Why Adani exited the FMCG joint venture, Adani Wilmar

It’s not very often that a consumer-facing business wants to exit it. One look at the multiples of most players in the space answers the question. They are expensive picks and have zoomed over the last two years or so, on the back of higher disposable incomes and many product categories remaining at relatively lower penetration levels.

The case of the Adani group to exit its holding in food FMCG major, Adani Wilmar is not just odd but intriguing as well. Most of its money (it had a revenue of over Rs 51,500 crore in FY24) comes from edible oils, a category that offers high volumes and consequently large revenue but lower profitability (a net profit of Rs 171 crore for the same fiscal or a margin of just 0.33 per cent).

The company went public in February 2022 and with a well-set portfolio of brands in edible oils (Fortune being the most prominent) and foods, looked to be on the right track. This is really where the decision of the Adani group to move out has been a little hard to comprehend – it (Adani Enterprises) sold its 44 per cent stake, most of it (31 per cent) to Wilmar, its foreign partner and the other 13 per cent in the open market for a total of around $2 billion. Wilmar International is a Singapore-based entity and struck up a 50:50 joint venture with the Adani Group in 1999. In edible oils, it is the leader with a market share of 20 per cent.

Let’s consider a few points here. The bribery issue that hit the Adani Group last November has led to a perception that raising money, especially in the overseas markets, will be difficult for it in the medium to short-term. Plus, there is huge debt at the consolidated level – over Rs 2.4 lakh crore across its listed companies for FY24 – provoking a few concerns. Together, they make for a case to exit a business to reduce debt before anything else.

Adani Enterprises held a 44 per cent stake in Adani Wilmar through Adani Commodities and last August, proposed a demerger of the food FMCG business. Consequently, it would now come directly under the promoter and promoter group shareholders. Interestingly, in October, the scheme of demerger was withdrawn. By this time, there was enough to suggest that a potential stake sale was round the corner.

Long-time Adani group trackers maintain the decision to exit the Wilmar joint venture is a way to allocate capital more smartly. “It was always on the cards. Typically, the infrastructure businesses deliver a return on equity of 14-15 per cent but that is just about 1 per cent for Adani Wilmar,” points out Deven R Choksey, Chairman and MD of wealth management and investment advisory firm DRChoksey Finserv. Again, a play in commodities is restrictive. “It is hard for the company to become a HUL or an ITC. The proceeds from the sale can be put to better use.”

The capex requirement for the Adani group across its businesses is estimated to be upwards of $75 billion or a minimum of Rs 7 lakh crore; these are expected to go into energy, transport, utilities and logistics. “There are multiple options available to raise funds including interest from investors in Japan and Europe. In that sense, the consumer business is only a distraction compared to other ambitious forays,” thinks Vinit Bolinjkar, Head (Research) at brokerage Ventura Securities. The objective, he says, was to get a good price. “With the $2 billion, it is possible to leverage that by 3x to raise at least $6 billion.”