Q&A_ Is Adani group in a bubble?

Nikhil_Tripathi Updated   
Adani group is in a bubble, if I consider the following points.

1. Rs 400 to Rs 4000 in a matter of 2 years. This isn't a behaviour of a large-cap stock.

2. The Adani group companies have borrowed hugely. Just look at the debt to equity ratio of Adani companies:-
Adani Enterprises: 1.31
Adani Ports: 1.04
Adani Transmissions: 3.16
Adani Total Gas: 0.45
Adani Power: 1.87
Adani Green: 7.70
Adani Wilmar: 0. 40
Average debt to equity is 2.275.
Debt to equity above 1 is bad.

3. The overleveraged companies will mostly hit hard in a scenario of a recession. The central banks will increase interest rates to fight inflation , which will increase cost of borrowing. Interest rate payments in the over-leveraged companies will keep eating their current as well as future profits. This profits is already decreased because of a recession. You and me (consumers) will spend less on goods and services due to high cost of living, which has already decreased the profit in most of the companies' pocket.

4. Coming recession: Inflation has crossed highest in 4 decades in USA and UK, 3 decades in India, etc. The central banks will keep increasing interest rates to stabilise their respective economies.

5. The political friendship:- The friendship between current ruling party and Adani has been stronger due to the give-and-take relationship in the past. This is one of the reasons why people and investors are betting hard on Adani companies.

6. What should retail people do:
A: Stay away from Adani group companies. There are tons of good undervalued companies so why would anyone only want Adani group company?
Just because of FOMO (fear of missing out)? then, it's harmful in the long term especially to retail people. You know, the big investors (institutions) has expertise and knowledge to manage their losing bets. But retail people has only option to sell it at a loss.

Recession has not been reflected in the Indian stock market now, but the big investors (institutions) will be lowering their stakes in these risky companies once they see weakness.
What do you think about this analysis, please let me know.

Disclaimer: The analysis I've shared is based on my understanding and experience in the markets. The future can not be predicted only be forecasted based on higher probability of happening. Please do your own analysis and/or consult your financial advisor before trading or investing.
40% of debt is taken from banks. Means 8% from global international banks, 11% from Indian private banks and 21% is from PSU banks (advantage of political relations).

Kingfisher Airlines had a debt to equity of 3.2, it' not very uncommon in airlines business. But Adani is different, if the company collapse like Kingfisher Airlines, then we as a tax payer will be burdened. PSU banks will try to restructure, government will either tax it's citizens or sell government bonds to RBI to introduce more Rupees into market, resulting in a demand pull inflation (what we're experiencing in the USA).
"11% of Adani Group debt is taken from Indian private banks and 21% is from PSU banks..."
Due to faltering confidence in Adani Group, the Banknifty fell more than 3.13%, Nifty 1.61%, Adani Ent 18.52%, Adani Ports 16.29%, Adani Green 20%, SBIN 5%, etc.
I have a negligible qty (swing trade) at Rs 1752, but this value isn't justified either. I bought it hoping for a bounce-back in prices. But, I will be selling it at a break-even or little profit on Monday, because as I dug more deep into Adani Group, it's value in my opinion is less than Rs 400. Please read following facts.

1. Adani Enterprises is a commodity trading company (like Coal and Iron ore, etc). Commodities move in a cycle. Adani Ent benefited from selling coal when "energy prices were high due to various events, like war in Ukraine, Corona, Govt support, Etc". Tell me any energy company that multiplied 23 times (from recent higher low on weekly chart), in such a short period of time and sustained prices in a long term. Hence, commodity and energy companies have cycles and average price to earning (PE ratio) of not more than 10, but Adani Ent had 293 PE (at peak).
Such a growth in such short period of time is mostly possible in the technology companies, because their business is infinitely scalable (like setting servers is much much easier than setting up a brick-and mortar store).

2. There are reports (Forbes) that Adani Group manipulated stock prices, by holding more than 75% of company's shares through overseas shell companies, which is prohibited by Indian corporate laws). Hence, the shares are less in supply keeping the prices ridiculously high.

3. Black Swan author Taleb’s advice for Gautam Adani: Don’t say ‘everything is OK’; "Advice to Adani (& others): It (sic) everything is OK, don't produce a video saying "everything is OK"," Taleb tweeted on February 3.

4. I have analyzed some stock price movements, especially Unitech and Bajfinance. Most of the companies which sustained it's prices in the long term, "didn't multiplied more than 15 times in 3-4 years". Unitech multiplied 150 times since the higher swing low in a matter of 2.5 years, this isn't believable depending on the business of real estate, that isn't scalable like Tech companies.
As a thumb rule, capital intensive businesses aren't scalable in a short period of time, to justify ridiculously high prices.

5. Bajaj Finance, it multiplied 28 times (between 2009-13) from higher swing low. It doesn't have financial statements of those years available so I cannot verify EPS. It is a finance company. It isn't that capital intensive like Telecom, Aviation, Automobile, Construction (real estate), Cement, Energy, etc. You see, these companies require huge working capital (they incur a lot of interest) and depreciation (on their assets like plant and machinery, etc).
Finance and banking is a key driver in Economic development in any country, they create credit and growth. India was on a sweet spot after liberalization in 1991 and these finance and banking companies well capitalized on it.

6. Tesla capitalized on environment consciousness and Democrats (they were always environment conscious and create policies to support it).
Indian IT companies (TCS, INFY, etc) capitalized on cheap labor, increasing dollar to INR prices, Etc.
Technology companies (Microsoft, Apple, Google, Amazon, Facebook, etc) capitalized on growing popularity and acceptability of Internet.
Adani has an opportunity to capitalize on (govt support and easy debt due to govt support). But, it is betting on the wrong sectors, "most capital intensive" businesses I would say. What do you think, please comment that down below.

Disclaimer: Above article is not a trading or investing advice.
Block, Inc is an another company targeted (shorted) by Hindenburg Research by releasing its report yesterday. The company is a payments firm being run by Twitter founder Jack Dorsey. The company's stock is at a good weekly trendline support (unlike Adani Ent which was at all time high), this stock had less room to fall on the downside. I thought Hindenburg might prove wrong this time. BUT, the company had P/E of 521 in the calendar year 2021, it hasn't posted a profit since then. So, the similarities in Adani Ent and Block Inc is the "ridiculous P/E" (in a hindsight without digging very deep into fundamental problems).

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