Aswath Damodaran values Adani Enterprises stock at ₹947 per share
5 min read . Updated: 06 Feb 2023, 07:30 AM IST
PremiumAswath Damodaran said Adani, notwithstanding all of its flaws, is a competent player in infrastructure business, which, especially in India, is filled with frauds and incompetents
Aswath Damodaran feels the share price of Adani Enterprises was over stretched when it was valued at at $53 billion. According to the valuation guru, the stock "with upbeat assumptions on revenue growth and operating margins, and without factoring any of the Hindenburg accusations of fraud and malfeasance, yields a value of just about ₹947 per share".
However, Hindenburg could be "indulging in hyperbole", he said.
"It is possible that Hindenburg was indulging in hyperbole when it described Adani to be "the biggest con" in history. A con game to me has no substance at its core, and its only objective is to fool other people, and part them from their money. Adani, notwithstanding all of its flaws, is a competent player in a business (infrastructure), which, especially in India, is filled with frauds and incompetents. A more nuanced version of the Adani story is that the family group has exploited the seams and weakest links in the India story, to its advantage, and that there are lessons for the nation as a whole, as it looks towards what it hopes will be its decade of growth," Damodaran, Professor of Finance at the Stern School of Business at New York University, said in his blog post.
“I don't think that there is much doubt that the market was over stretched when it valued the Adani companies collectively at $220 billion ( ₹17,600 billion) and Adani Enterprises at $53 billion ( ₹4,243 billion). In fact, a valuation of Adani Enterprises with upbeat assumptions on revenue growth and operating margins, and without factoring any of the Hindenburg accusations of fraud and malfeasance, yields a value of just about ₹945 per share, well below the stock price of ₹3,858 per share," he said.
“Even with the share price at 1,531 per share, I still think the company is priced too high, given its fundamentals (cash flows, growth and risk) and before factoring the damage that might have done to the company's reputation and long term value, by this short selling episode," he added.
This blog post by valuation guru Aswath Damodaran on Adani group and its flagship Adani Enterprises comes at a time when the group is facing the heat after US based short seller Hindenburg Research which accused the Adani Group of 'brazen stock manipulation and accounting fraud scheme over the course of decades.'
Since January 24, over 100 billion dollars of valuation has been wiped out of the the Adani Group stocks.
The flagship firm, Adani Enterprises on Friday, touched its new 52-week low of ₹1,017.10 apiece, but picked up momentum to close at ₹1,584.20 apiece up by 1.25% on BSE.
This stock nosedived by over 47% between February 1st and 2nd after the withdrawal of ₹20,000 crore FPO despite the issue getting subscribed fully. The stock has plummeted by nearly 54% since January 24th which was the day Hindenburg released its report with a host of allegations on the group.
In his assessment for Adani Group he said that group played ‘’fast and loose with exchange listing rules, that it has used intra-party transactions to make itself look more credit-worthy.'
“Adani Group has played fast and loose with exchange listing rules, that it has used intra-party transactions to make itself look more credit-worthy than it truly is and that even if it has not manipulated its stock price directly, it has used the surge in its market capitalization to its advantage, especially when raising fresh capital," he said.
He listed out lessons for India, ‘as it looks towards what it hopes will be its decade of growth.’
- He said that family businesses, especially those that are growth-focused, have to look outside the family for good management and executive talent. He said that in spite of broadening economy, India remains dependent on family group businesses, some public and many private, for its sustenance and growth.
“ While there is much that is good in family businesses, the desire for control, sometimes at all cost, can damage not just these businesses but operate as a drag on the economy. Family businesses, especially those that are growth-focused, need to be more willing to look outside the family for good management and executive talent," he said.
2. Indian stock markets are still dominated by momentum traders and there is a bias towards bullish momentum over its bearish counterpart.
“, Indian stock markets are still dominated by momentum traders, and while that is not unusual, there is a bias towards bullish momentum over its bearish counterpart. In short, when traders, with no good fundamental rationale, push up stock prices, they are lauded as heroes and winners, but when they, even with good reason, sell stocks, they are considered pariahs. The restrictions on naked short selling, contained in this SEBI addendum, capture that perspective, and it does mean that when companies or traders prop up stock prices, for good or bad reasons, the pushback is inadequate," he noted
“I believe that stock market regulators in India are driven by the best of intentions, but so much of what they do seems to be focused on protecting retail investors from their own mistakes. While I understand the urge, it is worth remembering that the retail investors in India who are most likely to be caught up in trading scams and squeezes are the ones who seek them out in the first place, and that the best lessons about risk are learnt by letting them lose their money, for over reaching," he said.
He said Indian banks have always felt ‘more comfortable’ lending to family businesses than stand alone enterprises
"The first is that the bankers and family group members often are members of the social networks, making it difficult for the former to be objective lenders. The second is the perception, perhaps misplaced, that a family's worries about reputation and societal standing will lead them to step in and pay of the loans of a family group business, even if that business is unable to. It is easy to inveigh against the crony relationships between banks and their borrowers, but it will take far more than a Central Banking edict or harshly worded journalistic pieces to change decades of learned behavior," he added.
