Daring To Dream

It is like a mini Chinatown at remote Mundra on the coast of Gujarat state, where around 140 Chinese workers live. Ajay Purohit, project manager for the 1,320-megawatt (MW) Adani power plant at Mundra SEZ grapples with a problem that’s chalked in Chinese at the status board, where the project schedule is updated on a daily basis.

The Gautam Adani-led Adani Group — based in Ahmedabad, Gujarat — has hired Chinese companies such as Sichuan, Shandong, Sepco and their labour force for the engineering and construction activities of the proposed 4,620-MW power plant that will come up at Mundra.

The power projects — just the starting point of a plan that proposed to build a generating capacity of 10,000 MW in the next five years — are the most visible signs of Gautam Adani’s vaulting ambition: that of converting his trading company into a conglomerate with big interests in power generation, ports, logistics, township development and energy, including oil exploration.

What characterises Adani is the scale of his ambition. “I want to be No.1 or No.2 in any business I get into,” he says. “By 2011, Mundra will be the No.1 port in India in terms of revenue, and handle the largest volume.” That is currently his flagship company, the Mundra Port and Special Economic Zone (MPSEZ) Ltd.

That is easier said than done. But Adani’s audacity has persuaded some parts of the Gujarati language media to refer to him as the next Dhirubhai Ambani, who was a hero to millions of people in that state, and who built a globally competitive industrial house from relatively humble beginnings as a cotton trader.

For Adani, realising his dreams will require three things: timing, execution capability and finance. Bringing projects on stream at the right time in the economic or business cycle is crucial to success, and it’s a combination — often indistinguishable — of instinct and luck.









EXECUTIVE SUMMARY





Adani has big plans for power

generation, ports, logistics,

townships development and energy





Apart from the scale of

implementation, his biggest

challenge is tying up finances

for the projects







“Large-scale execution requires planning to meet deadlines: and that’s about men (and women), materials and management,” says the head of a securities firm who did not wish to be identified. “Finally, large-scale projects will need loads of money. And on all these fronts, there is no one today who comes even close to the late Dhirubhai Ambani.”

Dream Or Delusion?

The Adani Group is already perceived as one of the largest companies in Gujarat. It had a mnemonic-like target that captured its goals: Rs 12,000 crore in profits after tax by 2012. But today, in the face of the economic slowdown, that number has been pared down to Rs 9,000 crore. Today, the group makes 5 per cent of that. Not exactly the most inspiring numbers.

Sitting in his Ahmedabad office, Adani looks as far from a delusional man as you can get. The word ‘shree’ on the office wall is an invitation to Lakshmi, goddess of wealth and prosperity; there is also a backdrop in paintings on the walls chosen by his wife. “I don’t believe in too much of analysis,” says Adani. He goes by pure gut and risk-taking.

How does a trading company — in petrochemicals, coal and agricultural products — morph into a major player in the infrastructure sector? By being aggressive, says Adani. Before the MPSEZ, the group had never undertaken any project-like venture, nor did it have the capability in-house. But it succeeded in setting up the Mundra Port nevertheless, and ahead of schedule.

MPSEZ and Adani Enterprises Ltd (AEL), a listed trading company, are the foundations of Adani’s (future) business empire. There are several other subsidiaries ( Click here to see table) that are ventures into seemingly related businesses: logistics, real estate development, energy, even oil exploration.

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But the big one — the one that will affect Adani’s fate and place in Gujarat’s business history the most — is power generation: to wit, in Adani Power Ltd. For Gautam Adani, this will be his toughest test yet: to plan, fund and execute large power projects and complete them on schedule. Given the lack of experience in projects thus far, do his ambitions — current and future — look like overreach?

Poonam Nisha, an anayst with ICICI Securities in Mumbai is not sure about Adani’s aggressive expansion spree. “The company does not have any prior experience in many segments it is venturing into, such as power generation and real estate development,” she says. “Infrastructure is also highly capital intensive.” Financing his dreams in a difficult environment is probably going to be the hardest part.















GAINING HEIGHT: Adani claims that Mundra port will become No. 1 in India by 2011 in terms of revenue

(Pic by Subhabrata Das)









The Power Gamble

In the next eight months, the first stages of his power plans — Mundra I and II, accounting for 1320 MW — will come on stream. A long-term — 25 years — purchase agreement (PPA) for 3,500 MW has already been signed with the Gujarat and Haryana state utilities for the offtake of generated power.

Mundra I and II expected to be completed on schedule. Here, Adani seems to have taken a leaf out of the Ambani playbook. Dhirubhai’s backward integration into petrochemicals was impeccably timed, but then so was that of his competition, like Orkay. “The difference was in the execution, which is why Orkay is no longer there,” says the head of an investment banking firm based in Mumbai.















GRABBING THE OPPORTUNITY: Importing

coal through Mundra port has enabled Adani to

invest in power sector too

(Pic by Subhabrata Das)







“Coal linkage is the biggest challenge for Indian power projects,” says Sunil Gutte, joint managing director of the Rs 300-crore Sunil Hitech, a company that provides fabrication and erection services for power stations. “The proximity of power plants to ports or coal mines — for economic efficiency — is there for most Adani projects.”

But the weakening economy has slowed down the demand for his power. The price of commercial power has also been falling as industrial production has fallen, and lowered the demand for power. Adani Power’s PPAs — for Mundra I and II currently — do not come into effect for almost another year.



Energy prices for bulk buyers — the merchant rates — have been falling, as demand has slumped. “The peak load deficit has fallen from 18 per cent to 14 per cent today; the merchant rates have corrected 30 per cent,” says Girish Solanki, power industry analyst with Angel Broking, a Mumbai-based firm. “Merchant rates are currently at Rs 5 per kilowatt hour (kwh) on an average, down from Rs 8.”

What about the next stages in the grand power plan? Getting finance for them will be a steep challenge. The original Rs 43,139 crore for 9,900 MW is now pared down to roughly Rs 30,000 crore for 6,600 MW. Adani will have to renegotiate with his banks and other investors in the new conditions, besides having to still find about Rs 3,000 crore in equity money. The rupee depreciation will also skew costs for imported coal; the original exchange rate was Rs 40 in the cost assumptions.

S. Ananthakrishnan, executive director of IDBI Bank says, though money may not be an issue for the right candidate, an increasing lack of confidence in many large projects is prevalent due to worsening of corporate results in the fourth quarter and which will likely continue into the first quarters of next year. Will Adani qualify?

“Apart from the slowdown, several captive power projects have also come on stream recently,” says a power industry analyst in a leading brokerage firm who did not wish to be named. “That may result in capacity additions exceeding current demand growth, which could potentially affect Adani Power’s return calculations.”

Safe Harbour In An Economic Storm

Will the MPSEZ — which seems to have been the first building block — serve as a shock absorber? Adani considers MPSEZ as his talisman. Acquired originally for manufacturing salt and exporting commodities, Adani made major investments in development and in building infrastructure linkages to exploit the natural advantages of the area as a port.

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PIONEERING EFFORT:

Vikram Sarabhai was one

of the first Gujaratis who

stood out for his efforts

on technology and

development (ABP)









He then went ahead and took a bigger risk: he acquired about 100 square kilometres around the port area, admittedly at very reasonable prices. Apart from handling 29 million tonnes of cargo through Mundra Port, the SEZ will be connected by air, road and rail — even an oil pipeline, since nearly a quarter of the cargo handled through Mundra is crude — making it a major hub.

Adani may have been right on the timing, execution and fund-raising for the Mundra ports business, but the downturn in the economic cycle is likely to have an impact there. Lower global trade stemming from the global recession could have serious implications. But Adani is not scaling down his dreams in any way: Ameet Desai, executive director at MPSEZ, says that the port expects to be handling 100 million tonnes of cargo by 2012. “In another decade that could go up to 200 million tonnes a year, and could even put us among the Top 10 ports in the world,” he says.

Adani still plans to beat the largest port in India — JNPT — and expects to handle 100 million tonnes of cargo by 2012; MPSEZ handles 29 million tones of cargo today and is one of the ten largest ports and one of the fastest growing ports in the country. They plan to make a profit of Rs 2,000 crore from this venture, even if he only makes a tenth of that today.

But how? Demand is not likely to rise in the next two years; there are chances it might fall further, according to many economists. “We are not super optimistic but realistic, and understand that our rate of growth in volumes might fall in the first quarter of the next fiscal,” says Maya Sinha, deputy chairperson of JNPT. “But we will do our best to keep it positive.”

Business from the SEZ and port is part captive: Adani Power plans to put in 4,620 MW from coal-fired plants — discussed above — that would need coal imported by Adani Enterprises and stored at the coal terminal; the coal will also be used by Tata Power’s 4,000 MW plant in the vicinity. Maruti Suzuki has been assigned a 35 acre car stockyard for its exports, and a textile park has been similarly allotted land in the SEZ.

















ICONIC FIGURE: The

rags-to-riches story

of Dhirubhai Ambani

has become a part of

folklore in Jamnagar,

Gujarat







Trading It All Away

What kind of role will the core business — trading — play in his future conglomerate? For one thing, Adani says, the power trading arm in AEL serves as his hedge against adverse movements in the economic cycle that impact his infrastructure investments: it can help sell the power that Adani Power generates to the various state electricity boards and grids. But others who are in the power trading business are less sanguine.

“Most of the independent power producers like Tatas and Adanis enter into PPAs based on long-term rates or short-term rates, which are more volatile,” says Deepak Amitabh, director-finance of Power Trading Corporation. As much as 70-80 per cent of the power to be produced by Adani will be sold on a long-term basis, which takes care of the financier’s risks, ensuring a stable cash flow back. Around 20-30 per cent will be available for trade. This is the model followed by NTPC for its ultra power projects.

AEL also trades in a number of commodities, including edible oils and other agricultural commodities besides coal. While the revenues of AEL add size to Adani’s balance sheet, they do not generate enough — the large revenues are matched by large purchases — to meet the large capital expenditure needs of infrastructure projects.

Adani’s hedge — it’s a double hedge in a way — is also intended to work on the fuel sourcing side of his power project. By acquiring coal mines in Indonesia (all of Adani’s power projects are coal-fired) and domestically — or at least a significant interest in them — Adani has an assured supply of coal for Mundra.

He has coal supply agreements for another project at Tiroda in Maharashtra, too. His logistics firm — Adani Logistics — is intended as another part of the hedge. Fuel — coal in this case — and its transportation usually account for 35 per cent of the operating costs of power plants. “We are the best-placed player across the value chain to execute power projects,” says Adani with total assurance.

But coal is environmentally unfriendly, and faces the prospects of a carbon tax being levied on coal power projects that could change the economics of the business. Adani remains supremely confident that for power-hungry India, that will not matter. He can mitigate the environmental effects with appropriate corporate social responsibility (CSR) initiatives, he says. Perhaps that is part of the solution, but thermal power is subject to high degrees of regulatory shifts that could be expensive.

Land, Land, Land

Andrew Carnegie once said that 90 per cent of all millionaires become so through the ownership of land; Adani is no different. When the stockmarkets reached dizzying heights in 2007, Gautam Adani was a billionaire in dollar terms. Things have changed since then, but Adani remains interested in real estate development.

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YOUNG PLAYER:

42-year-old Sudhir

Mehta, promoter of

Torrent Pharmaceuticals,

is another bright

Gujarati entrepreneur









From an integrated township project in Gujarat (Shantigram) near Ahmedabad, to an expensive commercial complex at the Bandra Kurla Complex and the erstwhile Khatau Mills in Mumbai, Adani has entered into joint ventures with local players for his realty play. The plans include developing 105 million sq. feet of commercial and residential space in Mumbai, Mundra, Ahmedabad, Surat and Cochin.

Analysts say that Adani’s real estate business is capable of becoming as large as Omaxe Housing or Purvankara Projects, two of the top 10 realty firms in India. As Poonam Nishal of ICICI Securities says, “Roping in local partners for project execution and leveraging their expertise reduces the risk for the Adani firm.”

The land has been acquired at historically low costs and unlike others, Adani may not face the kind of money pressures that other purely real estate companies are facing in today’s circumstances. But sluggish real estate demand and high interest rates could force a revaluation of Adani’s assets. That could put pressure on the company’s ability to raise the nearly Rs 7,300 crore they need to complete execution.

An Adani spokesperson confirmed the development that the group is planning to merge its three SEZs to do away with the administrative overheads and cut down costs. The request to the government to merge SEZs makes economic sense. “If you have multiples SEZs, it means many development commissioners, custom offices and related administration issues,” says a senior official from one of the largest SEZs in Maharashtra. “When unified, it is easy to take decisions for a CEO in terms of expansion and investment.”

Adani plans to merge his three separate parcels of land into a single SEZ, which could cut some costs. Will that be enough? “A merger of SEZs into a single entity makes a lot of business sense in a market scenario where the focus is more on ease of operations and sustainable financial models rather than reckless, cost-intensive expansion,” says Anuj Puri, chairman & country head, Jones Lang LaSalle Meghraj. “It is also a suitable method of overcoming other limitations, such as the requirement of separate government clearances for every SEZ.”

Money, Money, Money...

In the end, it all boils down to money and the ability to raise it in what are rather difficult circumstances. Chaula Desai, associate director at Ernst & Young, the global consulting firm, points out that the credit crunch could have a long-term impact on the financing of power and other infrastructure projects.

For just the power projects, Adani still needs to tie up financing for his capital expenditure needs, including for his equipment. “Private equity players would like to see long-term PPAs in place first before they bring in money,” she says. On the plus side, Adani has them for Mundra I and II.



In a research report, Edelweiss Securities, a Mumbai-based securities firm, said that the debt-equity ratio for Adani Power’s projects is 84:16, while the regulatory requirement is 70:30. “At, some point, the company will have to rework this strategy,” the report says. Adani Power did have an initial public offering planned, but market conditions have put that on the back burner.

















Dhirubahi Ambani’s amazing fund-raising capability would have been a phenomenal asset here. His knowledge of stockmarkets, his ability to keep the faith among investors (both institutional and retail) and brokers alike, and his personal charisma were critical to the success of Reliance Industries in continuously raising capital for its then capital intensive projects.

Can He Do It All?

In addition to the getting the so-called 3Ps — ports, power and property — to all click, Adani has more balls in the air: from oil exploration, logistics, energy (meaning natural gas distribution), edible oil refining and trading, to building a supply chain for agricultural commodities. He will need all the skills of the great conjurers to keep his eye on all of them.

Of course, he could let a couple go. He has shown no qualms of getting out of businesses which he cannot have a dominant place in; he sold his retail business to Reliance Retail, for instance, when he found he couldn’t compete in a difficult business.

From being largely Gujarat-based, Adani’s ambitions of expanding his business empire to the rest of the country could be his biggest challenge yet; he has to get the timing, execution and fund-raising to all come together at the same time. And then there is the one thing that set the late Dhirubhai Ambani apart from his contemporaries: his relentless drive.

If Gautam Adani can pull it off, he will make history of sorts. Men like Ajay Purohit, who shifted base to Mundhra, and in the heat of a midmorning watches a Chinese translator scribbling the project schedule for him in English just below the Chinese letters on the blackboard, are banking on it.



With inputs from Mahul Brahma

sreevalsan (dot) menon (at) abp (dot) in