Shares of Adani Group’s flagship firm are overvalued on some metrics despite plunging more than 50% in the rout triggered by US short seller Hindenburg Research’s scathing report last month, according to a New York University finance professor.
The India Rising story posits that the next decade will see India displace China as the growth engine of the world. That may or may not be true, but the Hindenburg short selling thesis on the Adani Group tests the weakest links in the India story. https://t.co/X9ZsWUouQw
— Aswath Damodaran (@AswathDamodaran) February 5, 2023
Adani Enterprises Ltd. yielded a value of 945 rupees per share even before “factoring any of the Hindenburg accusations of fraud and malfeasance,” Aswath Damodaran of New York University wrote in a blog post on Feb. 4. The stock traded at 1,561 rupees in Mumbai at 12:30 pm on Monday, 40% more than the value ascribed by Damodaran, whose work has been widely published in leading finance journals.
“I still think the company is priced too high, given its fundamentals (cash flows, growth and risk),” he added. The meltdown has wiped out about $118 billion from the market value of billionaire Gautam Adani’s empire, which spans businesses from ports to energy.
The so-called price-to-earnings ratio for the stock has surged from 15 times earnings in the five years to 2021 to 214 times in the last two years, the professor wrote, adding that “irrational exuberance” has “little play” for companies operating in the infrastructure sector. Operating income is barely higher than the interest expenses of the debt-laden business, according to Damodaran.
Adani group has consistently denied the shortseller’s allegations. A company representative didn’t respond to emailed queries on Damodaran’s views.
Even if the shares drop further, the professor will not be buying Adani Enterprises stock as family ownership usually increases the risks of opacity and wealth transfers, according to the blog post.
“Those risks increase, if the family group companies are built around political connections, where you are one political election loss away your biggest competitive advantage,” Damodaran wrote.