MUMBAI: Adani Group stocks have been falling relentlessly since the damning report by Hindenburg was published on January 24. Over Rs 12 lakh crore in terms of market capitalisation of the Adani scrips has been wiped out, but not all group stocks have fallen in sync. This is where the valuation of individual stocks comes into play. The deep plunge has been possible due to sky-high valuations.
The Adani Total Gas stock has crashed nearly 81% since January 24, while Adani Ports has dived 27% in the same period — the fall is in sync with how overvalued they were. Adani Total Gas stock was trading at a multiple of 844 times its earnings on January 24, a number that not even the best disruptive technology company can boast of, while Adani Ports was at 30 times, according to price-to-earnings (PE) ratios sourced from Refinitiv database. Stocks that had relatively lower valuations have fallen less. ACC, which had a PE ratio of 54, has fallen the least (26%) among the 10 Adani Group stocks, followed by Adani Ports (27%) and Ambuja Cements (31%).
A company’s PE ratio is one of the indicators of how undervalued or overpriced a scrip is in relation to its profit. Technology and consumer brands, apart from other high-growth companies, usually command steeper valuations than infrastructure or state-owned companies. For instance, TCS has a PE ratio of 31, but Tata Steel has 5. Indraprastha Gas has a PE ratio of 18, while Mahanagar Gas has 13 — both these are in the same business as Adani Total Gas.
A stock price indicates the market’s perception. But when there is a meteoric rise in a particular share, as was seen in the case of Adani scrips amid the pandemic, alarm bells start to ring. In May 2021, ET reported that CLSA had dropped coverage on Adani Transmission with the foreign brokerage saying that the stock is driven by speculative interest, keeping valuation at a stratospheric 16 times premium to the sector. That month, Adani Transmission had a PE ratio of 114, which had more than doubled to 351 by January 24 this year. Currently, it is at 73. The May 2021 ET report was quoted by Hindenburg Research in its study.
In November 2022, V K Vijayakumar, chief investment strategist at Geojit Financial Services, had alluded to ‘stratospheric’ valuations too. “A major disconnect between profits and market cap can be seen in the case of Adani stocks. Gautam Adani has proven expertise in executing large infrastructure projects, but the stratospheric valuations of Adani stocks are a matter of concern,” he had said in a report. When contacted, a representative of Geojit Financial Services said the firm doesn’t track Adani Group.
Interestingly, Adani companies may not be a steal deal even after the selloff. Adani Total Gas, which is stuck in a rut of hitting lower circuits since the report, is still available at 156 times its earnings. “Stock-specific actions will continue in Adani Group,” Kranthi Bathini, director (equity strategy) at WealthMills Securities, said.