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Indian billionaire Gautam Adani, once the world’s third-richest man, has had a rough week in the markets. Bribery charges filed in the US knocked more than $25bn in value off Adani Group companies on Thursday. Shareholders in its 10 listed company stocks suffered. So might the international investors who have piled into the Indian market in recent months.
The sell-off in most Adani group stocks reversed on Friday, led by shares of Adani Enterprises, the holding company. But for the wider Indian market, this week’s turbulence has drawn fresh attention to the risks and pricey valuations of local stocks.
Just months ago, Indian stocks had been seen as a viable replacement for Chinese equities in global investor portfolios. Shares of Adani Enterprises had been one of the top performers, more than doubling from its low last year. Over the past year, shares had gained 30 per cent up until this week when the chair of Adani Group was indicted in New York in connection with an alleged scheme to bribe Indian officials in exchange for favourable solar power contracts. Adani has denied the allegations.
Those types of gains have not been unusual in the local market. The broader benchmark has been on a four-year rally, more than tripling peak to trough — a period in which Chinese equities have been on a downward trend. Foreign investors shifting funds to India amid faltering growth in China have created a sense of the market’s coming of age.
That shift can be seen in the net foreign capital inflows into Indian equities over the four years to this year, which surpassed $35bn. The figure hit a new record this year. A record number of new retail investor accounts joining the market helped fuel the rally, attracted by brisk economic growth in India.
That has also meant Indian stocks are getting pricey. The Nifty benchmark index trades at nearly four times book value, more than double that of broader emerging market indices. That is even after a fall of a tenth from its September peak.
On a forward earnings basis, the index trades at 25 times earnings, a premium of more than a third to the broader MSCI All-World index. Companies such as Adani Total Gas and Adani Green Energy trade at more than 90 times trailing earnings
Panic selling of Adani group stocks is likely to be shortlived, as it was in 2023 following allegations of fraud, which Adani denied, made by US short seller Hindenburg Research. Shares of Adani Enterprises more than doubled in the year following the sell off. It will be more difficult to avoid being caught up in the market weakness if international investors rethink their affection for India.