Why Adanis Stock is Still Overpriced

Adani Stock in Perspective:

PE today is 94. Before the Hindenburg report it was > 254.

Valuation Guru- @AswathDamodaran highlights his view on Adani stock. 

According to him, the stock is overpriced even after the Hindenburg report impact. He values the stock for Rs 947. On Jan 1, 2023, the stock was trading at Rs 3858 and PE around 254. 

Today the stock is trading at Rs 1719 and a PE of 94. 

Background:

Adani Group which was established in 1984 has become a conglomerate of infrastructure companies in sectors like airports, shipping, logistics, power generation (solar), and defence.  

It's well established that infrastructure companies are about high volume and low margin, where with ageing returns get better, unlike telecom where returns diminish with ageing. While the Adani group had an astronomical rise from 2021 onwards where revenue grew by 112.70%, its margins were low at 3.4%, which is on the lower side as compared to other companies in this sector. 

Adani group has built a good reputation for executing on time like commissioning the largest hybrid power plant in 9 months or successfully managing the Mumbai airport. To date, all the companies in different verticals have been managed well and the market has put faith in them. 

Rise and Connection to PM Modi:

Adani and his family's close connection with Prime Minister Narendra Modi go back to when Mr Modi was the CM of Gujarat from 2001 to 2004.  Today the opposition parties claim that the growth of the Adani group (venture into defence, airports, and power) is indirectly driven by his proximity to PM Modi.  Gautam Adani, the chairman of  Adani Group became the 2nd richest person at the beginning of 2023.  

There is an element of truth in this narrative and that can be highlighted by a few examples.

PM Modi is a doer but likes to control things so that he can execute things the way he wants. He tends to select the same people for new assignments with whom he worked successfully in past (like Gujarat). Ex the architect of the new Parliament and Kashi Vishwanath Corridor is the same person who built the new secretariat of Gujarat, he handpicked the CM of Haryana with whom he worked as a prachaark. Similarly, he picked the Adani group for multiple new projects because he trusts them in delivering the way he wants (large scale, excellence, timely execution, courage).  This is in line with his working style and persona, which can be read in my book or here. 

Fast Forward to Feb 2023:

With this background on Adani and their close connection to the Government why the stock is trading at a PE of 94 when most infrastructure companies at the most will trade at a PE of 15-25 at the most? 

The answer to this lies in the opinion made by the market (fund managers, analysts) that, for the Adani group to grow at a rapid pace it needs the blessing and support of the current government in particular the PM. With only 15 months left to the next general election and opposition in disarray. It is clear that the market is factoring in that PM Modi is going to win the next general election and will come back as PM in 2024. This way the group's growth will be unhindered until 2029. In the stock market time span that's a good period to invest and make money. 

Similarly, Aswath Damodaan has an interesting conclusion on Adnai's stock valuation which is worth pointing out. 

Even with a further share drop, I am not tempted to buy shares in Adani companies, and it has little to do with the Hindenburg report. 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 your biggest competitive advantage. It is true that at the right price, I would be willing to expose myself to those risks, but it would require a significant discount on intrinsic value, and we are not even to close to that point yet. In short, I will watch this tussle between the Adani Group and Hindenburg from the sidelines, with less interest in the firm and more in what changes it may (or may not) bring to business, investing and regulatory practices in India.

Finally, I can't make sense of any other economic reason, why the stock is still overpriced at Rs 1719, other than what I have outlined above.