Behind the Stock: Adani’s entry into copper mining goes against group’s recent strategy

Behind the Stock: Adani’s entry into copper mining goes against group’s recent strategy

The Adani Group has managed to stage quite a turnaround since the beginning of the pandemic, by shifting the entire focus of its business strategy.

The billions of dollars of investment brought in by the group in its airport, data centers, city gas distribution, ports and renewable energy verticals has convinced the stock market that the conglomerate is preparing itself for the future and at the same time reducing the cyclical nature of its revenues.

In doing so, Gautam Adani took a leaf out of Reliance Industries’ playbook, as he shifted the focus of the conglomerate away from the volatile business of commodity trading and coal towards entities that can generate annuity-style revenues, just as Mukesh Ambani did with a shift towards digital services and telecommunications.

The pivot away from cyclical business has led to greater appreciation among investors of what Adani group is trying to build and has propelled Gautam Adani into the top echelons of billionaires in the world.

Yet, Adani remains an opportunistic businessman and he has now set his sights on the global copper business.

This past Thursday, Adani Enterprises, the flagship company of the Group, announced entry into the copper mining business through the incorporation of a subsidiary named Kutch Copper. The move appears solid on the face.

Copper is expected to be in high demand in the post-pandemic world with predictions from Goldman Sachs to Trafigura that the industrial commodity is in a new super-cycle, such as the one seen between 2004 and 2011.

The commodity has doubled in price to nearly $9,000 per tonne since hitting multi-year lows in March 2020, and Trafigura expects the price to top $15,000 per tonne in the coming years driven by demand for the metal in production of environmentally-friendly technology and products like electric vehicle.

In India, there aren’t many major players in the industry, barring Hindalco Industries, Vedanta and Hindustan Copper. Production capacity for refined copper has been hamstrung in the past few years after the closure of Vedanta’s Tuticorin plant, which means there is an opportunity for a new player to enter to try and meet the supply deficit.

Despite the opportunities that the copper business may represent, it is still a highly cyclical business and similar to the group’s earlier avatar. Cyclical businesses are not rewarded as sweetly by investors as recurring revenue businesses, simply because the former leads to uncertainty in terms of predicting future earnings. Investors despise uncertainty.

In that context, Adani Group’s entry into the copper business goes against the group’s recent strategy of minimising earnings volatility and dependence on business cycles.

It may not entirely alter the optimism that investors have shown on the new direction of the conglomerate’s future and the investment in the copper business may reap rewards in the short term given the benign market conditions, but it will force investors to think if the uncertainty they need to be worried about is not about the nature of business, but the business strategy itself.

Adani Group’s investments in airports, ports, data centers and city gas distribution businesses had made investors look at the conglomerate in a different light: a group looking to reduce earnings risk and improve return profiles. Throwing a dash of copper in that stew is akin to pouring salt in a chocolate sundae.

Investors, therefore, will hope Gautam Adani’s latest move is just an exception, and not the rule.

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