these stocks? Experts are divided. 

While some like Sanjiv Bhasin, executive vice-president (markets and corporate affairs), IIFL and G Chokkalingam, founder, Equinomics Research and Advisory, believe so, a few do say the rally may be only sentiment-driven. “It’s the season of small- and mid-cap stocks reacting to any positive news and ADAG stocks seem no exception,” says a long-time market observer. “ADAG stocks need to go through rigorous brand boosting if they must regain the past glory. Financials of the group, too, haven’t been very consistent in the recent times. As someone who was once bullish on the group, I wouldn’t rush to buy into the rally,” he affirms.

But, for Bhasin and Chokkalingam, not all stocks are weak fundamentally. “Reliance Nippon and Reliance Infrastructure didn’t deserve the fall in the first place. Therefore, if all the stocks were punished severely because of RCom’s troubles, the reward has also been rightly distributed,” says Chokkalingam. For him, Reliance Infrastructure, Reliance Nippon, Reliance Capital and Reliance Power (in the same pecking order) are good names to buy, while he would stay away from Reliance Naval. 

Reliance Power is Bhasin’s pick for 2018, while he is positive on Reliance Capital and Reliance Infrastructure. “Reliance Power is not a distressed asset and is grossly undervalued. When stocks in chemical and consumer sector are priced to book value, there is no reason why should power sector stocks be beaten down” he states. “After all, Anil Ambani deserves credit for turning around balance sheets of his companies,” he adds. 

While the Street is divided in its view, whether ADAG stocks will be good bets going ahead is something only time will tell.