How much difference a single week can make. If one were to calculate the three-year CAGR returns of the stock of Adani Enterprises till last week, it was 140 per cent. But extend it by a week, it drops to 91 per cent. What will it be in a week or two from now? As this drama in stock price unfolds, investors would do well to take cognizance of a famous law in economics, known as Stein’s Law. According to this law, ‘if something cannot go on forever, it will stop’. Share prices cannot keep compounding at ludicrous rates. At some point of time this will stop, and mean revert. However, impact on share prices apart, what does the withdrawal of the FPO mean for the fundamentals of Adani Enterprises?

As per its RHP filings, Adani was planning to raise ₹20,000 crore in two or more tranches — ₹10,000 crore in first tranche, and the balance in one or more subsequent calls in FY24-25. Out of the first tranche, maximum amount ( ₹4,165 crore) was intended to be used towards repayment of debt. Out of the balance, ₹3,335 crore was intended for capex relating to green hydrogen, airport and expressway project, and the rest for general corporate purposes.

Now, the unfavourable turn of events puts the company in a bind. Over the last week, company and group’s reputation in the credit markets has taken a hit, although till date the company/group have a  good track record when it comes to repayment of borrowings. Some of the debt of group entities have been put on ratings watchlist; however, the ratings itself has not changed. Sometimes such episodes tend to accentuate by disproportionate portions the challenges a company faces. Adani Enterprises faces this risk now. Another thing to be noted is that some of the repayment of borrowings (full extent not clear) planned from FPO proceeds was towards borrowings from a group company – Adani Properties Private Ltd. Thus, how this will impact group cash flows is a wait and watch.

As far as AEL is concerned, the immediate challenges it faces is that its borrowings will remain high for now. Its interest coverage ratio in 1H FY23 was at 1.7 times, up from 1.37 times in FY22. However, more importantly, this is the thing to note — if its 1H finance cost is annualised, it implies a 46 per cent Y-o-Y cent increase in finance costs. Now, if for any reason there is any downturn in its main business — Integrated Resource Management, which is primarily dependent on buoyancy in coal mining/trading business — then, its profits can decline, but finance costs will remain unmoved unless debt is repaid or interest rates come down. Thus the risk of interest coverage ratio getting to uncomfortably lower levels remains. The fortunes of the company depend a lot on the momentum in its main business sustaining. Whether it will, amidst risk of global slowdown, partially offset by China re-opening impact, is a wait and watch.

This apart, the FPO u-turn also raises questions on what exactly is going to be growth for the company. Much of the hype on valuations was predicated on company having assets that can generate growth. But without adequate investments, that growth is not going to be forthcoming. Without capital raise, company cannot make the investments.

Bottom line: the withdrawal of the FPO complicates affairs for AEL.