Adani stocks among most expensive on bourses: Check details here

Group's listed stocks' P/E of 102x over three times Sensex's 33x

Adani group companies such as Adani Ports and SEZ and Adani Enterprises were among the biggest losers on the bourses on Monday. The combined market capitalisation of the six group companies declined by 5.7 per cent to Rs 8.97 trillion from Rs 9.51 trillion on Friday.

The group’s cash cow, Adani Ports and SEZ, was the biggest loser, declining 8.4 per cent, while Adani Enterprises was down 6.3 per cent. Other group companies such as Adani Power, Adani Green, Adani Total Gas, and Adani Transmission were down 4-5 per cent on Monday. The immediate trigger for the decline was the news about the freezing of the trading accounts of foreign portfolio investors that held shares in listed group companies, but the stocks’ high valuation also means higher downside risk.

Adani group companies remain among the most expensive stocks on the bourses. On Friday, the six listed stocks ended with a price-to-earnings (P/E) multiple of 102x on average, more than three times the benchmark BSE Sensex’s P/E multiple of 33x. (See the adjoining charts).

The group stocks are also richly valued on price-to-book value (P/B) ratio. If one considers their market capitalisation on Friday, the group stocks were trading at a P/B ratio of 12.9x, nearly four times the Sensex P/B ratio of 3.3x.

Analysts say such a high valuation always raises the risk of a correction. “At their current valuation, a lot of positive news and optimism is built into the share price of Adani group companies. This always raises the possibility of a sharp correction in stock price at the first whiff of negative news,” said an analyst on the condition of anonymity.

Adani group companies have been the biggest beneficiaries of the rally over the past year. The combined market capitalisation of Adani group companies has risen nearly 600 per cent since the end of March last year against a 78 per cent rally in the Sensex. In comparison, the combined net profit of Adani group companies was up 140 per cent in financial year 2020-21 (FY21), while revenues were down 2.6 per cent. The group companies’ combined Ebitda or operating profit was up 65 per cent last fiscal.

As a result, the group companies’ P/E multiple expanded from 27.4x at the end of March last year to 102x now. Over the same period, the benchmark index’s P/E multiple expanded from 18x to 33x.

Some analysts also worry about the high indebtedness of the group. The group companies reported combined gross debt of Rs 1.48 trillion at the end of March 2021, based on unaudited results for FY21 up 8.2 per cent on year-on-year basis. This translated into a gross debt to equity ratio of 2x, which is one of the highest among the country’s top business groups. 

However, the group companies’ record high market capitalisation makes it easier and cheaper for the group to raise equity capital and reduce its leverage.