Aswath Damodaran is a professor of finance at the Stern School of Business, New York University. Here is a very brief extract from his blog post Deconstructing the Adani Affair!
With the exception of Adani Wilmar, a food processing business that has recently been bolstered by acquisition of leading brands, the rest of the Adani businesses share some common characteristics.
First, they are infrastructure businesses, requiring large up-front investments and having long gestation periods, with regulatory and government oversight.
Second, an increasing proportion of the company's investments are related to energy, in green energy and gas transmission/distribution, but the company's most significant investments are in logistics, especially in airports and ports .
While each of these businesses is operated by a stand-alone Adani company, the businesses flow through a holding company, Adani Enterprises.
The Debt load
As one can see from the percentages of financing that Adani Enterprises raised from debt and equity, it is incontestable that the company funded almost all of its growth with debt through this period.
In fact, the company continued to pay a dividend to shareholders, even as it raised fresh debt to keep growing, in effect using debt to pay dividends during the 2016-2021 time period.
In the most recent period (2021-22), there does seem to be a push to raise fresh equity, and that may or may not be in response to pressures from investors and lenders to reduce the debt burden.
The cumulated effects of adding to debt each year, as Adani Enterprises has grown, can be seen in three debt metrics:
- Debt as a percent of book capital (debt plus book equity)
- Debt as a percent of market capital (debt plus market capitalization)
- Interest coverage ratio, estimated by dividing operating income by the interest expenses
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. The interest coverage ratio better captures the limited buffer that the company has on its debt load, since the operating income is barely higher than interest expenses.
It is not uncommon for infrastructure companies to borrow money and carry heavy debt loads, especially as they make new investments, on the expectation that as their projects mature, this debt will be repaid as well. What sets Adani apart thought is it scale, since a failure on its part to make debt payments will create ripple effects that are vastly greater than a much smaller infrastructure company.
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.
Adani companies were over valued at the start of this year, when they hit their all-time high.
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.
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.
Even with a further share drop, I am not tempted to buy shares in Adani companies.
It is no secret that family group companies are controlled by the families that run them, but the degree of ownership that the Adanis have in their companies is high, even by Indian family group companies. Investors in family group companies, no matter how honorable the family, are buying into cross holdings, opacity and the possibility of wealth transfers across family group companies. 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.
At the right price, I would be willing to expose myself to those risks, but it would require a significant discount on intrinsic value, and we are not even to close to that point yet.
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