Arguing that Adani Group has become too big to ignore, US brokerage firm Cantor Fitzgerald initiated coverage with overweight rating on Adani Enterprises and a target price of Rs 4,368, which signals an upside potential of 51% from last week’s close.

Following the report, shares of Adani Enterprises rallied over 5% to day’s high at Rs 3,065.

Despite being the 10th largest non-financial stock in India, Adani Enterprises virtually has no analyst coverage.

“To that extent, we believe much of what the investor community knows about Adani has come from a short report published in early-2023. While that report brought to light serious concerns, we believe the company has taken actions to reduce liquidity risk (from share-backed loans), improve governance, and increase transparency. Thus, at this juncture, we believe Adani is too big to ignore, and for India, we believe the country needs Adani as much as Adani needs the country,” said Cantor analysts Brett Knoblauch and Thomas Shinske.

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While noting that AEL’s current valuation is largely driven by three main segments: airports, roads, and its new energy ecosystem, it said, investors are getting a free call option on the rest of AEL’s business, which accounted for over 85% of revenue in FY23 and includes many businesses that are in incubation phase and will materially contribute to financials over the coming years.

“As such, we believe risk/reward is attractive at current levels,” Cantor said, adding that the conglomerate’s airports and new energy businesses are poised for meaningful growth over the coming years.For its SOTP valuation, the brokerage has applied an FY26E EV/EBITDA multiple on nine segments that generate revenue, in addition to its corporate segment that does not.

“Our valuation is predominantly driven by three main businesses: 1) airports (Rs 1,622/share), roads (Rs 1,525/share), and solar, wind, and electrolyzers (Rs 1,511/share). Combining these three segments with corporate, which takes away Rs 1,238/share, we arrive at a valuation of Rs 3,419/share, which is ~18% above where shares currently trade,” it said, adding that shareholders are effectively getting the other six businesses for free.

“Our SOTP-derived price target would imply a target FY26E EV/EBITDA multiple of 23.5x, which compares to shares currently trading at 13.9x our FY26 EBITDA estimate. Furthermore, our valuation does not assign any value to AEL’s green hydrogen ambitions, which management believes could be a $7.5bn+ EBITDA business per year. As we approach FY27E, when Phase 1 of its green hydrogen facility becomes operational, we expect this will serve as an additional potential catalyst to propel shares higher,” Cantor said.

Since its founding in 1988, AEL has spun out seven listed companies with a combined market cap exceeding $156 billion. AEL’s net debt as a percentage of fixed assets has fallen from 51.6% in FY21 to 35.5% in 1H24, finance costs as a percentage of EBITDA have fallen from 53.5% in FY22 to 38.7% on a TTM basis, and net debt / EBITDA has gone from 5.2x in FY21 to 2.2x at 1H24.

“We believe both EBITDA margin and FFO (funds from operations) margin will continue to improve over the coming years as utilization rates increase and incubating businesses become more mature, enabling AEL to rely less on outside capital,” Cantor said.

The endorsement from US broking firm, which comes amid the one-year anniversary of publishing of Hindenburg report, led to buying in other Adani stocks as well during the day. Shares of Adani Power, Adani Ports, Adani Energy Solutions and Adani Green jumped 2-4% each.

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