The Adani saga has drawn a variety of reactions ever since a report by US-based Hindenburg Research set off the rout in Adani stocks from 25 January 2023. Angry 'nationalists' called it an attack on India. This was followed by reams of Adani apologia from mainstream editors and reporters. A few lawsuits have got the Supreme Court exercised. But the core issue about the Adani saga is how the share prices of the group companies rose to such extraordinary levels without any investigation or regulatory intervention.
The fact that Adani Total Gas Ltd (ATGL) and a few other Adani stocks have remained pinned to the lower circuit with no buyers in sight, day after day, only confirms the central point of the Hindenburg report: All Adani stocks were insanely overvalued the day the report was released. That price rigging is the elephant in the room, which we have refused to see.
I am not sure if most people understand the full implications of how crazily priced Adani shares had become. Since Adani and Ambani are often hyphenated by politicians, let us compare valuations of their stocks for perspective by doing some simple numbers. At its peak, Adani Enterprises, a component of the Nifty 50, was valued at a price-to-earnings (P/E) ratio of 427. If Reliance Industries was valued at a P/E of, say, 400, its market-cap today would be 16 times what it is and Mukesh Ambani would be the world’s first trillionaire, with a net worth of US$1.38trn (trillion)!
And, of course, if TCS and Infosys were similarly valued, the BSE Sensex would be 8-10 times higher at 480,000 to 600,000 instead of 60,000 or so! On the other hand, if Adani shares were valued as modestly (or correctly) as those of Tata Consultancy Services or Reliance Industries, Gautam Adani’s peak net worth would have been only a few billion dollars, not US$150bn (billion) which briefly made him the world’s third richest man. It is only this insane overvaluation that is unravelling now.
On Tuesday, 24 January 2023, the price of ATGL was Rs3,892, not too far from its all-time high. Yesterday, it was Rs715, a decline of about 82% in a month. To the shock of most participants, day after day, several Adani companies have been locked on the 5% lower circuit. For 22 consecutive trading days, there were no net buyers of the stock, only sellers. On Friday, about 175,000 shares were traded on the National Stock Exchange (NSE), but all at the lower circuit, as buyers were again swamped by a much larger group of anxious and eager sellers. So much so that the open, high, low, and close prices of the stock were the same – the stock was stuck at the lower circuit from the first minute till the last.
The question that many people are asking is: Who is selling in such desperation? The Adanis hold 74.8% of the stock and another 17.25% is held by 'foreign institutional investors' who are allegedly in the Adani camp, another 6.09% is held by domestic institutional investors, leaving only 1.85% in the hands of the public. So, who is selling?
That has an easy answer, but it is the wrong question to ask. ATGL has 110 crore shares. If the public holds 1.85%, it means 2 crore shares are with the public. On Friday, just 175,000 shares were traded and remained at the lower circuit. If the stock remains stuck at the lower circuit with such meagre selling, it can keep going down for a long time as the panic-stricken public continues to sell. Some FIIs, who have a large holding, could be sellers too. The question, therefore, is not who is selling, but why no significant buyers are scooping up something that has become 82% cheaper in just a month? The dismal answer is, ATGL is still perceived to be grossly overvalued, which is the crux of the Adani controversy.
According to Hindenburg, ATGL’s fair value (in accordance with industry norms of price/earnings ratio), ought to have been 97.6% lower than what it was when the report was released! That would make ATGL’s fair price about Rs100, but it is still Rs714, even after an 82% decline from the high. Stock valuation can be influenced by a variety of factors, especially of those that are narrowly-owned. So, the Adani group stocks don’t need to keep going down and hit Hindenburg’s estimate of fair value. On the other hand, Adani Power, which Hindenburg had said was only 18% overvalued, has lost almost 50% in value.
There would have been only raised eyebrows and no brouhaha if Adani shares found ready buyers on every dip. But they haven’t. As it stands today, the Adani story has only one angle—how the stocks were rigged up to ridiculous heights, followed by the Hindenburg report on gross overvaluation and then the vertical free fall of Adani stocks. The debate is not about how efficient Adani group’s businesses are, whether he was favoured by the State and how hard it is to become the world’s third-richest person from humble origins. These peans of glory are misdirected and diversionary tactics designed to sidestep the main issue. The question anyone should first ask is how was the price-rigging allowed to get so horribly out of hand. Other discussions, questions and debate about the Adani saga come much later.
(This article first appeared in Business Standard newspaper)