Adani Enterprises consolidated shares, slumped on Friday, the 3rd Feb 2023, 35% to hit their lowest since March 2021. That low took its losses to nearly $33.6 billion since last week, a 70% fall.

Hindenburg’s report said key listed Adani companies had “substantial debt” and shares in the seven listed firms had a downside of 85% due to what it called sky-high valuations. This is coming true.

The listed Adani firms now have a combined market value of $100 billion, versus $218 billion before the report. That is a slide of $118 B. Adani’s personal wealth fell from $142 B to $61.3 B. That is a drop of $81 B in just a week. He has slid to 21th in Forbes’ list of the world’s wealthiest people from 3rd, he once was. S&P Dow Jones removes Adani Enterprises from Dow Jones indices  due to charges of stock manipulation & accounting fraud. Analyzed Adani flagship Enterprises which fell the most about 70%. In spite of this steep fall, it is still overvalued! 

The summary of Stock quantitative analysis is also shown for all the 7 Adani stocks. The earnings per share (5 years average), Debt to equity ratio, ROE (return on equity 5 years average), PE ratio (trailing 12 month average) are shown in green (acceptable) and red (not acceptable). None of them qualify as a buy except may be Adani Ports.

The Tables show the Graham Number which is a conservative estimate of the Stock price for an aggressive defensive investor. The PE value, ROE (return on equity), BVPS (book value per share), EPS (earnings per share), Zombie value (liquidation value when the stock price goes to zero) are also calculated. The Adani stocks are generally overvalued except for Adani Power and Adani Ports. For comparison, GOOGL (Alphabet Class A) shows all acceptable values.

How does Adani Enterprise fund their Project?

What has been shown here is how Adani stocks fare in a quantitative analysis. Adani Ports is the only one that qualifies as a buy. The funding diagram shows how 7500 crore rupees is raised by pledging shares directly, through its subsidiaries and using bonds.

The following are the concluding remarks  (excerpts from his blog “Musings on Markets”) made by Valuation Guru Prof. Aswath Damodharan, Professor of Corporate Finance and Evaluation, Stern School, New York University. My own views are very close.

In sum, I am willing to believe that the 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. As for the institutions involved, which include banks, regulatory authorities and LIC, I have learned not to attribute to venality or corruption that which can be attributed to inertia and indifference. 

  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. 

• First, in spite of the broadening of India’s economy, it 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.
• Second, 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.
• Third, 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.
• Fourth, Indian banks have always felt more comfortable lending to family businesses than stand alone enterprises for two reasons. 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.

I know that there are some of you who may view me as unpatriotic for pointing to these flaws, but I think that for the India story to unfold, it has to deal with these weaknesses. The short thesis against Adani can start that process, and I hope that the foreigner card does not get played on Hindenburg, dismissing its claims. There are plenty of Indians (analysts, investors, fund managers) who have been saying and thinking what is made explicit in the Hindenburg report, and the question that we should be asking is why they have not been given bigger platforms to air out their views.

    There is another seam or weakness in the global economic setting that Adani Enterprises exploited, and that is ESG, an acronym far more deserving of the “biggest con” label than Adani, since it is threatening to lay waster to trillions of dollars, not billions. If you review the Adani website and sales pitch, it is quite clear that the company learned to play the ESG game well, creating an entire ESG universe to underpin its companies, and exploiting the green bond market, presumably for its green energy business. The notion that a family group that build ports, airports and gas transmission lines qualifies for green bond issuance, tells you less about the group making the issuance, and more about the emptiness of the green bond promise. In fact, if Adani happens to default on its debt, I hope that it starts with the green bond holders, since I cannot think of a group that deserves default more.

Courtesy: Profit Hunter, Think School, Prof Aswath Damodharan