Stock Market India: Adani’s Valuation Still On High Edge

Stock Market India: Adani’s Valuation Still On High Edge

Stock Market India: In the past couple of weeks, the financial world has been highly moved by the stock market collapse of the Adani Group. After the immense stir with the report of Hindenburg Research, Gautam Adani’s conglomerate had lost a successive amount of their value which is over US$110 Billion. 

However, this fall seems not to keep the stocks from crashing even when the stock market India is down. On the contrary, according to traditional stock market measures, the conglomerate still enjoys a high valuation. That said, the price-to-earning ratios are much higher. It has even been seen that it is sometimes several times higher than most of the world’s high-powered businesses.

According to data provided by Reuters, as of last Thursday’s close, the seven core companies that make up the Adani Group had an average price-to-earnings ratio of 141.45 times their annualized earnings. Comparable PE multiples for other companies included Apple (25.6), Tesla (56.6), Berkshire Hathaway (59), Reliance Industries (25.8), Berkshire Hathaway (59), and Amazon (98.6).

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Adani’s still-high valuations in the stock market India are of concern to everyone, not just investors. Bankers should be concerned because the Indian infrastructure behemoth secured loans from international lenders by pledging tens of millions of its shares as collateral. A further downgrade of the group’s rating, even to somewhat fewer extreme levels, could result in margin calls requesting more collateral.

Anand Batepati, co-founder at GFM Asset Management in Hong Kong mentioned,

“This is a critical issue because recent big acquisitions have been debt-funded, and a lot of this debt capacity has been created by pledging the owner’s own shares and intercorporate holdings as margin collateral.”

He further added,

“Any big decline in equity valuations, such as what has happened, will trigger margin calls, with the worst-case scenario of this turning into a downward spiral that unravels the conglomerate structure.”

The Adani Group, which has stakes in everything in the stock market India from ports, airports, and roads to mining, electricity, and green hydrogen, has racked up debts totalling $30 billion, according to its chief financial officer. The group has also become a key player in India’s drive to develop world-class infrastructure. As a result, Gautam Adani amassed a fortune estimated to be worth more than US$120 billion at the beginning of this year, making him one of the richest people in the world.

Analysts are concerned about how much of that debt has been backed by stock. Stock exchange data of the stock market India indicates that the Adani family has pledged up to 25% of its ownership in Adani Power and 17.3% in Adani Ports and Special Economic Zone in order to obtain financing.

Amin Rajan, chief executive at UK-based research firm Create Research stated,

“It’s not the quantum (of loans) but the (promoter) pledges that has raised the eyebrows.”

The conglomerate this month repaid a US$1.1 billion share-backed loan, due to mature in September 2024, after receiving a margin call, according to information published by The Financial Times last week. According to the group’s “prepayment planning,” the entire loan was repaid early, and the group claimed that it had not received a formal request for a margin call.

In the three years leading up to January 24, the day before the Hindenburg report, shares of the core Adani companies had increased by an average of 706.95% in the stock market India.  This was partly due to the enthusiasm of international investors for India, especially in light of China’s zero-Covid period. 

A study by the New York University Stern School of Business found that the stock market India traded at 23.59 times forward earnings in January, compared to 12.89 in South Korea, 14.53 in Singapore, 15.5 in Japan, 17.83 in the US, and 24.94 in China.

According to database provider Equitymaster, 50 large-cap companies in India have a PE multiple of more than 50, including the engineering firm ABB India, the insurers SBI Life Insurance and HDFC Life Insurance, and consumer goods firms like Britannia and Dabur.

Madan Sabnavis, the Bank of Baroda’s chief economist confirms,

“The stock market is saying that while the world economy is likely to head into a recession, India is standing out and doing relatively better.”

He goes on to mention,

“The hope is that Indian companies will perform better in the next fiscal than they did in the previous two, hence the prices appear to be relatively higher than warranted.”

Hindenburg asserted on January 25 that the reason for the group’s superior performance was stock-market manipulation, but Adani stood out from the other Indian large-cap companies. In particular, it claimed that by using offshore shell companies and funds connected to the Adani Group, the group circumvented Indian regulations that set a cap on promoter holdings at 75%. The Adani Group has denied the allegations, describing them as “baseless” and a “calculated attack on India”.

The Adani Group must now figure out how to pay off debts without having access to additional share sales in the stock market India. Adani already decided to cancel a fully subscribed US$2.5 billion secondary share offering of its flagship company, Adani Enterprises, after the price of its shares dropped by 30%. The group had planned to pay down debt with about 20% of the proceeds and use about half of the money for capital improvements.

The entire financial community will be following. Deutsche Bank, Barclays, and Standard Chartered were some of the conglomerate’s lenders, and they provided about $5 billion in loans to help Adani Group last year buy the Indian cement division of Holcim, a company with its headquarters in Switzerland. Apollo, Barclays, and Standard Chartered each provided the company with a US$1 billion loan to help it grow its airport business.

As collateral for margin loans, Credit Suisse, Citi, and Standard Chartered reportedly no longer accept Adani Group bonds. The four Adani Group companies — Adani Green Energy, Adani Green Energy Restricted Group, Adani Transmission Step-One, and Adani Electricity Mumbai — now have a negative outlook from neutral, according to rating agency Moody’s Investors Service, which cited a “significant and rapid decline in the market equity values of the Adani Group companies.”  Adani Ports and Special Economic Zone as well as Adani Electricity Mumbai now have a less favourable outlook from S&P Global Ratings.

Didier Cossin, professor of governance and finance at the IMD Business School in Switzerland stated,

“In their eagerness for fees, it seems that the banks may have not done enough due diligence. They have a history of getting involved in relationships that appear to be lucrative but that subsequently derail. For anyone doing due diligence, there were clear signs that Adani was overvalued.”

That is all for today. Hope this will be helpful for you. However, there is a small disclaimer. Investing tips and views expressed by investment experts on Newsmagnify.com are their own and not those of the website or its management. Before making any investment decisions, News Magnify recommends users check with certified experts.

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Sahil Patil

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