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Adani Gas’ Stock Jumps Most In A Year After Total Agrees To Buy 37.4% Stake

Total shall make an open offer to acquire 25.2 percent stake from public shareholders and the residual from Adani family.



Gas pipeline. (Photographer: Luke Sharrett/Bloomberg)
Gas pipeline. (Photographer: Luke Sharrett/Bloomberg)

Shares of Adani Gas Ltd. jumped the most in nearly a year after Total S.A. agreed to buy 37.4 percent stake in India’s city gas distributor as part of the French energy giant’s plan to expand its presence in one of the world’s fastest growing energy markets.

Total will make an open offer to acquire 25.2 percent stake from public shareholders and the residual from Adani family, according to an exchange filing. The open offer price is set at Rs 149.63 apiece, an 8 percent premium to Friday’s closing price. Total and the Adani family will ultimately hold 37.4 percent each and public shareholders the remaining 25.2 percent.

Yogesh Patil, analyst at Reliance Securities, expects an earnings per share of Rs 3.5 for the financial year ending March 2021. At an EPS of Rs 3.5, the deal is estimated to value Adani Gas at 43 times its price-to-earnings for FY21.

Shares of Adani Gas jumped as much as 18.4 percent on Monday reacting to the announcement compared with a 0.26 percent rise in the NSE Nifty 50 Index.

Adani Gas’ Stock Jumps Most In A Year After Total Agrees To Buy 37.4% Stake

The deal will give Total access to India’s natural gas market and support its drive to become one of the world’s top LNG firms. India, home to cities with the world’s most toxic air, aims to lower its reliance on fossil fuels to curb emissions. The nation’s looking at more than doubling the share of natural gas in its energy basket to 15 percent in the next few years and is giving major push to city gas distribution projects.

Total, in October last year, was in talks to buy up to half of Adani Group’s stake in LNG projects in Gujarat and Odisha, PTI had reported quoting people aware of the development. Adani is developing liquefied natural gas import terminal at Mundra and Dhamra, Odisha.

Adani Gas’ joint venture with Indian Oil Corporation Ltd. is authorised to distribute gas in 15 states covering 71 districts with 68 large towns. The joint venture is operational in 13 locations with a large part of its business coming from Ahmedabad.

Board Composition

After the transaction, Adani and Total will have the right to nominate two directors each on the board of Adani Gas, according to the exchange filing.

The deal, Adani Gas said, will aid the company’s project execution. Apart from its earlier plan to setup compressed natural gas stations in India, the company said it plans to foray into fuel retailing by setting up 1,500 fuel stations across the country.

Watch | Adani Group CFO Robbie Singh speaks to BloombergQuint.

Here are the edited excerpts from the interview...

Can you enumerate how the structure will shape up and its timeline? What would this deal mean for Adani Gas?

The transaction timeline is about mid-January to end-February primarily on account of meeting statutory requirements which are procedural in nature. We expect that once the transaction is completed, then Total will end up with 34.4 percent, Adani family’s interest in Adani Gas will be 37.4 percent and we’ll have a free float in the market of about 25.2 percent.

From an overall perspective, we’ve been working on our gas distribution and integrated gas utilities strategy for the last 18 months or so and this has been a part of the discussion. So, these particular transactions have been 12 months in the making. So, it’s been a tiring time for the team. Although, they are not here so I get to speak for them. But it’s been a 12-month journey.

So, we are very pleased that one of the global majors in gas and LNG is combining with one of the infra majors. So, from a strategic aspect, it’s a very good marriage. We have demonstrated that we can execute on the ground in infra and we’ve done it for the past nearly three decades now. So far, for a large infra group in India to marry with a large global gas and LNG player is an excellent outcome for us. This gives us a chance to showcase the Indian infrastructure to the world and also gives confidence to global investors that, from infra point of view, India still is a good story to cover.

What happens to the board composition within Adani Gas as a result of now? Are there being two equal partners? Are there any agreements for the same already done?

Yes, the normal agreement in a transaction of this nature is that Total will also have board representation and that would be equal. Then there are normal reserve matters that you are required to go through; keeping in mind the requirements of the company’s law and listing requirements that are imperative for both parties to observe.

Would you enumerate what this deal means for Adani Gas? What does this large, equal partnership bring to the table in terms of the global expertise that Total brings? Any details thereof, anything you can share with us?

No, it’s largely more of a strategic development. The team led by Suresh is a very competent team and the company itself is a profitable, calm entity that’s fully funded for its level of growth.

But what this transaction demonstrates is that, from a governance and compliance perspective, a wholly grown Indian company primarily owned by one family, can also be seen to meet with the governance requirements of a publicly-traded company in an OECD environment. So, I think that is a bigger aspect to this. That there is the journey that Indian corporates; and in the particular case, Gautam and Adani family have taken. That’s the bigger play here. Because as you rightly pointed out it’s not about that, it’s a secondary trade. It doesn’t change the balance sheet of the company.

So, from the balance sheet point of view, the company is a very well managed. It’s entirely a strategic game plan for both Total and Adani—for us, giving access to a global resource major and for them, to have access to the largest Indian infrastructure in a fast-growing market.

What do the next two to five years look like in terms of what’s Total bringing to the table? Did you have any plans of your own without Total coming into the picture in the first place? How does this whole business of Adani Gas change from what it is right now? Will its different verticals contribute to the overall percent? What will this become in the next five years?

So, the investment plan does not change because of this transaction. Effectively, what it does is, it solidifies certain aspects of the transaction. So, Adani Gas is primarily a distribution and retail business. We have, as we had previously announced, another joint venture with Total on LNG and terminals. Now, if you look at both as a portfolio, then this becomes an integrated gas utility. From procuring gas, all the way to distribution to the final customer.

So, from a numbers perspective, Adani Gas is committed to its plan which is about Rs 7,000 crore. This will happen over the next 10 years. Now, that plan continues. What it does for Adani Gas is that it gives them access and ability via Total to better manage a procurement plan. As Total is a major global player, this deal will now give us access to procurement on a very competitive basis. So, from an integrated basis, this gives us an ability to create; for both Total and Adani families, a genuine, integrated gas utility in the country.

What about the business? Does it change from what it is right now in any way in terms of contributions? Does the business look different materially in the next five years? How do you fund all of the plans that you have?

Yes, so one part of this transaction is that both parties are committed to funding the equity requirement needed for the completion of the end-to-end integrated gas utility. The other aspect is that we are currently in discussions with banks for specific debts that will be required for this.

So, that is well underway. So, just on that point, the business plan does not alter because of this transaction. This transaction will happen because there’s a very viable business plan that supports it. That is why it interests Total and us. From our point of view, we will have the procurement strategy and ability to create an integrated gas utility. From Total’s point of view, this is a move away from upstream into downstream.

So, both agree that the business plans are symbiotic and Total thinks that the business plan that Adani Gas already has is worthwhile. We think what Total brings to the table is worthwhile. So, nothing changes from that perspective.

As a company would you go out over the next five years and try and acquire more geographical areas that might be capital-intensive and margin-dilutive in some fashion or would you look to penetrate the areas which you are already entrenched in? Is it because those are severely under-penetrated areas or is it a combination of both?

This is a regulated business. So, the regulators have to agree that if the new geographical area comes up, they call it the new ‘GA’. To that extent, if the new GA comes up, then naturally, we are interested. That’s the continuation of our business. Our current GA plan is to continue as per the requirement under our licences to develop those in the appropriate time and the right capacities. So, what this does from that aspect, what this transaction does is, naturally it exposes the company to a larger banking group because of Total’s presence and not just our banking group. So, therefore, it expands the financial markets that we can access. So, what we can expect is, to the extent that both of us commit to the strategy, Adani Gas Board would be looking to expand.

You mentioned briefly about how you’re in talks with bankers to raise the necessary debt, etc. How’s the balance sheet looking as of now and would you be comfortable in both aspects of debt and equity in order to be able to fund these aggressive plans? Would you in the near term need to raise any kind of equity capital in order to fund these Capex plans that you have?

No, we are fully funded from the equity perspective. So, we are committed to funding capital expenditure as part of this agreement. Beyond that, we don’t (commit) unless the entity expects Adani Gas to grow faster than what is expected. So, from a debt-equity perspective, all I can say at the moment is, by implication a futuristic statement.

From the perspective of Adani’s portfolio, the key infrastructure verticals are Adani Ports, Adani Transmission, Adani Power, Adani Green and Adani Gas, if you’ll notice that three of our verticals, Adani Ports, Adani Transmission and Adani Green energy- are sovereign equivalent issuers. Their credit rating is the same as that of the Government of India. Therefore, whatever we do our objective always is to have our companies to that level. That is the objective of Gautam Adani. Being in infrastructure monopolies, we naturally should be as close as possible to sovereign equivalents. So, therefore, we are publicly committed to maintaining conservative leverage, commensurate with high G-ratings.

Would you want to stick with these leverage ratios that you’ve spoken about or would you need to, therefore, raise equity in order to fund this Capex? Because Rs 6,000 crore is not a chump change, let’s face it.

Yes, but we’ll stick to our public statements of maintaining adequate leverage which keeps us our customer’s investments safe.

Okay, one final question and on Adani Gas. If I look at the last two-three years and the CAGR for the last two years, revenue and PAT growth have been higher. I think, 25-odd percent for PAT growth. Do you reckon that now, at a slightly heightened base, but with the aggression in the plans that you have, you could enumerate what you’ve done in the past or would you like to just trickle it down a bit?

I think this question is more appropriate for the CEO and CFO of the vertical. We certainly are committed to investment and would not be committed to an investment if it’s not meeting a required rate of return and hurdles. So, there is an expectation of double-digit growth.