Shares of Adani Enterprises rose to their all-time high of ₹3,432 in morning trade on BSE on September 5.
The stock, however, erased gains and ended 0.29% lower at ₹3,347.05.
The stock has jumped over 96% in the calendar year so far against a one percent gain in the benchmark Sensex.
The stock has been on a streak of hitting fresh record highs of late. For the first quarter of the financial year 2023 (Q1FY23), Adani Enterprises posted a consolidated net profit of ₹469.46 crore compared to ₹271.46 crore in the same quarter last year - registering a growth of 72.94%. Consolidated revenue from operations came in at ₹40,844.25 crore in Q1FY23 - rising by 3.25 folds or 224.71% from ₹12,578.77 crore in Q1FY22, reported Mint.
The company’s main businesses include airports, road construction, coal, and defence and it is also strengthening its presence in newer areas like green hydrogen and data centres.
The latest development is that the stock will replace Shree Cement to be the part of key index Nifty50. After Adani Ports and Special Economic Zone, Adani Enterprises will be the second stock of Adani group companies to be included in the Nifty50 index.
The potential impact on Nifty50
Adani Enterprises' entry into the Nifty50 index has raised concerns over the high valuation of the company; investors are worried that its inclusion in the Nifty50 will mess up the return of the index.
"One concern is the high valuation of the company, which has seen its market capitalisation grow by 10 times in the last two and a half years. In the long term, this may not be sustainable, and the stock may see a correction in the midterm," Pranit Arora, co-founder & CEO of Univest said.
The high debt of the group is also a concern.
Media reports widely quoted a Credit Suisse report which said the recent acquisition by the Adani Group of cement maker Holcim’s India businesses is expected to add another ₹40,000 crore to the conglomerate’s debt, taking it to approximately ₹2.6 lakh crore.
The debt level of Adani Group has increased from ₹1 lakh crore to ₹2.2 lakh crore over the past five years as it has been on an expansion spree in its business.
In the last five years or so, the group has increased investments in the ports business, green energy and venturing into newer areas (Adani Enterprises) such as airports, roads, data centres, etc.
Recently, Adani group launched a hostile takeover bid of the media firm NDTV, with an open offer to acquire an additional 26% or 1.67 crore equity shares for up to ₹493 crore.
Arora pointed out that while a lot of analysts caution about the company's being over-leveraged being a risk factor for investors, the mix of brick and mortar as well as new age businesses gives the company an edge in terms of balancing risk.
"The Adani group built up the debt to go on an acquisition spree in recent times including renewable energy, power, cement, and media, with the latest being its bid to buy a controlling stake in Indian news network NDTV," said Arora.
"The stock of Adani Enterprises has nearly doubled over the last six months, moving much higher than the index in the same period. With inclusion in the Nifty50, this will be one of the high beta stocks in the Nifty50 and will play a decisive role in the returns of the Nifty, particularly if there are large swings in the stock price," Arora added.
Rahul Goud, Research Analyst - Equity Research of CapitalVia Global Research is of the view that When Adani Enterprises will be added to the Nifty50, the counter may see a net inflow of about $213 million, while Shree Cement would see an outflow of about $87 million.
"Inclusion comes at a time when the group is 'seriously overleveraged,' and its numerous investments in capital-intensive sectors could present long-term dangers to investors. Analysts have noted pressure on the conglomerate's credit ratings and profits," Goud said.
"Given its high valuation and significant group debt, we advise against purchasing the stock at the current price. In our experience, anytime a high-debt stock has been included in the Nifty50, that stock has lagged peers, and as a result of the inclusion, we may observe some impact on the Nifty50 returns in the years to come," said Goud.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.