The share of Adani Green has been on a constant rise from the past few days. Last year in August 2019, the share price of the firm stood at Rs. 45 which increased to Rs. 115 after 3 months in November 2019. The price has been constantly rising from then and is now near Rs. 1100. The stock price has increased by 2344% since August 2019. The stock has given an annual return of 856% return. Due to the continuous increase in Share prices, the market capitalization of Adani Green now stands at about a whopping 179000 Crore. Adani Green is now part of India’s top 20 biggest firms and recently the firm has also been made a part of Nifty Next 50.
Alot of investors have invested in Adani Green seeing such an extraordinary ordinary growth of the stock price. The company has been operating for a long time, however the share price started rising rapidly since only one and a half years. This creates curiosity about the reasons behind the performance of the firm on the stock market.
But first let us briefly try to understand why the price of any share increases. The increase of share price has to do with the demand supply economics. When the demand for a share starts to increase, the price of the share is also bound to increase. Now comes the question that when can the demand of a stock increase. The following factors cause the price of a share to rise:
- Company Related Factors: Any positive news regarding the company may trigger the share price. News can be in any form for eg. New investment in firm, bagging new deals, announcement regarding increase in profit, launch of new product etc.
- Industry Related Factors: If a particular industry starts growing or is gaining a lot of attention, the share price of all the companies in the industry will increase.
- Economic Factors: The overall growth of the economy can lead to high investor confidence which drives up the stock prices.
Now that we have some understanding about the reasons for an increase in stock price, Let us look at what is driving the Adani Green stock price. Some of the key reasons for the rising share price of Adani Green are:
- Solar Energy Corporation of India (SECI Deal): Recently, in June 2020, Adani Green bagged an 8 Gigawatt project from the SECI. This is a manufacturing link solar contract and the total size of the project is Rs. 45000 crores. The share price started increasing at a rapid rate as soon as the company bagged this contract, to be precise, the share multiplied 3 times in number.
- Low Public Shareholding: One of the reasons behind the sudden change is that Adani Green has a very low public shareholding. Adani Green’s public shareholding is only 2.4% which is very less when compared to the market average. A low public shareholding in any firm leads to high fluctuations in the share price. This is because such scrips have very few buyers and sellers and hence as soon as the trading volume from any side starts to increase, the share starts to fluctuate rapidly. This was also the case with Ruchi Soya which had only 1.1% public shareholding.
- Optimism: The third reason is that people are very optimistic about the firm. The world is moving away from non-renewable sources of energy. The past few years have seen rapid growth in renewable energy. At this time Adani Green is heavily investing on its wind and solar energy operations which makes people believe that soon Adani Green might become the world’s biggest company in this sector. This investor confidence is one of the key reasons for the development of the share price.
- Financial Performance: The firm booked losses for the past 2-3 financial years, however, the firm turned profitable in the March 2020 quarter. Seeing this, the investor confidence in the firm increased and the stock started seeing huge buy volumes leading to extraordinary increase in prices.
There are some aspects of Adani Green which investors need to be a little cautious about
- The initial deal between Adani Green and SECI involved a Guaranteed Power Purchase agreement which means that SECI will buy energy produced from the plant at a certain rate. However, the SECI pulled out of this in the final contract which means that Adani needs to look for another buyer to buy its energy. This increases firm risk in case it is not able to find a buyer.
- In the last 1.5 years, that revenue has decreased and not increased. The revenue in January – March 2019 quarter was 681 crores, which reduced to 612 crores in the recent July-September 2020 quarter. The business performance is not supporting the increase of the share price.
- Even after being profitable, the profit of the firm seems to be decreasing. The profit in June 2020 Quarter was 45 crores which reduced to 19 crores in the September 2020 quarter.
- The debt of the firm is continuously increasing. The debt has increased by about 4-5 times in the past 4 years and currently stands at Rs. 19000 crores. The firm needs to make profit and start reducing debt otherwise it will prove to be a big burden for the firm.
- Valuations: The company’s valuation is very high when calculated through Benjamin Graham’s Valuation formula for Growth Companies. The formula yields a valuation of Rs.33984 Crores whereas the Market capitalization of Rs. 179000 Crores is quite high. This makes the stock overvalued from Graham’s point of view. Even Peter Lynch’s PEG ratio approach gives a similar conclusion. The PEG ratio of a firm should be ideally less than 1, however, in the case of Adani Gree, the PEG ratio is 116 suggesting that the stock may be overvalued.
In Conclusion Adani Green seems like an attractive company with a bright future provided it is operating in a sector which is being promoted on all fronts. Also the financials of the stock seem interesting as the company has started booking profits and have bagged some big projects. However, Investors must look at the valuations as it seems that the share might be overvalued.
| Dhruv Patel | Hitanshu Bansiwala | Pooja Patel | Samarth Patel | Vatsal Zaveri |