ARVIND SUBRAMANIAN, former Chief Economic Advisor (CEA) to the Government of India, coined an interesting phrase to describe the Ambani-Adani phenomenon and its contribution to India’s economy — ‘the 2A variants’. Addressing a seminar, Is the Indian Economy Back?, at the US-based Brown University’s Watson Institute for International & Public Affairs, where he teaches, he said India’s economy is taking a new turn in ‘stigmatised capitalism’. “Stigmatised capitalism in India is essentially the lurking sense that, for the last 30-40 years, private capital has flourished due to its proximity to governments and favours.” He listed a dozen or so sectors where government is focussing big time and where these ‘2As’, too, are investing heavily. Without naming Gautam Adani, Chairman of Adani Group, he said: “This group added $50 billion to its valuation in one year, and went from $25 billion to $75 billion. Will this ‘national champion-making strategy’ work (for the country)?”.

Depending on your perception, you may agree or disagree with Subrama- nian, but stock markets are lapping up promises of India’s ‘2A National Champions’. Fortune India Research data shows that market capitalisation of Mukesh Ambani’s Reliance Industries grew 27% from ₹13,10,460 crore on November 13, 2020, to ₹16,65,088 crore on November 5, 2021. The Tata Group did better. Combined market capitalisation of the group companies rose 62.6% from ₹14,13,219 crore on November 13, 2020, to ₹22,97,931 crore on November 5, 2021. But the real outperformer was Adani Group, which does businesses under six listed firms, whose market capitalisation rose 183% from ₹3,46,435 crore to ₹9,81,910 crore.

“Clearly, the Adani group is reorienting itself towards new avenues to leverage its overarching infrastructure-focussed businesses created over the years. They clearly want to be leaders in areas they are entering,” says infrastructure expert Sanjay Sethi, Managing Partner & CEO of Nestor Capital Consulting LLP, and former senior executive director & head of infrastructure at Kotak Investment Banking.

As Subramanian indicated, the biggest wave that the ‘2As’ are riding is the ambitious infrastructure-building targets set by the government. This is especially true of Adani.

Coal to Green

Gautam Adani has always focussed on building his businesses around growth in India’s agri-processing, ports, logistics, coal trading, coal-fired power plants, solar equipment. Now, he is shifting to sectors that will be the key to a strong and modern India — green energy, defence, airports/aviation, logistics, data, water, gas, mining and real estate, areas where government wants to build massive capacity. And the biggest piece of this shift is energy. This is not surprising as, in his early days, too, Adani’s biggest bet was coal, first as a trader and then a builder of India’s largest thermal power capacity in the private sector. However, coal was not the only focus. By the time government decided to dump fossil fuels in favour of renewable energy, Adani was already investing heavily in solar and wind power and well on its way to becoming the largest solar power producer in the world. Now, a $70-billion investment is projected to make it the world’s largest renewable power producer by 2030. “There is no other company that has made such a large bet on developing its sustainability infrastructure,” he said at the recent Bloomberg India Economic Forum.

At a recent JP Morgan India Investor Summit, he pledged the group would help India exceed its emission intensity reduction goal, citing that its renewable pipeline had touched 25 gigawatts (GW) four years ahead of the 2025 target. “India is set to experience the largest increase in energy demand over the next 20 years. The additional funding for clean energy technologies required to put India on a sustainable path over the next 20 years is $1.4 trillion, or 70% higher than in a scenario based on current policy settings,” says a recent International Energy Agency report.

Group sources say Adani’s thermal portfolio is already at least 7% less emission-intensive than India’s other power plants and among the most emission-efficient in the world. To further reduce emission-intensity, Adani Power Ltd. (APL), the thermal power company, plans to blend biomass with coal. It is also doing pilots for co-firing hydrogen and green ammonia. Experiments for carbon capture and utilisation are also under way. Adani Transmission Ltd. plans to increase the share of renewable power procurement from 3% to 30% in two years and 70% by FY2030.

That’s not all. After Prime Minister Narendra Modi announced the National Hydrogen Mission in August 2021, Adani decided to tap the hydrogen opportunity, too. The aim is to become the world’s largest producer.

“Reducing reliance on fossil fuels in hydrogen production can help it re- duce dependence on liquefied natural gas imports and rationalise its $6.7- billion annual import bill. By leveraging low-cost, domestic renewable energy generation, India can produce green hydrogen for export,” says a report by Centre for Energy Finance.

“Given the Adani group’s large-scale capabilities in renewable energy and its transmission and distribution infrastructure, green hydrogen is a logical next step,” says an Adani group executive. The group plans to spend 75% capital expenditure in green businesses, including $20 billion in renewables, green component manufacturing and enabling infrastructure, over the next decade.

Adani Green Energy Ltd (AGEL), world’s largest solar power developer, plans to build 45 GW renewable capacity by 2030. In October, it completed the largest M&A in India’s renewable space by acquiring SB Energy, an 80:20 joint venture between Japan-based SoftBank Group and Bharti Group, for ₹26,000 crore. The 5.4 GW assets took the total operational portfolio to 20.28 GW.

However, big revenues from renewables are still years away for the group. AGEL’s revenue from power supply in first half of FY2022 was ₹1,682 crore with cash profit of ₹859 crore, 48% and 45% higher, respectively, from the same period a year ago. Analysts say the company will start doing better when more projects are up and running. “AGEL has a large upcoming portfolio of 11.4GW, of which 3.3GW is under construction. Construction of the rest is set to commence by FY2022,” says Bhanu Patni, Senior Analyst, India Ratings and Research.

Ports & Logistics

At Mundra, the Adani group has built India’s largest commercial port over the last two decades. Adani has 12 other ports and terminals. Adani Ports and Special Economic Zone Ltd. (APSEZ) is India’s largest commercial port operator and integrated logistics player with capacity of 498 million metric tonnes annum (MMTPA). It has a 28.6% share of all-India container movement. Consolidated revenues grew 56% to ₹8,089 crore, while cargo volume jumped 47% to 144 MMT (average cargo volume growth at Indian ports was 16%) in first half of FY2022.

The group was handling 36 MMT cargo in FY2009. In FY2020, it was 223 MMT. It plans to reach 500 MT and take 40% of the country’s trade market well before FY2025.The group has also made huge investments in logistics and warehousing.

“Our strategy of geographical expansion with focus on higher-growth regions, balancing cargo mix, expansion in logistics business, particularly rail transportation, and foraying into Grade-A warehousing segment reflects our move towards a ‘transport utility’ business model,” says Karan Adani, Chief Executive Officer and Wholetime Director of APSEZ. The ambi- tious APSEZ has acquired Sarguja Rail Corridor Ltd., Dighi port and Ganga- varam port, and forayed into Sri Lanka with a greenfield port in Colombo, in just last six months.

The ambition dovetails with Central government’s Sagarmala project for increasing port capacity from current 602.5 MMTPA to over 3,500 MMTPA. For this, 249 port modernisation projects have been identified. Of these, 107, costing ₹67,962 crore, are under way.

Analysts agree on the immense opportunity at hand. “Diversified cargo mix and increased efforts towards east coast (26%) and west coast (74%) de-risk Adani Port’s portfolio from concentration and volatility risks. We expect revenue and EBITDA CAGR of 30% and 24%, respectively, over FY21-23,” says a recent report by ICICI Securities Research Analysts Bharat Chhoda and Harshal Mehta. “In FY2022, cargo volume guidance is 350-360 MMT, growth of 45%, says an SMC online research report.

Fossil Power & Transmission

Despite green energy plans, fossil fuel plants remain a major source of revenue for the group, though APL’s earlier plan to become one of the world’s largest coal-based power producers with another 7,000 MW green- field projects has been scaled down in favour of green energy. The only greenfield plant under construction is the 1,600 MW Godh project that will be commissioned by mid-2022 and will mainly sell power to Bangladesh.

APL generated consolidated revenues of ₹12,785 crore in first half of FY2022, as against ₹14,148 crore in first half of FY2021 (this included a one-time regulatory revenue of ₹2,580 crore). However, the company is still looking to buy stressed coal plants, say sources. In 2015, it had bought Lanco’s 1,200 MW Udipi Power for ₹6000 crore. In 2019, it had bought GMR’s 1,370 MW Raipur Energen in Chhattisgarh for ₹4,792 crore .

Analysts say APL is going to make profits for a long time due to assured returns from long-term power purchase agreements. An Equitymaster research analysis says APL’s Return on equity was 255.2% in FY2021, as against 106.6% in FY2020.

In transmission and distribution, Adani Transmission is already India’s largest private utility with more than 18,300 circuit kms and 33,100 MVA transformation capacity, covering 12 states with over three crore connec- tions. Adani had acquired Reliance Infrastructure’s power generation, transmission and distribution business in Mumbai for ₹18,800 crore in FY2019. The firm had ₹4,978 crore revenues (up 16%) and ₹772 crore profits (up 26.8%) in first half of FY2022. Adani recently sold 25.1% stake in Adani Electricity Mumbai Ltd to Qatar Investment Authority for around ₹3,200 crore. The funds will be used to move into more distribution circles. The reason is simple. At present, about 89% of India’s power is distributed by the public sector and 11% by the private sector. This is expected to reverse in next three decades.

The Gas Opportunity

Natural gas accounts for just about 6% of India’s energy mix. The govern- ment wants to increase this to 15-25% by 2030. Adani is investing heavily in India’s transition fuel. It was the pioneer in private city gas distribution starting with Ahmedabad in 2001.

“India’s path to energy transition goes through natural gas, and for that, we need to create infrastructure, only then can its usage be enhanced. That is what we and our partners are doing in terminals, CDG (city gas distribution) networks and cross-country pipelines,” says S.M. Vaidya, Chairman of Indian Oil Corporation (IOC). Adani has a joint venture with IOC, Indian Oil-Adani Gas, which is implementing CGD networks in 19 cities.

Adani is also pursuing PNG, CNG, biomass and hydrogen opportunities. In October last year, the group sold 37.4% stake in Adani Gas to French energy giant Total for ₹5,700 crore — the largest FDI in the country’s city gas distribution.

The deal can give the venture access to Total’s global gas at competitive rates and, with its own logistics and port infrastructure, help it beat competition. Adani and Total have also teamed up with Snam, Europe’s leading gas infrastructure company, to build a CNG compressor facility in India and explore hydrogen opportunities. “India will be one of the most attractive transition markets for low-carbon electricity technologies.

We intend to play an essential role in this energy-mix transition,” Gautam Adani had said, while announcing the JV with Snam. However, gas revenues are yet to pick up for Adani. In first half of FY2022, revenues were ₹648 crore, 34% down from ₹982 crore in first half of FY21. But Adani Total Gas and Adani Transmission have had the highest growth in market capitalisa- tion among group companies.

Agri-business, New Forays

Agri-processing, like gas and coal, was an early business for Adani who had, in 1999, formed a 50:50 JV with Asia’s leading agri-business group Wilmar International of Singapore, mainly to make edible oils, castor oil, oleo chemicals and specialty fats. Adani now sells a wide range of edible oils such as soya, mustard, rice bran, groundnut and cotton seed. The group is planning a ₹4,500-crore initial public offer (IPO) to unlock value from this business. Adani Wilmar had ₹37,195.65 crore revenues in FY2021, 25% more than ₹29,766.98 crore in the previous year. Consolidated net profit was ₹727.64 crore in FY2021 and ₹460.87 crore in FY2020.

“The IPO proceeds will help us double capacity of integrated factories as India currently lacks big food-processing factories like they have in China, Thailand or Indonesia,” says Angshu Mallick, CEO of Adani Wilmar.

The Adani group is also incubating businesses such as airports, water, data centres, mining, solar manufacturing, road/rail, defence and aerospace under flagship company Adani Enterprises. But these are very small. More than half the revenues of Adani Enterprises in first half of FY2022, ₹26,328 crore, were from the soon-to-be-demerged Adani Wilmar.

Gautam Adani’s big bets to be the ‘National Champion’, as Arvind Subramanian interprets, may appear overambitious, but the stock markets are showing full faith in Adani for now, at least.

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