Hindenburg Research’s report about Adani Group stocks has created waves, not only in stock exchanges, but also in political circles. While political parties and politicians are hurling allegations and counter allegations at each other, the media and social media is filled with debates about valuations of Adani Group stocks. Hindenburg Research has highlighted the skyrocketed valuations of Adani Group stocks. The concern raised by Hindenburg Research about the valuations are not new. Many participants and experts in capital markets have been debating this issue for quite a long. Many stock brokers and equity research analysts have a buy rating or recommendation on the stock and are bullish on the future prospects of the company. At the same time, many brokers and equity research analysts have been lukewarm to negative about valuations of Adani Group stocks.
Their views have been exactly what Hindenburg Research has observed in its report. In stock markets, equity research analysts come out with research reports on companies listed on the exchange or are coming out with IPOs to get listed. These equity research analysts are either working with the research arm of the broking house or are independent equity analysts. They come out with reports that explain the company’s business, sector/(s) and market/ (s) in which the company operates, growth drivers for the company, projected financials, and valuations of the company. Based on this, the analyst comes out with a rating or a recommendation for the stock.
The recommendations for the stocks are either But, or Hold, or Sell. So any company that is undervalued gets a Buy rating, and a company that is overvalued gets a Sell rating. While many brokers had issued reports on Adani with a buy recommendation, equally large number of brokers were skeptical about the valuations and, like Hindenburg, they also believed that Adani stocks are overvalued. This brings us to the core issue of the dichotomy between valuations and price of the stock. The valuations are based on the perception of an individual analyst, which varies from one analyst to another. It is based on the perspective that the person carries about the business, sector, and company’s prospects. Hence, the same company has multiple valuations, because projected financials and long term outlook of the company made by every analyst differs, even if their view on the stock, i.e. Buy or Hold or Sell, is common. Coming to the issue of Adani Group stocks, disagreement over valuations is perfectly fair and justified. There is nothing wrong in analysts having a negative view on the stocks.
However, at the same time, investors having a positive opinion cannot be blamed for a wrong decision. The ruling dispensation BJP is blamed for arm-twisting state-owned State Bank of India and Life Insurance Corporation of India to invest in Adani stocks. This accusation can be deemed to be true, given the track record and history of politicians misusing their powers to influence public sector banks and financial institutions in taking wrong decisions. However, if we closely peruse the list of institutional investors who subscribed for Adani Enterprises Ltd shares at an offer price of Rs 3,276, we will find marquee investors like Abu Dhabi Investment Authority (the sovereign wealth fund of the Royal family of Abu Dhabi), Goldman Sachs, Morgan Stanley, etc. Even after the controversy broke off, UAEbased $300 bn conglomerate—International Holdings Corporation—announced its interest in subscribing for the shares of Adani Enterprises Ltd. This raises questions on whether BJP or Modi can arm-twist such global investors. If we look beyond Adani, the question of justification of valuations has been a hotly and passionately debated issue. Many analysts who despite having a positive view about Adani’s prospects, were uncomfortable with the valuations of Adani stocks, had similar concerns about valuations of many e-commerce and online retailing companies. This becomes even more intriguing in the wake of the fact that many companies in the space are loss making and yet attracting premium valuations in fund raising rounds. Even more intriguing is the fact that fund raising is done to raise funds to finance cash burnout. Again there are no tangible fixed assets in these tech companies that secures the investors. Compare that with Adani group companies that have ports, airports, power plants, cement plants, power transmission lines, etc. In case of tech companies, the investors and analysts hold a long term view about the prospects of the company and pay a premium for the shares, even when the company is in losses. Many institutional investors held a similar view about Adani group companies. They believed that long term outlook of Adani group companies was directly linked with the long term economic growth and it would reflect in earnings growth in the future. That was one of the reasons for global investors like ADIA, Goldman Sachs, etc to pay a premium to buy Adani stocks. So the crux of the issue is that every person carries a different perspective and perception about the company, its future, and, in turn, its valuations. However, the price is the reality.
Sumeet Mehta is a Chartered Accountant by qualification and a Corporate Finance professional. He is author of the book “Diagnosing GST for Doctors” published by CNBC Books18. He tweets from @sumeetnmehta. This is the second of a three-part series. Opinions of the author are his own and personal.