Monday, February 27, 2023

Adani equities see a bigger decline

Adani stocks with higher PE ratios see steeper fall

MUMBAI: Since the damning Hindenburg Research report was published on January 24, Adani Group stock prices have been falling steadily. Although not all group stocks have fallen at the same rate, the Adani scrips have lost more than Rs 12 lakh crore in terms of their market capitalization. This is where individual stock valuations come into play. The profound dive has been conceivable because of out of this world valuations.

Since January 24, the stock of Adani Total Gas has fallen nearly 81%, and the stock of Adani Ports has fallen 27%, indicating that they were overvalued. According to price-to-earnings (PE) ratios sourced from the Refinitiv database, Adani Ports stock was trading at a multiple of 30 times its earnings on January 24, while Adani Total Gas stock was trading at a multiple of 844 times its earnings—a number that not even the best disruptive technology company can boast of. Stocks that were valued at a lower level have fallen less. Among the 10 Adani Group stocks, ACC has experienced the least decline (26 percent), followed by Adani Ports (27%), and Ambuja Cements (31%).

One way to tell if a scrip is undervalued or overpriced in relation to its profit is by looking at its PE ratio. Apart from other high-growth companies, technology and consumer brands typically command higher valuations than infrastructure or state-owned businesses. Tata Steel, on the other hand, has a PE ratio of 5. Mahanagar Gas has a PE ratio of 13, while Indraprastha Gas has a PE ratio of 18. Both of these companies are in the same industry as Adani Total Gas.

The perception of the market is shown by a stock's price. However, alarm bells begin to ring when a specific share experiences a meteoric rise, as was the case with Adani scrips during the pandemic. ET reported in May 2021 that CLSA had stopped covering Adani Transmission. The foreign brokerage said that the stock's valuation, which was 16 times higher than the industry's, was because of speculative interest. Adani Transmission's PE ratio was 114 in that month, but by January 24 of this year, it had more than doubled to 351! It is currently at 73. Hindenburg Research used the May 2021 ET report in its research.

V K Vijayakumar, chief investment strategist at Geojit Financial Services, had mentioned "stratospheric" valuations in November 2022 as well. A Geojit Financial Services representative stated that the company does not monitor Adani Group when contacted.

Interestingly, even after the selloff, Adani businesses may not be a steal. Adani Total Gas is still available at 156 times earnings, despite hitting lower circuits since the report. Adani Group will continue to take stock-specific actions, according to WealthMills Securities director (equity strategy) Kranthi Bathini. 

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