Adani stocks trading at valuation premium over Sensex companies

Even after recent carnage, group firms' trailing P/E multiple at 29.4x, against 22.5x of 30-pack index

The meltdown in Adani Group companies’ market capitalisation (m-cap) in the past month had led to a sharp decline in equity valuation, but group companies continue to trade at a premium to the valuation of the S&P BSE Sensex. This, observed analysts, exposes its shareholders to further downside in stock price, unless Adani Group companies report a big surge in earnings in the quarters ahead.

The 10 Adani Group companies were trading at a trailing price-to-earnings (P/E) multiple of about 29.4x on Monday on average — still, nearly 30 per cent premium to the Sensex trailing P/E of 22.5x.

Similarly, Adani Group companies' current price-to-book (P/B) ratio at 4x is nearly 24 per cent higher than the benchmark index’s P/B ratio of 3.3x.

The P/B ratio for Adani Group is based on the combined networth of group companies at the end of September 2022 (first half of 2022-23, or FY23). 

Among individual Adani Group stocks, Adani Total Gas is the most expensive with a P/E of 148.7x, followed by Adani Green at 125x, Adani Enterprises at 66.3x, and Adani Wilmar at 62x.

For comparison, in the 2019 calendar year, Adani Group stocks were trading at a lower valuation, compared to the Sensex, but historically there have been extended periods when group companies’ P/E has been higher.

In the past two years, the listed Adani Group companies’ combined net profit has grown at a faster pace (compound annual growth rate, or CAGR of 27.7 per cent) than growth in the Sensex’s underlying earnings per share, or EPS (22 per cent CAGR).

Sensex EPS tracks the combined net profit of 30 stocks that are part of the index. There are no Adani Group stocks in the index.

Many analysts now expect a slowdown in Adani Group earnings growth, as it turns its attention away from growth and expansion towards cash conservation and debt prepayment. A slower growth in earnings generally leads to lower valuations.

Adani Group stocks have now lost nearly two-thirds of their m-cap since the publication of the US-based short seller Hindenburg Research report on group finances and ownership on January 24.

The combined m-cap of the 10 listed Adani Group companies, including Ambuja Cements, ACC, and New Delhi Television, declined to Rs 6.82 trillion on Monday, from Rs 19.2 trillion at the end of January 24, 2022.

As a result, the group average trailing P/E multiple declined to about 29.4x on Friday, down sharply from 82.6x on January 24 and 84.7x at the end of December 2021.

The calculation is based on Adani Group companies’ consolidated net profit — adjusted for exceptional gains and losses — in the latest four quarters, including the third quarter (Q3) of FY23.

The 10 listed companies of Adani Group reported a combined net profit of Rs 23,217.7 crore on a trailing 12-month (TTM) basis ended December 2022.

Adani Group has now slipped below Bajaj Group in the m-cap league table to fourth place. The nine Bajaj Group companies, led by their flagship Bajaj Finance, had a combined m-cap of Rs 7.85 trillion on Friday —nearly 15 per cent higher than Adani Group’s combined m-cap that day.

Tata Group companies with a combined m-cap of about Rs 21 trillion stays on top, followed by Mukesh Ambani-owned companies with a group m-cap of Rs 17 trillion.

However, Adani Group stocks continue to trade at a premium to the current valuation of listed companies from other big family-owned business groups. For instance, the 27 listed companies of Tata Group are currently trading at a trailing P/E multiple of 28.5x, nearly 3 per cent lower than Adani Group’s average valuation ratio.

Tata had a group m-cap of about Rs 21 trillion on Monday and TTM net profit of about Rs 73,000 crore in Q3FY23.

The Mukesh Ambani-owned Reliance Industries (RIL) is currently trading at a P/E of 25.4x, nearly 15 per cent lower than Adani companies’ current valuation ratio.

RIL ended Friday with an m-cap of Rs 16.03 trillion and reported a TTM net profit of Rs 63,606 crore in Q3FY23. Similarly, Bajaj Group stocks are currently trading at a P/E of about 28.5x on average, while Aditya Vikram Birla companies, such as Grasim Industries, UltraTech Cement, and Hindalco Industries, are trading at a trailing P/E of 15x Adani companies’ valuation ratio.