He was Adani’s top finance guy. But his AIF doesn’t pick Adani stocks

Can you share your experience as chief financial officer of Adani group?

My first major work at Adani group was to work with the Adani port business, which we used to call Mundra Port and Special Economic Zone initially, understand the operations, bring some of the best information management practices and creating a robust organization on the financial management side.

We got foreign private equity investors in the company. I joined in 2005 and we achieved this in 2006 with investments from GIC and 3i. This was followed by ₹1,700 crore IPO. Our internal target was to do it in 2007, which we finished in November 2007.

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The plan, vision and direction of Gautam bhai (Gautam Adani) was to bring the company to the public markets. We were preparing ourselves to go public in terms of compliance. So, we got one of the Big Four auditors. We got some of the most reputed people on our board, the right advisors to prepare for the IPO.

In hindsight, had you waited for one more year, would it have been very different for the IPO?

Yes, it would have been very different. And as a group, we were already building power generation business. We were caught in the crossfire of global financial crisis of 2008. Our Adani Power IPO, which was actually planned for 2008, was put on hold. So, we had to manage alternative sources of medium-term funding.

So, the projects continued to get implemented. And when markets gave us a window of opportunity in 2009, we brought Adani Power IPO to market at ₹3,100 crore of issue size, and market once again acknowledged the group’s ability to execute projects. So, that issue also got significantly oversubscribed.

Prior to that, 3i had reposed big faith in the power business by taking almost 9% of the company in December 2007.

So, which were the Adani companies that you were responsible for listing in the public markets?

The four companies I was instrumental in, where I took lead responsibility, were Adani Ports, Adani Power, Adani Transmission (listing was done upon demerger from Adani Enterprises in 2014-2015). I was also responsible to list Adani Green Energy. So, of the seven Adani-bearing listed entities, I was responsible for four. Now, there are two more after acquisition of Ambuja Cements and ACC.

You would have seen numerous interest rate cycles in your tenure, and that matters a great deal to a company’s expansion. So, how you were able to navigate those cycles?

When you are working with infrastructure projects, which by definition are long-gestation projects and extremely capital-intensive, you always look for the right mix of equity and debt. You try and take debt hopefully at the lower end of the rate cycle, but you won’t be always able to catch it.

You always look for longer-term debt, linked to repo rate, marginal cost of funds-based lending rate (MCLR) or SBI prime-lending rates (PLR). Infrastructure projects cannot even afford medium-duration rates.

Initially in the early part of the first decade of the century, banks were not very inclined to give more than eight-nine years of debt. In 2014 and in 2015, Reserve Bank of India (RBI) changed that.

But in India, there is still a bit of inconsistency. This is because between 18-year or 20-year cycle will still require you to do annual amortization of your outstanding amount. Whereas in the international bond market, which is where we started getting investment grade rating in the port company and transmission company and now, the group has much stronger track record.

That is where you get 10-15-year-money, where you repay with a bullet at the end of the tenure and hopefully, you refinance that whole outstanding portion. That is the most amenable structure for infra projects and India is still far from that.

You managed the Adani family office. Can you tell us a bit about that?

So, the family office was set up more to ensure that the compliance practices and the information systems were brought almost in line with the prevalent corporate practices, a separate team, which would manage the projects in the private domain — the investment in the private domain on a completely detached basis — which had nothing to do with the listed group companies.

And, this is how the promoters envisioned it. Eventually, they would look at creating a corpus of the family, which is sort of removed from the main set of companies. Though much smaller, because the only income that promoters get is the dividend income.

And then, whatever investment decisions they take, whether in the private side or public side, other than the businesses of the group, they will be taken by a set of people through an established set of processes. So, in the early days when I set up the office, we talked to a few other family offices in India, and established some of these practices, so that it was a group of people who managed the family office’s affairs under different processes than how a corporate would normally be managed.

Tell us about your foray into alternative investment funds, with Anubhuti AIF.

So, we started this in December 2019. At that time, we had foreseen that our major thesis was to buy into companies, which offered the highest growth in earnings over the previous 12 months vis-a-vis their book value. If the company had a book value of ₹225 and earned ₹40, that was nearly 20% growth and we would juxtapose that with price-to-earning (P/E) multiple of such companies. So, we created a G/PE model, and looked for companies with highest G/PE ratios.

We would pick up one stock from each sector eventually after going through all rejection criteria. Leverage would be one such rejection criteria. So, if debt-to-Ebitda (earnings before interest, taxes, depreciation and amortization) of the company was more than 2.5 times, we will not invest, if the promoter holding was less than 26%, we would not invest in the company.

We have added two more dimensions to our investment philosophy because in the G/PE, you end up with companies which are necessarily trading at low trailing P/E. This would exclude all companies with high-growth prospects or high earnings growth, but are trading at higher P/E multiple and have promising 12-24 months’ cycle ahead of them.

So, to address this, we have now carved out another bucket in our portfolio, which we call fundamental. So, G/PE is about 50% of our portfolio, another 25% is fundamental and the remaining 25% is what we call opportunistic investment bets, where certain catalysts can potentially lead to re-rating of the stock.

For example, promoters might be taking additional preferential stake in the company given its improved prospects. That could be one indicator. Or a huge capex has been announced, which is likely to be funded from the current and the future earnings, and so huge equity value is getting created, which is like once in a lifetime opportunity. Or an acquisition that is so value-accretive that current ratios don’t seem to reflect the same, but it will get justified in the future ratios. We use the last 25% of the portfolio for such special situations.

You have a debt filter that avoids high leverage. At the same time, you have been part of a business group that has seen tremendous growth over the years and has taken debt and leverage on its books. Do you think the debt filter should be tweaked?

The debt-to-Ebitda in infrastructure companies can be as high as 3.5-to-4-times. In all other normal businesses, which are not as capital-intensive as infra businesses, it would be 2.5-to-3-times. So, the philosophy you take when you have certain types of projects, where your ability to manage debt comes from the fact that you have fairly high Ebitda margins. In infrastructure businesses, Ebitda margins can be very high. Like in the ports company, it’s always mid-to-high, 60s-70%. Most normal businesses, won’t have that.

So, the reason the infrastructure businesses sustain high debt-to-Ebitda is because they have inherently high operating margin, but that’s not likely to fit in the G/PE portfolio we do. Because, here you have an asset managers’ role, there you are playing the role of a risk manager and risk is given based on the business strategy. Here you are managing assets, which are third-party assets. So, these are the distinct situations that you have to be mindful of.

So, given your current model, most Adani stocks won’t fit into that?

Why just Adani stocks; high P/E stocks like FMCG companies, IT companies will not fit into the model. We have to be fishing for value all the time. And there, growth may come over 12-24 months and it could broadly multiply, but you have to wait it out and make the current selection.

How many stocks are there in your portfolio?

Our total stocks would not exceed 15, as we are currently structured. About 50% of our portfolio will have stocks based on our G/PE model, followed by 25% on fundamental and the remaining 25% on the opportunistic special situations. Our G/PE model runs on the NSE 500 universe. It throws up two-three stocks which are large caps, another two-three mid caps and another three that are small caps. The fundamental bucket is mostly from Nifty 50 universe, so you have large cap stocks there. The opportunistic bucket is mix of large cap and mid cap stocks. The overall split would be 20% large cap, 18% mid cap and 15% small cap.

Which sector are you bullish on?

We are normally sector-agnostic. But over the next 12 months, we like financial services and banking. We like auto and auto ancillaries. And we also like cement.

What kind of AUM you have now and what kind of AUM you are targeting?

We currently have over ₹200 crore in our AUM (assets under management), because we are less than three years old.

We have also been working on the other dimension of asset management, which is the advisory investment role, where we have modeled a portfolio comprising of large- mid-cap and small cap stocks, with an average holding period of about eight months over the last 12 months. So, that is going to be our second offering that we would take to potential clients over the next quarters. We would provide this under our RIA (registered investment advisor) licence.

What are your charges for AIF investors?

We charge only 1% of management fee on the contributed capital. We have a 11% hurdle rate, after which the profit-sharing comes into play. Our hurdle rates are unusually high compared to other peers in the industry, which offer 8-10% hurdle rate. After the hurdle-rate threshold, we have a 15% profit-sharing structure.

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