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Are Adani’s listed firms looking down the barrel of a major correction?
Mar 22, 2024
Is a significant 'correction' looming for Adani Group companies?

The Adani Group’s listed companies lost over US $15 billion in value during a wider market correction on 13 March 2024 amid warnings from India’s market regulator about ‘froth’ in the stock market. Despite a partial recovery, they once again lost about US $8.5 billion on 18 and 19 March. The Group’s stocks and bonds have all been consistently down over the past month, raising the possibility of a group-wide correction underway. While there have been long-standing concerns regarding the Adani Group’s listed firms being over-valued, in this report AdaniWatch analyses coverage of Adani Group shares by analysts and investment in its shares by mutual funds to quantify how little Indian market professionals trust the Adani group’s listed companies’ valuations. This analysis calculates that Adani stocks are overvalued by at least 32%.

The explosive report by US-based short-selling firm Hindenburg Research of January 2023 held that the Adani Group’s shares were over-valued on the Indian stock exchanges by 85%. This over-valuation, that report said, was attributable to alleged manipulation of the Group’s share prices. The report alleged that the Adani Group was funnelling money into its own shares through shell companies disguised as independent foreign-portfolio investors and artificially pushing up its share prices to levels far above those justified by the underlying fundamentals of its businesses.

On 13 March 2024, a downward trend started in Indian stock markets. Since that day the Bombay Stock Exchange’s Sensitive Index (SENSEX) has fallen to below its 2024 starting level. These losses have come alongside a series of events that depressed the market – including the widespread expectation that the US Federal Reserve would not cut interest rates in its March monetary policy meeting, a warning from the chairperson of India’s securities regulator of ‘froth’ in sectors of the Indian market, and a series of revelations about companies’ donations to political parties.

Adani shares and bonds are both down in the past month

This period has been particularly harsh for the Adani Group. On 13 March its cumulative loss in market capitalisation since the start of the year exceeded Rs 1.26 trillion (about US $15.1 billion). Its stocks partially recovered in the following two days, but took another beating after Bloomberg reported that prosecutors in the United States’s Department of Justice are investigating whether an Adani Group company and Group chairman Gautam Adani paid bribes to obtain government contracts. The Bloomberg report was published on the evening of Friday 15 March after Indian stock markets had closed for the week. When the markets re-opened on Monday 17 March, the Adani Group’s stocks lost over Rs 700 billion (about US $8.5 billion) in market capitalisation.

The Adani Group has denied allegations concerning bribery, terming them false, and has told the Indian stock exchange that it is aware of an investigation into an ‘unrelated third party’.

However, the wider market trend suggests that the downturn in Adani stocks may not be a simple reaction to news reports but could be part of a wider ‘correction’ that the Indian stock market is undergoing. Unless there is a trend-reversing intervention that causes the share prices to recover, which could take the form of large block purchases of shares by portfolio investors, institutions or other forms of equity infusion by its owners, the Adani Group may face a correction of up to 30%.

Table showing Adani Group’s stocks’ recent performance as of 19 March (National Stock Exchange data from Economic Times)(Story continues below)

 

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Chart: Adani Group’s stocks’ recent performance (Data Source: NSE data on Economic Times)

The Group’s outstanding bonds were also almost all down over the past month.

Table: The Adani Group’s bonds had been down over the month to 19 March 2024 (Data source: Bondblox)

The Adani Group’s stocks have remained highly volatile despite regaining much of their lost value since the Hindenburg report. This raises the question of whether their valuation on the market is true to the underlying fundamentals of the companies concerned.

Does the market trust Adani’s valuation and how can we know?

Valuing a company and projecting its future performance based on its financial fundamentals form the principal job of market professionals such as analysts, fund managers and investment advisors.

Analysts judge how well a company’s stock is likely to do and issue recommendations for investors to buy, sell or hold a stock, and set targets for its stock price. Their performance is judged against the actual performance of a stock compared with the analysts’ predictions. If an analyst predicted the performance of a stock correctly, it is taken as a proxy for having correctly valued the company and correctly projected its performance. As a result, analysts tend to stay away from stocks whose price is inflated beyond the company’s underlying value – because this suggests extraneous factors outside the company’s performance are affecting its stock price, complicating the business of making accurate predictions.

Fund managers, especially mutual-fund managers, are in a similar position. They conduct analyses regarding whether or not to invest in a particular stock. Their job is to ensure that their investors’ money is invested safely into a stock portfolio that guarantees a return. If their mutual fund does well, it is an indication that their analysis was correct. So, due to the same incentives as analysts, they tend to avoid investing in companies whose valuation on the market they judge to be highly inflated compared with their fundamental value, because they cannot trust those stocks to follow predictable trends. For these reasons, regular analyst recommendations and mutual-fund investments into a stock can be taken as a measure of the confidence of market professionals in a stocks’ valuation.

Of all the Indian listed companies, the top 80 have a market capitalisation of more than Rs 1 trillion (US $12 billion). Among them are seven of the ten listed firms of the Adani Group – Adani Enterprises, Adani Power, Adani Ports and Special Economic Zone, Adani Energy Solutions (formerly known as Adani Transmission), Adani Total Gas, Adani Green Energy and Ambuja Cements.

However, these stocks are among the least trusted among market professionals; they are among the least covered by analysts, and the least invested in by mutual funds. AdaniWatch gathered data to look at how many analyst reports were issued about those top 80 firms, and what percentage of their shares were bought by mutual funds and the analysed data is presented below. The data is based on publicly available information as of 5 March 2024 and does not take into account changes since then.

Adani firms are among the least-covered by analysts

The table below lists Indian stocks with market capitalisation of over Rs 1 trillion and looks at to what extent the stock has been analysed in the past five years (FY19-20 to FY23-24) based on Trendlyne data to show how remarkable its lack of coverage is for similarly sized companies. On average 5.5 reports are issued on each stock every quarter, and the most covered stocks see over 10 analyst reports every quarter.

The table shows the marked lack of coverage of Adani stocks by firms analysing the stock market. Analysts have generally declined to cover Adani stocks – suggesting a concern that the stock price is manipulated and is thus not a reliable measure of the company’s valuation.

Six of the seven Adani firms are in the bottom fifteen, with five in the bottom ten. The only outlier, Ambuja Cements, is comparable with the average, at 5.6 reports about it every quarter – and this company was not in the Adani Group until its acquisition by the Group in mid-2022.

Of the five in the bottom ten, Adani Power and Adani Energy Solutions (previously Adani Transmission) were covered just once by an analyst in the past five years. Adani Green, Adani Total Gas and Adani Enterprises were covered three, seven and twelve times, respectively.

Table: Analyst coverage of listed companies with market capitalisation of over Rs 1 trillion based on Analyst reports compiled by TrendLyne

Chart: Adani firms are among the least covered by analysts (Data Source: TrendLyne)

Adani firms are among the least invested in by Mutual Funds

The same is the case when it comes to Mutual Fund investments. The following table shows the average quarterly mutual fund investment (as a percentage of their total float) over the past four quarters based on Economic Times data.


Table: Mutual fund investment in listed companies over past four quarters with market capitalisation of over Rs 1 trillion based on Economic Times data

Once again, the Adani companies are towards the bottom. The same six are in the bottom twenty now, while Ambuja Cements is, once again, close to the average (the average being 7.79 percent, Ambuja Cements is at 6.12 percent). Four of the bottom six are Adani companies – Adani Power, Adani Energy Solutions, Adani Total Gas and Adani Green respectively. Adani Enterprises and Adani Ports and SEZ are ranked 70 and 61 respectively.

Chart: Adani firms are among the least invested in by mutual funds (Data Source: Economic Times)

Are Adani firms overvalued, and by how much?

Why are the valuations of Adani Green Energy so doubted by Indian finance professionals? Allegations of stock manipulation long pre-dated the allegations in the Hindenburg Report of January 2023. That report anticipated an ‘85% downside’ in Adani Group stocks taken together.

Even today, a different market analyst produces a significant figure of overvaluation. Data compiled from Alpha Spread, a service that provides valuations based on different methods of calculation, is presented below. When combined across the ten Adani stocks, AdaniWatch calculated an overall overvaluation of around 32%.

Table: Adani listed firms’ overvaluation or undervaluation based on Alpha Spread’s base case intrinsic valuations

Chart: Adani firms’ overvaluation or undervaluation based on Alpha Spread’s base case intrinsic valuations

Combining the ten stocks’ actual market capitalisation with their intrinsic valuation based on Alpha Spread’s valuations in the base case (with a financial model that uses assumptions deemed most likely to occur), AdaniWatch calculates that the Adani group’s listed companies as a whole are over-valued by at least 32-33%.

As the Indian markets undergo a long overdue correction, this means the Adani Group’s listed firms may see a correction (fall) of up to 32-33% in this time, unless block deals by portfolio investors or large institutions save the day for these companies. Such a correction would represent a fall of around US $60 billion in the Adani Group’s market capitalization.

The author is an independent journalist.