Diversified equity mutual funds (MFs) have, by and large, stayed away from making large investments in Adani group. This, despite the Adani group market cap touching ₹20 trillion from just ₹1.6 trillion in just the past three years. Four of the six Adani group stocks have even delivered returns in the range of 18-46-times in this period.
The share price rally of Adani group companies has led to Gautam Adani — the founder and chairman of Adani group — briefly becoming the second richest person in the world behind Tesla chief Elon Musk.
As for the Adani stocks, a large part of the active scheme exposure of MFs is in arbitrage funds and equity savings funds, where equity exposure is used for hedging purpose.
According to Value Research data, MFs held just 0.76% of the market cap of the entire group. Except for Adani Enterprises and Adani Ports & SEZ where 22-28 fund houses have exposure (see table), just a couple of fund houses have active investments in other Adani group companies.
What fund managers say?
Fund managers say the steep valuations of Adani group companies have kept them on the sidelines. “Valuations in the past were on the higher side, and now have gone up further. Some correction may offer an opportunity to enter the stock,” said a fund manager.
Adani Green Energy and Adani Total Gas trade at 12-month trailing price-to-earnings of more than 700-times. Adani Enterprises and Adani Transmission trade between price-to-earnings multiples of 400-450 -times on trailing basis.
“Apart from the ports business, which is the cash cow for the group, other businesses of the group are long-gestation businesses,” said a second fund manager .
While the group has high levels of debt, fund managers say it is important to avoid mismatches between cash flows and liabilities in long-gestation businesses “The debt has been spread over long tenure. So, it should not have an impact on immediate cash flows,” said a third fund manager. All three fund managers did not want to be named.
The total debt for the group at the end of FY 2022 was over ₹2.2 trillion, showed data from Capitaline.
What should investors do?
Adani group stocks are part of major benchmark indices. Adani Ports & SEZ is part of the Nifty 50 index. From next month, Adani Enterprises will also get included in the Nifty 50 index, moving from the Nifty Next 50 index. Adani Green Energy and Adani Transmission are part of Nifty Next 50 index.
“The sharp run up in prices of several Adani stocks over the past few years has led to increased index weights as well as inclusion in various indices. Most active managers haven’t held exposure to these counters, which has led to a negative performance attribution relative to the benchmark,” says Kautubh Belapurkar, director-fund research, Morningstar India.
A fund manager can decide to invest in or avoid a stock for a range of reasons. “These reasons may be related to debt, valuations or fundamentals. Investors pay fund management fees for the fund to take such investment decisions. If investors want to avoid the risk of underperformance, they can add passive strategies to complement their active portfolio,” says Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors.
Passively-managed funds track indices which are market-cap weighted. So, weights of the stocks in the index rise as their market cap rises. While these funds can capture the appreciation of a stock price, their performance will come under pressure if there is a decline in share price of a large heavyweight stock. As these funds’ portfolios mimic the constituents of the index, exclusion of a declining stock will happen when the index provider excludes it in its re-balancing exercise. So, building a portfolio that combines active and passive strategies is advisable.
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