“The Adani Group collectively carries about three times as much debt as it should, confirming that the group is over-levered as well, but note that this is a bad business practice, not a con,” Damodaran wrote in his blog.
He argued that the cost of capital shows that there is little, if any, benefit in terms of value added to Adani from using debt, and significant downside risk unless the debt is being subsidized by someone (government, sloppy bankers, green bondholders).
“In my assessment, Adani Enterprises carries too much debt, with an actual debt of 413,443 million more than double its optimal debt of 185,309 million, and reducing its debt load will not just lower its risk of failure, but also lower its cost of capital. This company is part of a family group, where higher debt at one of the Adani companies may be offset by less debt at another,” said the finance professor who teaches at the Stern School of Business at NYU.
To deal with this cross-subsidisation, he aggregated numbers across all seven publicly traded Adani companies and estimated the optimal debt mix, relative to the combined enterprise values.
In a 106-page report published on January 25, New York-based Hindenburg Research had alleged that the Gautam Adani was pulling the largest con in corporate history.
“We have uncovered evidence of brazen accounting fraud, stock manipulation and money laundering at Adani, taking place over the course of decades. Adani has pulled off this gargantuan feat with the help of enablers in government and a cottage industry of international companies that facilitate these activities,” the report had said.Earlier in the month, Damodaran had written a blog post showing that the fair value share price of Adani Enterprises should be around Rs 945 per share without factoring any of the Hindenburg accusations of fraud and malfeasance.
“Even with the share price at 1,531 per share, I still think the company is priced too high, given its fundamentals (cash flows, growth, and risk) and before factoring the damage that might have done to the company’s reputation and long-term value, by this short selling episode,” he had said earlier.
After falling non-stop for seven consecutive trading days, the stock rallied up to 15% today amid reports that banks have decided to maintain the status quo on credit limits sanctioned for Adani Enterprises.
As seen from its 52-week high price of Rs 4,189.55, the stock is still down around 67% with investors finding it hard to come to terms with the allegations around accounting practices and stock manipulation made in the Hindenburg report released more than a month ago.
