Why the 80% drop in Adani Enterprises is justified

A day after Adani Enterprises announced in a filing with the stock exchanges that the company is going in for a business restructuring the stock touched a high of Rs 803.90. That is a price it will not be touching anytime soon. The stock has fallen by over 80 per cent on Wednesday (June 3) and closed at around Rs 110, a fall of over 82 per cent from Monday’s close.

The share price gives the impression that it is already trading at an ex-split price. But the record date of restructuring of Adani Enterprise is June 4, 2015, which means shareholders whose name appears in the Register of members of the company on that date (June 4) will be allotted shares of the various companies as per the restructuring.

Those who have bought the shares today will not be able to see their name on the Register, on account of the two day settlement period, and will not be able to avail of the benefit of the split. Shares bought on or before June 2 would get shares of all the demerged companies.
 

As per the exchange filing, For every 10,000 shares of Adani Enterprises, 14,123 shares of APSEZ (Adani Port and Special Economic Zone), 18,596 shares of APL (Adani Power) and one share of ATL (Adani Transmission) will be issued. In other words 100 shares of Adani Enterprises will get 141 shares of Adani Port, 186 shares of Adani Power and 100 shares of Adani transmission.

According to the scheme of arrangement, the port business of Adani Enterprises has been demerged into APSEZ, the power business including the solar power unit has been demerged into APL and the transmission unit has been demerged into ATL. Adani Enterprises shareholders will however benefit from the merger of Adani Mining Pvt Ltd.

So does the 80 per cent fall in share price of Adani Enterprises take into account the values of all companies involved in the restructuring? Let’s do the math based on Monday’s share price, when values of all the companies were embedded in Adani Enterprises. This analysis assumes that the share prices of Adani Port and Adani Power remain at the same level as they did on June 2 after new shares are allotted.  
 

Adani Enterprises closed at a price of Rs 638 per share on June 2, 2015. A shareholder who held or bought its share on June 2 would get the shares of demerged companies in the ratio mentioned above. A hundred shares of Adani Enterprises would have a value of Rs 63,800. This amount entitles the owner to get 141 shares of APSEZ which was trading at Rs 309.15 and thus had a value of Rs 43,590.15. Plus 186 shares of APL which closed at a price of Rs 36.25 carried a value of Rs 6,742.5. Thus the total value of the two listed companies was Rs 50,332.65. The residual value of Rs 13,467.35 was of the unlisted ATL and Adani Enterprises, stripped of the above two listed businesses but includes the mining business.

Assuming that ATL is valued at its face value of Rs 10 and accounts for Rs 1,000 in the combined entity, the residual value of all the businesses of Adani Enterprises as of yesterday is Rs 124.6 per share or Rs 12,460. The stock trades at Rs 116.5 today. 

But does it makes sense to buy Adani Enterprises at these levels, now that most of its businesses are being stripped out and it will now be a trading company with the mining business being merged into it? Broking house Edelweiss in a result update of the company said that the demerged company will largely be an energy resource company. In the near term, post completion of coal mine auctions, the opportunity is in the domestic coal MDO (mine developer operator) business where the company enjoys an early-mover advantage.

After the demerger Adani Enterprises will largely focus on coal. The company management, as per Edelweiss, is confident of scaling up the MDO business manifold over the next five years (in FY15 it clocked around 3 mn tonne output under MDO for Rajasthan utilities) given the large opportunity that has come up after coal auctions. Despite domestic coal output slated to rise, the management remains upbeat on coal demand trickling into sustained trading volumes going ahead.

Traders who bought Adani Enterprises at its opening price of Rs 574 on June 3 will have to wait for a long time to see that price again.