Adani Group firms' valuation premium over Sensex surges to new high

As the Adani Group companies continue to scale new heights on the bourses, they are becoming expensive compared to the broader market.

The seven listed group stocks are trading at a trailing price-to-earnings (P/E) multiple of 109.2X, which is nearly five times the Sensex companies’ average trailing P/E of 22.9X on Tuesday.

This is the group’s highest valuation premium over the index (see the adjoining chart).

The group companies reported combined net profits of Rs 17,676.3 crore during the trailing 12 months ended June this year against their market capitalisation of Rs 19.3 trillion on Tuesday.

There has been a decline in the P/E multiple of the group stocks but the moderation in valuation has been much sharper in the broader market.

For example, the group’s P/E multiple is down just 6 per cent from 116.4X at the end of December 2021.

In comparison, the Sensex stocks are now a third cheaper than their peak P/E multiple of 34.4X at the end of March 2021.

Among the 30 stocks constituting the Sensex, the P/E multiple ranges from 91.9X in the case of Bharti Airtel to 3.3X in the case of Tata Steel.

There are no Adani Group companies in the Sensex.

There has been a rapid rise in the valuation premium of the group companies. Their combined market capitalisation has doubled during the year so far from Rs 9.62 trillion at the end of December 2021 to Rs 19.3 trillion on Tuesday.

The Sensex is up just 1.33 per cent during the period.

The group valuation premium over the index is even bigger on the metric of price-to-book value (P/B).

The group stocks are trading at a P/B ratio of 19, which is 5.6X times the Sensex stocks’ 3.4X. On this count also, this is the biggest valuation premium for the group over the index stocks.

Till three years ago, the group’s valuation was similar to that of the index. The overtaking happened in the first half of FY21 and the group stocks continued to become expensive compared to the broader market.

The group companies’ combined reported net worth was Rs 1.02 trillion at the end of March this year.

For comparison, among the Sensex stocks, the P/B ratio ranges from 81.3X in the case of Nestle India to 1.1X in the case of NTPC.

Many analysts say P/B is a more reliable measure of stock valuation than P/E multiple, which is volatile because it is affected by changes in companies’ quarterly profits.

Analysts attribute the group’s valuation premium to the shareholders’ expectations of a rapid rise in the earnings of its companies over the next few years.

The group companies’ combined annual net profits need to grow 377 per cent from the current levels for the conglomerate’s average P/E multiple to decline to the level of the Sensex stocks.

Over the last three years, the group’s combined net profits have gone up 227 per cent cumulatively.

The rise in the group’s combined earnings would be much lower if the other income and exceptional gains Adani Power reported in the last two quarters were excluded.