Valuation guru Aswath Damodaran said Life Insurance Corporation of India (LIC) made a lot worse investments than investing in the Adani group companies. In an interview to India Today TV, Damodaran said if one looks at the cost of shares at which LIC invested in Adani group firms and the prevailing value of those shares, they were one of better investments that LIC made in the last 20 years.
Damodaran said as long as LIC has been around, it has been the investor of last resort. He said the government has forced India's largest insurer to invest in every bad company that needs money, clarifying that "Adani firms are not one of those companies."
Damodaran teaches corporate finance and valuation at the Stern School of Business at New York University.
If LIC invests in Adani group, the professor said he would be interested in knowing the motive behind that investments.
"But by itself, it is India's biggest institutional investor and the Adani group was one of the largest in terms of market capitalisation," he said.
Infrastructure companies borrow a lot and are always at the mercy of regulators because they often run quasi utilities, Damodaran said. Damodaran was quick to give example of an airline. He said a private airline is never given the complete power to raise prices, as if they were given the same, the operator would surely hike airfares by three times. He said the businesses that the Adani group are low margin businesses even in their best days, but are quite capital-intensive.
Infra companies, he said, believe that once they build the business, they would find a way to pay interest. "One just can't blame Adanis for that. Banks lend not based on earnings power or cash flows, they like to lend on big physical assets," he said.
Damodaran gave an example of real estate and said if the cash flow was so important, nobody should be a lender in Mumbai real estate market, as there is not enough rental income in Mumbai in an expensive piece of property. But bankers do love to lend on big physical assets, he said.
"Infrastructure businesses feed on that. I don't think you can make that a crime. You can argue that this is a bad risk. You should not be borrowing so much money when your operating income is just 1.4 times your interest expenses. There is not much buffer," he said.
Damodaran said everything that Hindenburg Research said in its report was in public domain, something Indian press reported in the past. There was nothing in there which, Damodaran said, he never heard before.
He said there are 6,300 companies in Mauritius, the country which has a total GDP of mere $11.5 billion. This, he said, is a place where Indian businesses go and while one can debate where that is immoral or unethical, the Indian government knows it and its been trying to crack down on it, Damodaran said.
Damodaran said even if he assumes that Adani group has 38 shell companies, he does not believe in allegations of stock manipulation, as Adani companies are not small in size, even if they have low float. He noted that the market capitalisation of Adani group companies jumped by over $100 billion dollars and, to do that, one needs a lot of trading.
Also read: Adani Ports shares: Despite a target price cut, Kotak suggests 45% potential upside