What is the fair value of Adani Enterprises stock? Aswath Damodaran shares the math

NEW DELHI: With shares of Adani Enterprises having fallen 62% from its peak of Rs 4,190, valuation guru Aswath Damodaran says the Nifty stock is still not cheap even if the allegations made in the Hindenburg report are incorrect.

A detailed calculation shared by the finance professor in his blog shows that the stock's fair value should be around Rs 945 per share without factoring any of the Hindenburg accusations of fraud and malfeasance.

For his valuation exercise, Damodaran assumed that the company's revenue will grow at a fast pace of 30% for the next 5 years and 5.59% thereafter and operating margin will increase from 3.6% to 7% after 10 years.


"Even with the share price at Rs 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," he wrote in his blog 'Musings on Markets'.

Even with a further share drop, he said he is not tempted to buy shares in Adani companies because he avoids investing in family group companies.

"I have likened buying shares in a family group company to getting married, and then having all of your in-laws move into the bedroom with you. 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 from your biggest competitive advantage," Damodaran said.

However, at the right price, he would be willing to expose himself to those risks, but it would require a significant discount on intrinsic value.

In the last seven trading sessions since the release of a lengthy report by American short-seller Hindenburg, Adani stocks have lost nearly half of their market value after a one-way rally seen in the last few years.

On Hindenburg's allegations, the finance professor at the Stern School of Business at NYU said their critique of the Adani Group rests on a mix of serious contentions, circumstantial evidence and questionable claims.

"To be able to manipulate and move the market capitalization of a company by a hundred billion, roughly the increase in value in 2022, you would expect to see huge numbers of shares being traded by these entities, and I don't see that. The questionable claims are the ones to do with earnings manipulation, since if Adani is manipulating earnings, it is not doing a very good job, reporting low margins and returns," he wrote in the blog.

Damodaran went on to say that it is possible that Hindenburg was indulging in hyperbole when it described Adani to be "the biggest con" in history.

"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," he said.

On the issue of debt pile, Damodaran said 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," he said.

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