Power players: Adani’s Hindenburg lesson is one for India Inc

Data InsightECM Explorer 27 February

Power players: Adani’s Hindenburg lesson is one for India Inc

Asian business groups, typically tightly held by families or promoters, are so ubiquitous, as well as economically and politically powerful, that Dealogic, a sister company of this news service catering to the equity capital markets (ECM) community, created a ‘holding companies’ classification specifically to capture their activity.

However, efforts to pull data relating to corporate actions by conglomerates can be frustrating. The complexity and opaqueness of business dealings among listed and/or unlisted entities within these titans means activity can easily go undetected.

In the case of Adani, an Indian multinational headquartered in Ahmedabad, which was accused by Hindenburg, a US-based research firm, of multiple business misconducts in a 24 January report, the picture is no less murky.

Hindenburg’s short-sell report comes at a time when multinationals are increasingly looking to India as one of their target countries as they diversify away from China. Infrastructure expenditure therefore is among the priorities for the world’s largest democracy to attract and better serve foreign direct investors (FDIs).

This is where Adani Group fits in, especially with its close ties to the incumbent Modi government. Its diverse array of interests includes: power generation and transmission, renewable energy, natural gas, mining, as well as a variety of significant infrastructure projects.

The business seldom taps ECM, based on Dealogic data pulled by this news service. Since 2013, the entire Adani Group has raised only USD 995m from ECM, the lowest figure among India’s top five conglomerates.

Short circuit

In little over a month since publication of Hindenburg’s report, the share price of Adani Enterprises Ltd [BOM:512599] has tumbled. Moreover, the company had to pull the plug on a well-anchored USD 2.46bn follow-on (which would have been India’s largest ever) at the last minute.

Adani refutes the accusations levelled against it, claiming Hindenberg’s report was an “unwarranted attack on any specific company, but a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India”.

Adani Enterprises Ltd stock has shed nearly 70% in the year to date (YTD), plunging to INR 1,193.50 on 27 February, its lowest level since early May 2021.

Adani Power [BOM:533096] has sunk by more than half YTD, slumping to INR 139.35, its lowest point since March 2022.

The world’s top-three index providers – MSCI, S&P Dow Jones, and FTSE Russell – have all indicated that adjustments to the weightings, or a removal altogether, of Adani stocks is underway.

While the damage thus far appears confined to Adani businesses, there are lessons to be learnt for the group’s peers. The top-five conglomerates together have accounted for as much as 20% of India’s total ECM fundraising in recent years, Dealogic data show.

The country’s market regulator, the Securities and Exchange Board of India, has pledged to investigate the Hindenberg allegations. Yet, some market watchers – domestic ECM bankers and foreign investors alike – expect little to change.

Auditing practices are among the flashpoints between Adani Group and Hindenburg. Adani uses relatively small firm Shah Dhandharia to audit the financial statements of its group entities.

On 30 January, responding to comments on the size of its auditors for such a sprawling conglomerate, Adani chief financial officer Jugeshinder Singh said that it is the group’s responsibility to help groom homegrown auditors, according to an interview with India’s Business Today news offering.

This contrasts with Tata Steel [BOM:500470], part of the Tata Group, one of the most high-profile conglomerates in India, which works with PriceWaterHouse & Co chartered accountants to help prepare its financial statements.

Dark days for IPOs

For India’s ECM market, the Adani news represents a “setback”, opines a banker, who believes the case is unlikely to greatly influence (IPO) activity or valuations.

In India YTD, only 49 IPOs have been filed, per Dealogic data. Unless sentiment turns around dramatically, this could be one of the worst years for Indian IPOs since 2012, when only 46 listings were filed. In 2022, 253 IPOs were filed.

Even at the height of the Global Financial Crisis, the country saw 130 IPOs in 2007, and 60 the following year.

“We have been witnessing investors demanding a much higher margin of safety for any upcoming IPOs,” the banker acknowledged.

An uncertain future

This change in sentiment has further weighed on Adani’s stocks. The banker added that he does not expect its share prices to turn around for another two to three quarters, which means the group may need to look elsewhere to raise funds.

With the collapse in Adani companies’ share prices, we feel equity may be extremely difficult to secure given serious corporate governance concerns, as highlighted in a 27 February report by Hemindra Hazari, an independent research analyst with over 25 years’ experience of Indian capital markets.

Even raising long-term debt may be problematic and on exorbitant terms, and lenders may demand high-quality security, he says. He believes the only viable solution for Adani may be divesting quality assets such as its recent Gujarat Ambuja and ACC cement acquisitions to reduce group debt.

Hazari says raising long-term capital is imperative for the Adani Group to fund capital expenditure and refinance/repay existing debt.

“In such a situation, it will either rely on special situation funds or raising capital via large asset disposals,” he continues. “As capital will remain constrained, the group will need to consolidate its businesses and liquidity management will take precedence over growth.”

For now, “the big-picture issue for Adani Group is how to make investors happy,” said Travis Lundy, an analyst with Quiddity Advisors in Hong Kong. Allaying market concerns is particularly crucial, with the group’s officials embarking on an investor roadshow tour to Hong Kong and Singapore this week.

Adani Group did not respond to this news service when asked for comments.

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