Valuation guru Aswath Damodaran says he will not be tempted to buy shares of Adani group companies even if the group shares fall further. In his Blog 'Musing on Markets', Damodaran said investors in family group companies, no matter how honourable the family, are buying into cross holdings, opacity, and the possibility of wealth transfers across family group companies.
Damodaran said the risks increase if the family group companies are built around political connections, "where you are one political election loss away your biggest competitive advantage".
Damodaran’s latest Blog was titled “Control, Complexity and Politics: Deconstructing the Adani Affair!”
Damodaran said it was true that 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 short, said Damodaran, he would watch the tussle between the Adani Group and Hindenburg from the sidelines, with less interest in the firm and more interest in what changes it might (or might not) bring to business, investing and regulatory practices in India.
Damodaran said he did not think there was much doubt that the market was over stretched when it valued the Adani companies collectively at $220 billion and Adani Enterprises at $53 billion.
Damodaran said 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, yielded a value of just about Rs 945 per share, well below the stock price of Rs 3,858 per share.
Damodaran said even with the share price at Rs 1,531, he still thought the company was priced too high, given its fundamentals (cash flows, growth and risk), and that's before factoring the damage the Hindenburg episode might have done to the company's reputation and long-term value.
Damodaran said he was willing to believe that the Adani Group had played fast and loose with exchange listing rules, that it had used intra-party transactions to make itself look more credit-worthy than it truly was and that even if it had not manipulated its stock price directly, it had used the surge in its market capitalisation to its advantage, especially when raising fresh capital.
"As for the institutions involved, which include banks, regulatory authorities and LIC, I have learned not to attribute to venality or corruption that which can be attributed to inertia and indifference. It is possible that Hindenburg was indulging in hyperbole when it described Adani to be "the biggest con" in history," Damodaran said.
The valuation guru said a con game to him has no substance at its core, and its only objective is to fool other people, and part them from their money.
"Adani, notwithstanding all of its flaws, is a competent player in a business (infrastructure), which, especially in India, is filled with frauds and incompetents. 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.
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