Aswath Damodaran flays Adani Group for high debt, but fights against fraud tag

(Illustration by Suneesh Kalarickal)

Valuation guru Aswath Damodaran has said the Adani Group, as a whole, and Adani Enterprises, in particular, have too much debt as the power-to-port conglomerate bleeds on its wealth after a US short-seller accused it of stock manipulation.

The high level of debt has done more harm than good for the group, the professor of finance at New York University’s Stern School of Business said in a blog post on February 27.

“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 bad business practice, not a con,” said Damodaran.

“In fact, as you can see from the cost of capital graph, 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 subsidised by someone (government, sloppy bankers, green bondholders).”

Hindenburg aftermath

Hindenburg Research in a report on January 24 flagged high levels of debt and also accused the group of stock manipulation. The group has denied the accusations but has failed to assuage investors. Its companies have lost nearly Rs 16 lakh crore in market value from their peak.

The group has reiterated that the debt was manageable even as it has started prepaying some of its debts.

Damodaran, though said, in his assessment, Adani Enterprises, the holding company for several of the group's new ventures, carries too much debt, with an actual debt of Rs 413,443 million, more than double its optimal debt of Rs 185,309 million.

“Reducing its debt load will not just lower its risk of failure, but also lower its cost of capital,” he added.

On February 28 afternoon, shares of Adani Enterprises were trading 14 percent up at Rs 1,360, thanks to low-level buying. But it still trades at nearly a third of the valuation from its 52-week high.

In an earlier blog post, Damodaran had said he believed that Adani Group, despite all its flaws, remained competent in India's infrastructure space which is full of incompetent players.

He pegged the fair value for Adani Enterprises at Rs 947, factoring in upbeat assumptions on revenue growth and operating margins.

Highlighting bad business practices, especially when it comes to taking debt when several factors, including rational and irrational, determine the behaviour, Damodaran said in their zeal for control, insiders, founders and families sometimes make dysfunctional choices, and one of those is borrowing.

"A growing firm needs capital to fund its growth, and that capital has to come from equity issuances or new borrowing," said Damodaran. "When control becoming the dominant prerogative for those running the firm, they may choose to borrow money, even if it pushes up the cost of funding and increases truncation risk, rather than issue shares to the public (and risk dilution their control of the firm)."