Why Aswath Damodaran Backs Adani On ‘No Fraud', Calls Out Hindenburg For Exaggerating Financial Troubles

Beleaguered Adani Group, facing the ramifications of the Hindenburg Research report has finally received some support on its claims of ‘no fraud.’ In an explosive blog post on the Adani Enterprises and other companies of the group, valuation guru and Professor of Finance at the Stern School of Business at New York University, Aswath Damodaran has decoded the Adani vs Hindenburg crisis, raising the point that the latter may be indulging in ‘hyperbole’ when accusing the company. 

“It is 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. Adani, notwithstanding all of its flaws, is a competent player in a business (infrastructure), which, especially in India, is filled with frauds and incompetents,” Damodaran wrote in a blog post on Sunday. 

At a time when the billionaire Gautam Adani-led Adani Group is navigating tricky waters with the world, stock markets, lending agencies and so on, Aswath Damodaran has said that despite its flaws, the Adani Group remains ‘competent in India’s infrastructure space’. 

Over the last couple of trading sessions, the Adani Group stocks crash have been the biggest newsmakers of the stock markets. While some stocks revived in an intra-day trading session on Friday, at a time when the group’s stocks are supposedly extremely volatile, Aswath Damodaran has pegged the fair value for the Adani Enterprises stock at Rs 945. 

He added, “I don't think that there is much doubt that the market was over stretched when it valued the Adani companies collectively at $220 billion (₹ 17,600 billion) and Adani Enterprises at $53 billion (₹ 4,243 billion). In fact, 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, yields a value of just about ₹ 945 per share, well below the stock price of ₹ 3,858 per share.”

Let’s take a look at why Aswath Damodaran favours Adani’s stance of ‘no fraud.’

Adani vs Hindenburg – Aswath Damodaran’s Interpretation Explained

Arguing for the Adani story, Damodaran begins his interpretation by mentioning that the crash in Adani’s stock price primarily includes three factors - ambitious family group obsessed with control, a financial market where trading momentum trumps financial fundamentals and a capital market where governments and regulators put their thumbs on the scale. 

Explaining each and every fundamental of the Adani Group, Damodaran aids the decoding by breaking down Adani Enterprises’ 20-year long history into three sub-periods. These include, “The 2022-2015 time period, where the company grew its revenues steadily and reported solid, albeit low, profitability; the 2016-2021 time period after a major restructuring in 2015 that spun off Adani Ports, Adani Power and Adani Transmission, as separate companies; and the most recent year and a half (from March 2021 to September 2022), where the company reported a quantum leap in revenues.”

Adani vs Hindenburg – The Company’s Debt

Using the cashflow from Adani Enterprises, Aswath Damodaran decodes how the company funded its investments. He explains that while Adani Enterprises raised from both debt and equity, during a particular period, the company funded almost all its growth from debt. He adds that it is not uncommon for infrastructure companies to borrow money and carry heavy debt loads. However, what differentiates the Adani Group is its scale.

“The debt to book capital ratio has stayed high through the period, but the rise in market capitalization in 2021 and 2022  lowered the debt to market capital ratio. The interest coverage ratio better captures the limited buffer that the company has on its debt load, since the operating income is barely higher than interest expenses,” Damodaran wrote. 

Hindenburg vs Adani – The Company’s Ownership

Even by Indian family group company standards, as per Damodaran, the degree of ownership that Adanis’ have in their companies, is high i.e., the family owns “about 73% of the outstanding equity in these companies.” Of the 27.5 per cent that is not held by the family, a significant percentage is held by foreign institutional investors (FIIs), with Vanguard and Blackrock making the list, largely through their index funds holdings. 

On this, he wrote, “While a family controlling a significant portion of the equity in a family group may not surprise you, the fact that this ownership stake has hardly budged over a decade where the company has increased in scale more than ten-fold, with dependence on external capital for that growth, is striking. The reason, of course, lies in the earlier graph, where we looked at how dependent the Adani companies have been on debt for their funding, rather than equity.”

Adani’s Market Capitalisation – Explained

While the valuation guru has supported the Adani Group’s stance, he has also accepted that despite every pricing metric in place, “the surge in the last two years is striking...... What makes it surprising at Adani is the fact that this is an infrastructure company, and the irrational exuberance that animates pricing in tech or software usually has little play in this sector.”

As per Damodaran, the PE ratio for the Adani stock has gone from a 15 times earnings in the 2016-21 time period to 214 times in the most recent two years. This also means that the Adani Enterprise value has zoomed from about 12 times EDITDA during 2016-21 to 53 times EDITDA in the most recent two years, as mentioned before.

Usually, the spike in pricing multiples is a feature of volatile markets. But in Adani’s case, as per Damodaran, “One benign explanation is that foreign institutional investors are using Adani listed shares to make a joint bet on Indian growth, infrastructure investment and Indian politics, and that the pricing is being pushed up because of the limited float, but as we will see when we get to the short sellers' thesis, there are more malignant explanations, as well.” 

Giving a final assessment of the Adani vs Hindenburg issue, Damodaran writes, “Hindenburg should be complimented for their legwork, but their critique of the Adani Group rests on a mix of serious contentions, circumstantial evidence and questionable claims....... I am puzzled that Hindenburg's short thesis spends as much time as it does trying to convince us that the company is over levered...... The infrastructure business is full of companies that borrow heavily, with little or no earnings buffer, and I am not sure that many of them will withstand the Hindenburg test for over leverage.”