8 PSU Stocks with Exposure to Adani Group Companies. Should Investors be Worried?

Rs 2 trillion!

That's how much Adani group stocks lost today following Gautam Adani's indictment in the US on bribery and fraud charges.

It was literally a sea of red.

Performance of Adani Stocks on 21 November 2024

With this recent fall, the Adani group witnessed its worst trading day since the Hindenburg crisis back in January 2023.

The decline in stock prices was not just limited to Adani stocks but also its bonds and other PSU companies.

In this article, we'll look at some of the PSU stocks that have a good exposure to Adani companies.

#1 State Bank of India (SBI)

You probably guessed it... the first PSU on this list is State Bank of India (SBI).

SBI has the largest exposure to Adani group companies. The PSU bank has not publicly commented on its exposure to Adani stocks but whenever Adani stocks suffer a big fall, SBI follows suit.

Today, SBI share price declined over 4%.

In February 2023, SBI had disclosed a total exposure of around Rs 270 billion (bn) to the Adani group. However, as mentioned by SBI's chairman, back then the exposure only accounted to around 1% of the total loan book.

Over the years, SBI's exposure to the Adani Group has remained manageable, given its strong buffer of provision reserves.

Also, SBI has the capacity to generate pre-provisioning operating profit into account for future bad debt provisions.

Presently, the public sector bank operates a network of 22,219 branches and about 62,617 ATMs across India. It also operates about 71,968 business correspondent outlets across India.

The bank has a global footprint with a network of 233 branches/offices in 32 countries. It has presence in USA, Canada, Brazil, Russia, Germany, France, Turkey, Australia, Bangladesh, Nepal, Sri Lanka, and other countries.

SBI has a market share of 22.84% in deposits and 19.69% share in advances in India. It has a strong customer base of about 450 million (m) customers.

Going forward, the management remains optimistic about maintaining NIMs and overall profitability despite macroeconomic pressures.

It is confident of growth going forward led by the government's capital outlay plans and an uptick in the credit demand across the country. Moreover, it is confident in generating sufficient capital organically to fund the growing business.

The bank is also focussing on enhancing liability franchise and deposit mobilisation through various initiatives.

It is opening approximately 60,000 savings bank accounts daily, with significant contributions from digital channels and enhancing deposit interest rates selectively to maintain franchise value and attract deposits.

For more details, see the SBI fact sheet and quarterly results.

#2 Bank of Baroda (BOB)

Next on this list is Bank of Baroda.

Bank of Baroda had disclosed an exposure of Rs 53.8 bn to the Adani group back in January 2023. Back in 2023, BOB's CEO and MD had said that it is willing to consider lending additional money to the Adani Group.

It had said BOB will extend loans to the conglomerate if it meets the lender's underwriting standards, adding that they're not concerned about the market volatility around Adani stocks.

Coming to its financial performance, Bank of Baroda's net profit has grown at a 5-year CAGR of 77% driven by controlling operating costs and maintaining net interest margin. The company's RoE has also grown to 18.95%. Its asset quality is also healthy.

Going forward, the management remains optimistic about future growth, focusing on asset quality and profitability while navigating market challenges.

The bank is strategically managing deposits and advances to maintain margins and is prepared to capitalise on growth opportunities in retail and corporate segments.

It plans to introduce new retail products to enhance its deposit growth, optimise costs through digital transformation, and utilise technology to grow its advances and loan book.

It is aiming for 10-12% deposit growth and 12-14% advance growth in the upcoming quarters. It also has a strong pipeline for corporate loans, with an expected growth of 10-12% in that segment.

For more details, see the Bank of Baroda fact sheet and quarterly results.

#3 Union Bank of India

Next on this list is Union Bank of India.

Adani group's annual report lists Union Bank of India as one of its key lenders. The exact amount is still unknown.

As of FY24, the bank's market share in deposits and net advances is about 6% and 5.5%, respectively, thereby making it the fifth-largest public sector bank.

Union Bank has a network of 8,466 branches and 8,982 ATMs. It has overseas branches in Sydney and Dubai, along with operations in London through WOS, Union Bank of India (UK) Ltd., and a JV in Malaysia, India International Bank (Malaysia) Berhad.

The bank's loan book is split as 45% loans to industrials, 34% to personal borrowers, 16% loans to the service sector, 12% towards agriculture and balance 4% for others.

In FY24, the bank raised equity capital of Rs 50 bn by the allotment of 577 m equity shares and equity capital of Rs 30 bn by the allotment of 221 m equity shares through a qualified institutional placement.

For FY25, Union Bank projects growth in advances between 11-13%, 9-11% deposit growth, net interest margin of 2.8-3%, and gross non-performing assets below 4%.

To know more, check out Union Bank of India's financial factsheet.

#4 Canara Bank

Next on this list is Canara Bank.

In 2023, Canara Bank had reported an exposure of Rs 20.5 bn to the Adani group. This is minimal when we compare with its huge loan book.

Canara Bank was incorporated in 1906 and nationalised in 1969, along with 13 other major commercial banks of India, by the Government of India.

The PSU's financial performance has not been steady in the past. However, the bank has turned it around since 2021.

This bank used to enjoy 2.3x book value in 2010 but due to the NPA crisis in 2010s, public sector banks suffered a huge derating.

But after a decade of cleaning their books and bad loans, banks like Canara Bank are prime candidates for further rerating as their operations improve.

The intent for the same is seen in Canara Bank's progress towards divestment / winding up of Canara Bank (Tanzania) Ltd., which is expected to be completed in FY25.

Over the last three years, the bank's net profit has grown at a CAGR of 75% taking its RoE from 4.6% in 2021 to 16.6% in the year 2024.

Its asset quality is also not far behind. The bank's net NPAs stand at 1.24% while its gross NPAs stand at 4.14% as of June 2024, a vast improvement from 1.57% and 5.15% in June 2023.

Going forward, the bank's management is confident in achieving its full-year guidance. It is focus on maintaining consistency in performance across all business parameters.

The bank is actively focusing on improving its NIM. To do so the management is working on reducing costs while maintaining its asset quality.

It has also been taking various measures to improve its CASA ratio and has guided for an improvement in the CASA ratio to 33% for FY25.

The management expects to deliver 11-12% loan growth in the current financial year.

For more details, see the Canara Bank fact sheet and quarterly results.

#5 PFC

Next on this list is Power Finance Corp (PFC).

PFC is among the worst hit stocks today, down 6%, as it has a meaningful loan exposure to Adani group stocks.

Green finance companies like PFC and REC have large loan books of Rs 4.9 trillion (tn) and 5.5 tn, respectively.

Out of this, their exposure to Adani stocks stands somewhere around Rs 170-180 bn, which comes to 3.3% of the total loan book.

Also, the loans given by these companies are backed by Adani group's assets, guarantees and the amount is locked into TRA bank account which gets released only with lenders' approval.

Any kind of payment from the borrower has to flow to the lender first before any payments to any other entities... so it's a good thing.

PFC is a government of India enterprise that is registered as a non-deposit-taking NBFC with the Reserve Bank of India (RBI). It's engaged in extending financial assistance to infrastructure projects of the Indian power sector.

It offers fund-based products such as project term loans, lease financing, and debt refinancing, as well as non-fund-based products such as deferred payment guarantees and letters of comfort/intent.

The company disburses the majority of its loans (over 80%) to the government sector and the rest to private sector companies.

PFC has recently expanded its portfolio beyond power projects and is now funding metro projects, smart cities, infrastructure projects, and road projects for both government and private players.

It also recently entered the IFSC Gift City, which is the company's strategic leap towards the global financing arena.

The company is also diversifying its funding across renewable energy projects to capture the growth in this high growth space.

With the growing demand for energy, high renewable energy adoption, infrastructure development, and government support, power financing companies are bound to experience high growth.

For more, check out PFC's financial factsheet.

#6 REC

Moving on, next on this list is REC.

Rural Electrification Corporation (REC) had disclosed about Rs 70 bn of exposure to the Adani group back in 2023. Although these figures may have fluctuated since their initial disclosure.

In tandem with PFC, REC shares have also fallen 6% today.

As mentioned above, the total exposure hardly comprises around 3-4% of the total book and it's backed by assets and guarantees. The stock prices have fallen as the sentiment is negative.

REC, a central public sector undertaking under the Ministry of Power, is an infrastructure financing company. It is also a subsidiary of PFC.

It's engaged in the business of extending loans to the power sector value chain from generation to distribution.

The company also forayed into infrastructure and logistics sector and is funding metro, road and highways, port waterways and steel infra projects.

Just like PFC, even REC funds major government projects, but the share of private projects is growing in its loan book.

It also funds renewable energy projects and aims to expand its green lending by eight times by 2030. Like PFC, REC is also planning to establish a subsidiary in the IFSC Gift City to expand its presence internationally.

For more, check out REC's financial factsheet.

#7 Punjab National Bank (PNB)

Next on this list is PNB.

Punjab National Bank had disclosed an exposure of around Rs 70 bn to the Adani group back in January 2023.

Shares of PNB are down over 4% today. PNB is India's first Swadeshi Bank and one of the largest public sector banks in India.

It has 10,150 domestic branches, 12,080 ATMs, and over 32,000 business correspondents.

In most recent years, PNB has undergone a notable transformation, shifting from losses to profitability.

Its emphasis on expanding its branch network has driven deposit growth, and a rigorous approach to loan underwriting has improved asset quality by reducing non-performing assets.

In the September 2024 quarter, the bank's net interest income (NII) rose by 6% to Rs 105.2 bn. While operating profit increased by 10.3% to Rs 68.5 bn. Net profit surged by 145% from Rs 17.6 bn to Rs 43 bn.

It also reported a significant improvement in asset quality with gross NPA reducing from Rs 655.6 bn in September 2023 to Rs 475.8 bn in September 2024. The bank plans to monitor exposure to stressed sectors, particularly in telecom, with provisions already recognised.

For more, check out PNB's financial factsheet.

#8 Life Insurance Corp (LIC)

Last on this list is LIC.

India's largest insurer LIC has debt exposure to the Adani group worth Rs 61.83 bn.

In 2023, Life Insurance Corporation (LIC) had disclosed a total exposure of Rs 359.2 to the Adani group, which also included the above amount in debt.

Today, LIC shares are down half a percent.

In FY24, the state-owned insurer saw a 59% rise in value of its investments in Adani group companies. This was after Adani group stocks made a recovery post the Hindenburg report.

In recent times, LIC has faced some scrutiny over its decision to invest in Adani group stocks amid allegations on Adani stocks for stock manipulation.

Coming to is financials, for financial year 2024, LIC posted a record profit of Rs 408.8 bn compared to Rs 360 bn in FY24.

LIC is now looking at acquiring private health insurance firms to enter into the health insurance segment. This inorganic option will be the company's initiative towards expansion.

The question now is whether LIC will pursue the acquisitions effectively and successfully establish its presence in the health insurance segment to keep up with the record profits.

For more, check out LIC's financial factsheet.

Conclusion

These were some of the PSUs that have good exposure to Adani stocks.

If we talk about private lenders, IndusInd Bank, ICICI Bank, Axis Bank, and HDFC Bank have exposure to Adani stocks.

Overall, Indian lenders including banks and NBFCs have extended close to Rs 881 bn worth loans to the Adani Group, out of its total debt of Rs 2,413.94 bn as of 31 March 2024.

This accounts to 36.5% of Adani's total debt.

In September this year, the Congress had alleged that the Adani group's takeover of 10 financially stressed companies resulted in a 74% "haircut" on the loans from PSU banks.

In simple language, this basically means that the banks had claims worth around Rs 620 bn from Adani companies, but they settled for Rs 160 bn.

In conclusion, I'm sure you must have read plenty of stuff regarding the latest Adani bribery saga by now. So, should you look at Adani stocks after the fall or are they falling knifes to be avoided?

If you look at the valuations, there is no rationality in the numbers of most of these companies.

While we agree that Adani group is plagued with slew of negative news flows, the group has exciting plans for the future.

Recently, the Adani Group has ventured into shipbuilding at Mundra Port, a strategic move that aligns with India's broader maritime goals.

Additionally, the group's commitment to reducing the cost of green hydrogen reflects its dedication to large-scale sustainability efforts.

The Adani Group recently also decided to invest US$ 5 bn in India's metal industry, targeting copper, iron, and steel production.

The group has set an ambitious target to achieve an EBITDA of Rs 900 bn in the next 2-3 years.

While the current issues may appear to be a big setback, thorough research is needed before making investment decisions.

For more on Adani's future in green hydrogen, airports, and data centres, read out our editorial Is Adani the New Reliance? Decoding the Rise of Adani Enterprises.

Also, you could quickly refer to both fundamentals and valuations of Adani group stocks on Equitymaster's Indian stock screener.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...