Days after US-based short-seller Hindenberg Research alleged stock manipulation in Adani group stocks, putting an 85% downside target, valuation guru Aswath Damodaran said that “it is possible that Hindenburg was indulging in hyperbole.” Damodaran, Professor of Finance at the Stern School of Business at New York University said that the share price of Adani Enterprises was overstretched when it was valued at $53 billion. 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 Rs 947 per share, well below the stock price of Rs 3,858 per share,” he said. While the stock was definitely overvalued, Damodaran believes that Hindenburg could be “indulging in hyperbole” when it described Adani to be “the biggest con” in history.
Adani Enterprises share price on Friday touched its new 52-week low of Rs 1,017.10 apiece, but picked up momentum to close at Rs 1,584.20 apiece on BSE. The stock has plummeted by nearly 54% since 24 January which was the day Hindenburg released its report with a host of allegations on the group. According to Damodaran, even at Rs 1,531, Adani Enterprises shares are 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.”
Adani Enterprises share price value jump: ‘Irrational exuberance’
In his final assessment, Damodaran looked at how the market have priced Adani Enterprises over time, looking at the multiples that investors have been willing to pay for its operating numbers from earnings to revenues to EBITDA, as well as relative to its accounting value (book value). “With every pricing metric, the surge in the last two years is striking. The PE ratio for the stock has gone from a modest 15 times earnings in the 2016-21 time period to 214 times earnings in the most recent two years, and the enterprise value has jumped from about 12 times EBITDA during 2016-21 to 53 times EBITDA in the most recent two years,” he observed.
He went on today that similar movements were seen in the price to book, where the “stock has gone from trading under book value to 6.7 times book value, and the enterprise value, which was less than revenue in 2016-21 to 2.71 times revenues in the most recent two years.” Damodaran noted that the surge in pricing multiples is a feature of volatile markets. However, Adani is an infrastructure company, and the irrational exuberance that animates pricing in tech or software usually has little play in this sector.
Adani group has not manipulated stock price directly
In his blog post titled, ‘Control, Complexity and Politics: Deconstructing the Adani Affair!’, the valuation guru stated that Adani, notwithstanding all of its flaws, is a competent player in a business (infrastructure), which, especially in India, is filled with frauds and incompetents. “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,” he said.
For the unversed, Damodaran is a highly sought-after speaker and consultant, having given presentations and lectures on valuation and corporate finance to a wide range of organizations and groups, including investment banks, private equity firms, and academic institutions. He is best known for his approach to valuation. He has written several books on the topic, including “Investment Valuation: Tools and Techniques for Determining the Value of Any Asset” and “The Dark Side of Valuation: Valuing Old Tech, New Tech, and New Economy Companies.”