Valuation guru Aswath Damodaran believes that Adani Group, despite all its flaws, remains competent in India's infrastructure space. According to him, he pegs the fair value for Adani Enterprises at Rs 947.
Hindenburg was indulging in hyperbole when it described Adani to be 'the biggest con' in history. Hindenburg's short thesis spends as much time as it does trying to convince us that the company is over-levered. Being over-levered is not a con game, but a risk that equity investors in many investments take to increase their returns. So said Damodaran.
While valuing the stock at only Rs 947 apiece, he factored in upbeat assumptions on revenue growth and operating margins. That is a 38 percent downside from the stock's Friday close of Rs 1,531. The reason behind this, he says, is that the company's profitability has lagged, partly because investments take time to pay off and partly because it is in low-margin businesses.
For his calculations, Damodaran has split the past 20-year history into three parts: 2002-2015 - when the company grew its revenues steadily; 2016-2021 - when major restructuring spun off Adani Ports, Adani Power and Adani Transmission; and the recent period, when the group bought Holcim's stake in ACC and Ambuja Cements.
The debt to book capital ratio has stayed high through the period, but the rise in market capitalization in 2021 and 2022 lowered the debt to market capital ratio, he notes.
Consolidating across the Adani companies, the valuation guru explains that the family owns about 73 percent of the outstanding equity in these companies.
Of the 27.5 percent that is not held by the family, a significant percentage is held by foreign institutional investors, largely through index funds holdings. Meanwhile, retail investor presence is small, while some traders have been drawn to the counters due to the surge in pricing over the past two years.
According to the finance professor at the NYU Stern School of Business, investors in family group companies are buying into cross-holdings, opacity and the possibility of wealth transfers across family group companies.
So, it was overvalued, and perhaps by share movements by a select group within the family business. Is this a crime? Even if the intent was to pile on more debt against share value (overvalued), it may not seem a crime unless stock manipulation or insider trading is proven.
But what about Modi’s close association with Adani? This is not new. The Congress party was close with Adani when they were in power – in fact, Adani’s approvals or licenses were initially given by the Congress Government of that time. So, what’s the big deal? Most entrepreneurs are close to the Government of the day whether it is in the U.K., the U.S. or India.
Did Hindenburg Research have an agenda? They are acknowledged short-sellers. Was this their strategy? Piling debt is not a con. Accounting fraud or stock manipulation is. So, let the authorities examine what’s the truth of these allegations.
Meanwhile, Damodaran says he will not buy the stock because he likens buying shares in family group is like getting married and having your in-laws move into your bedroom (not just the house)!
Reference:
Aswath Damodaran dissects Adani crisis: What’s the fair value of this “competent” infra play? Shailaja Mohapatra, Money Control, 6 February 2023
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