Adani Group's high debt is not a con but...: Valuation guru Aswath Damodaran

The Adani Group as a whole has too much debt and it has done more harm than good for the conglomerate, valuation guru Aswath Damodaran said in another blog post on the embattled group on Monday. He, however, said that high debt was a bad business practice, not a con - as was claimed by the US-based short-seller Hindenburg Research.

Also read | Adani-Hindenburg issue: Sebi has not found any irregularities yet, claims report

Hindenburg on January 24 published a damaging report on the group, claiming Gautam Adani, the chairman of Adani Group, was "pulling the largest con in corporate history".

Damodaran, a professor of finance at New York University’s Stern School of Business, had earlier said that it was possible that Hindenburg was indulging in hyperbole when it described Adani to be "the biggest con" in history. "A con game to me has no substance at its core, and its only objective is to fool other people and part them from their money," the valuation guru said in his blog post published on February 4.

Also read: Adani Enterprises shares rebound 24% from day's low; here's why

In that post, Damodaran said Adani, notwithstanding all of its flaws, is a competent player in a business (infrastructure), which, especially in India, is filled with fraud and incompetents.

On Monday, Damodaran said the Adani Group collectively carried about three times as much debt as it should, "confirming that the group is over-levered". He said there was little, if any, benefit in terms of value added to Adani from using debt, and significant downside risk, unless the debt was being subsidised by someone. That could be government, sloppy bankers, and green bondholders, he added.

"In my assessment, Adani Enterprise Ltd carries too much debt, with actual debt of Rs 413,443 million more than double its optimal debt of Rs 185,309 million, and reducing its debt load will not just lower its risk of failure, but also lower its cost of capital," Damodaran said in his latest Musings on Markets.

Hindenburg, too, had flagged the high debt of Adani and said the stocks of the seven listed group companies were 85 per cent overvalued. This prediction came out somewhat true as most of the stocks of the group have crashed 70-80 per cent in over a month.

The short-seller also claimed that the group was indulging in stock manipulation and fraud by using a wave of shell firms. It said key listed Adani companies have taken on substantial debt, including pledging shares of their "inflated stock for loans", putting the entire group on precarious financial footing.

"5 of 7 key listed companies have reported ‘current ratios’ below 1, indicating near-term liquidity pressure," the report claimed. This triggered panic among investors and caused a massive selloff in Adani stocks. To win the confidence back of investors, Adani recently prepaid some of the debts due later this year.