Sharp decline in Adani group mcap, valuation in the last two years

The decline started months before Hindenburg report in Jan 2023

The Adani group has seen a sharp decline in market capitalisation and equity valuation over the past two years, with key figures indicating that the erosion began a few months before the January 2023 Hindenburg Research report on the coal-to-airport conglomerate’s financials.

 

The situation worsened following US Securities and Exchange Commission's (SEC's) bribery allegations involving the group’s founder, Gautam Adani, and seven others in connection with projects under Adani Green Energy Limited (AGEL). This only accelerated the sell-off and valuation correction of the group’s stocks.

 

At its peak in August 2022, the combined market capitalisation of Adani group companies reached Rs 21.14 trillion, while their equity valuation peaked in April 2022, with a 12-month trailing price-to-earnings (P/E) ratio of 122.6x. By Wednesday, the listed Adani companies were trading at an average trailing P/E ratio of 35.6x, a sharp decline from 47.7x at the end of September 2024, and less than a third of their peak valuation. For context, before the Hindenburg report in January 2023, the group was trading at a trailing P/E of 88.6x.

 

In terms of profitability, the group reported combined net earnings of Rs 34,267 crore for the trailing 12 months as of Q2FY25, down from an all-time high of Rs 40,536 crore at the end of Q3FY24. Adani group companies are currently trading at a price-to-book ratio of 4.9x, compared to the Sensex companies’ average of 4x. At their peak, the group was valued at nearly 20x price-to-book ratio in August 2022. The group’s combined net worth stood at approximately Rs 2.5 trillion as of September this year.

 

While group companies continue to trade at a valuation premium to the benchmark Sensex, this premium has significantly shrunk in the past two years. The Sensex is currently trading at a trailing P/E of 22.91, down from 23.7x at the end of December 2022 and 24.6x at the end of April 2022.

 

Despite a strong recovery in share prices and market capitalisation during the second half of 2023 and the first half of 2024, the subsequent SEC charges have reversed most of these gains. As of Wednesday’s close, the nine key listed Adani companies had a combined market capitalisation of Rs 12.19 trillion, nearly 42 per cent down from their record high of Rs 21.14 trillion in August 2022.

 

In contrast, the benchmark BSE Sensex has rallied 35 per cent during this period, climbing from 59,537 at the end of August 2022 to 80,234 on Wednesday. The group’s combined market capitalisation has dropped by 36.5 per cent since December 2022, compared to a 32 per cent rise in the Sensex over the same period.

 

Business Standard’s analysis excludes the market capitalisation and earnings of ACC and Sanghi Industries, subsidiaries of Ambuja Cement, whose financials are incorporated into Ambuja’s consolidated profit and loss account.

 

Beyond the allegations, the decline in the Adani group’s market capitalisation has also been driven by a drop in the cumulative net profit over recent quarters. The combined profit after tax of Adani group companies fell 6.9 per cent year-on-year in Q2FY25, following declines of 29.5 per cent and 19.7 per cent year-on-year in Q1FY25 and Q4FY24, respectively. This marks a sharp contrast to the group’s high double-digit net profit growth for eight consecutive quarters from Q4FY22 to Q3FY24.

 

However, there have been signs of financial improvement within the group. Notably, its gross debt-to-equity ratio decreased to 1.12x at the end of September 2024, down from 2.12x at the close of FY22, marking the lowest level in at least 15 years.