'Adani Group shouldn't deleverage too much, time to go full throttle,' says Rajiv Jain of GQG Partners

In the world of finance, some may argue that Rajiv Jain, Chairman and Chief Investment Officer (CIO) of GQG Partners, is playing with fire. But this Fort Lauderdale, Florida-headquartered private equity firm has found its special sauce with its successful investment strategies. Whether it’s HDFC Bank or ITC, Jain’s strategy has been to get in early, thereby maximising returns for his global clients. His investments in the Adani Group—more than $4 billion—have attracted considerable attention due to the controversies surrounding the conglomerate. But the 55-year-old, who has a knack for seizing opportunities amidst challenges, is betting on his investment experience of more than three decades to come through for his clients. In an exclusive interview with Business Today, Jain decodes his investment thesis. Edited excerpts: 

What were your investments in India before the Adani Group? 

We launched GQG Partners seven years ago and I am very grateful to have got such a strong response from thousands of sophisticated institutions and pension funds from all over the world. We currently manage around $104 billion and offer four core equity strategies. We have approximately $14 billion of our overall investment book in India. I first started investing in India in the early 1990s, when the markets first opened for FIIs [foreign institutional investors]. So, I have seen more than a few economic cycles. And there have been times when I have had significantly larger positions. About a decade ago, I had more than 5 per cent each in ITC and HDFC Bank... So, I like to make large, concentrated bets. Our India book is relatively concentrated in just a handful of names. We believe that’s how one can deliver good returns to clients. 

Did you study Indian infrastructure companies before the Hindenburg report? 

I looked at infrastructure operators but never invested in a big way. L&T was as close as we got to infra. Prior to joining GQG, I had also looked at a bunch of mid-cap infra stocks that did very well for six to seven years. But I missed all of that! This is the first time in 30 years that I have been as bullish on Indian infrastructure stocks. 
If you look at our India exposure, we believe banks look very attractive... We also like some public sector banks. We have been familiar with them for a long time, along with ITC. [But] we have nothing in IT services, for example.

What is your assessment of the Adani Group, the board, the management and the conglomerate’s governance structure? 

We started looking at the group more closely after the Hindenburg report came out to see what could potentially go wrong and how much impact it would have. Some of our team members had met the management and the family members when they (the Adanis) were doing road shows last year. We did some work on their business a few years ago. At that time, which was almost five years ago, we were more bullish on China tech. And we also thought the valuations were a bit expensive. 

When we started doing the work this year, what we found was that the more work we did, the more bullish we got. In our view, they have world-class operating assets with utility-like characteristics. We feel that the Adanis’ asset allocation decisions have been remarkably good. If you buy Mumbai airport or any other airport during Covid-19, when it is likely a distressed sale, the transaction has a high probability of doing well. Another example would be solar modules. They were not in that business even a few years ago. Now, they will be one of the largest producers of solar modules outside of China. If anybody wants to set up data centres in India, who would they go to [other than the Adanis]? It’s [also] an electricity business... [but] the group is one of the lowest- cost producers of electricity in the country. What is also not appreciated is that if India wants to be net zero by 2070, it likely cannot happen without this group. 

Has the correction in valuations, the government’s focus on infra, or the maturity of the infra sector in India encouraged you to invest in the Adani Group companies? 

There are multiple reasons here. First and foremost, we look for bottom-up execution capabilities. In every country, and it’s not unique to India, everybody likes to talk big. The way I like to put it is that there are a lot of hot-dog stands that claim they will be the next Microsoft. But most of them remain hot-dog stands. I don’t think political connections can create competencies. What we would like to see are core execution capabilities over multiple cycles—which is what we saw in this [the group’s] case. And this is not just in one area but in multiple areas, such as power, transmission, green energy, gas distribution, edible oils, roads, etc. It’s very unusual to see this high level of competency across multiple complex projects.  

We have invested in utilities in over a dozen countries, including emerging markets and developed countries. We have seen utilities go bankrupt in Europe. We have seen utilities go bankrupt in a lot of developed markets and, obviously, in emerging markets, including in India. So, it is not as straightforward. What we found at the Adani Group was its consistent ability to deliver in a very cost-effective manner and thereby generate high returns. That’s what, first and foremost, attracted us. People talk about free cash flow, but free cash flow comes later in the best-growing businesses. Almost all US utilities have negative free cash flows. Even outside, for example, retail giant Walmart: It had negative cash flows during its fastest growing years, for almost three decades! 
We also thought there was inefficiency in the Indian market where the focus was too much on short-term P&L [profit and loss]. I consider Indian corporations to be among the best in the world. Of course, I may be a little biased. But I believe it [Adani] truly is a well-run corporation that managed tough environments over a very long period. There is a long list of companies that have survived and thrived. But even within that context, I rarely see somebody execute consistently well across diverse categories as [does] this group. 

Is there a difference in the investment cycle for infra this time from the last time? 

There is a difference between this cycle and the last cycle for infra. Why did we not invest in the last cycle, and why are we investing now? Last time, there were a lot of hot-dog stands that said they would be Microsoft. We didn’t like the structure of those projects or the regulatory regime then and we avoided them. This time, there are not many Indian promoters who are coming out to say they are investing in infrastructure and that’s despite a much better regulatory environment. Why? Most of them [the investments] blew up. Who is going to bid for or build new airports, transmission or gas assets now? There are not many groups. Will India really give these airports to any foreign operator to run them? These are critical national assets. 
     
What attracted you to Adani Enterprises Ltd (AEL), the group’s holding company? The better option for any investor like you could have been to invest in operating companies like airports, roads, green hydrogen or data centres. What’s your view? 

They are not available right now. The new businesses are not listed separately. We like the holding company. That is a larger position for us. We own about 6 per cent of AEL on behalf of our clients now. If you look at the incubation track record of the new projects of AEL, it has a very high hit rate. Look at the projects that are coming through, such as petrochemicals, defence, copper smelting, green hydrogen, etc. In all these instances, India needs much more capacities domestically. A lot of these are power-intensive businesses, and land acquisition could be a problem for any private player. Opportunities in the defence sector itself could be very large. These sectors are strategically important for India. Who in the private sector can do it? 

Which business of AEL, according to you, is more mature and could be the first to see unlocking? 

As investors who take a long-term view, we don’t care about unlocking for short-term gains. Let the businesses compound. If you unlock them too early, we believe there is a risk of becoming inefficient. In our view, unlocking makes sense in some cases such as green energy because you can get a cheaper cost of debt as there is a set of debt investors who want to invest in green projects. But in airports, full unlocking seems a bit early. There’s obviously no such benefit in petrochemicals, so it is better off being part of AEL. So, we believe there’s no real benefit at this point in spinning off too much. Roads maybe... but I don’t know. Ultimately, all of this is their call as they have a very good long-term record, so let them decide. 

I think, big picture-wise, unlocking makes sense only in the long term. But you don’t have to hurry as it reduces flexibility. That’s where related-party transactions, acquisitions, and many other things that cause friction come in. This is the time to keep your foot on the accelerator. And if the market doesn’t agree with it, so be it. 

Will you work closely with the group in terms of strategy and future direction? 

It will be too arrogant of me to say that I can improve what they are doing. I think they have done just fine without me. I don’t think they need my advice. Our view is that most of the time, good management does its job and our clients enjoy the returns. The Adani [Group] doesn’t need people like me to tell them what to do. Just don’t deleverage too much and this is the time to go full throttle. That is my view. 

Will you be comfortable if they raise money by selling equity? 

The question of dilution [of stake] is always: at what return are we going to reinvest the capital? If you look at HDFC Bank, it has raised equity multiple times in the past. I invested in HDFC Bank from 2001 onwards. It made as many as, I think, four or five equity offerings over the past two decades. And the client accounts that I managed participated in every one of them. It doesn’t need it now. There are businesses that generate very high returns, but they cannot deploy more capital. Markets typically pay higher multiples to companies that don’t need extra capital. 
However, there are select businesses that can deploy more capital and give high returns. That is a very rare phenomenon. Most good businesses don’t need extra capital as they generate enough cash. The problem starts when companies start doing stuff that is not generating higher returns. We believe the Adani Group can deploy a lot of capital without diluting incremental returns, just like HDFC Bank did in its initial journey. We want to own more of such businesses. 

The Adani Group is now willing to go below 75 per cent equity stake, which was not the case earlier... 

There is plenty of evidence [of that]. Companies that have high insider ownership tend to be better than companies that have low insider ownership. When we study Europe and the US, Warren Buffett owned 55 per cent of Berkshire Hathaway for the longest time. Bill Gates, when Microsoft listed, owned more than half of the company. That’s a good thing... Whether it’s 70 per cent or 73 per cent, who cares! In fact, for a business that has created almost $130–140 billion worth of equity, it has not really raised that much equity if you look at its history. And what is the test for that? There’s a simple back-of-the-envelope test. It has not diluted its stake. 
Why does Jeff Bezos own a lot less [of Amazon] than Bill Gates [does of Microsoft]? Amazon had more cash losses in the early years than Microsoft. So, it had to issue more equity or give employees stock options. Microsoft was profitable from the get-go. So, if a promoter has a higher insider stake after 10-20 years, it means that the business generates a lot of free cash on its own. We like high insider ownership—the higher the better. 

Despite the massive fall or value correction, none of the mutual funds in India bought into Adani companies. Does that bother you? 

Why should I care? I am not being arrogant here. There are a hundred ways to heaven. Everybody must find their own way to make money. And I’m not here to judge. People can make money in many different ways.  
          
@anandadhikari