Adani, Continued — Issue #40
Turbulence in the Adani stocks continues for a third week, pointing to considerable risk in India's "green growth" plans
The Big Picture
Two weeks have passed since Hindenburg Research released its report on Adani. The second week has been as manic as the first. The battle shifted from rebuttals and counter-rebuttals to market actors – and began scouring Adani.
The broad details are well-known. Despite Adani Enterprises’ share trading lower than the FPO’s asking price, Adani closed the public offer successfully. With retail investors staying away, a few billionaires had stepped in to help the group. Then came a surprising late-night announcement from the group that it was scrapping the FPO. The reasons for this call are still speculated – see this and this. Also came extraordinary news that funds linked to Adani had covertly invested in the FPO as well – further proof for Hindenburg’s charge that Adani gets covertly-controlled firms to prop up its share price.
As things stand, the FPO is big news – it would have added Rs 20,000 crore (~ USD 25 billion) to Adani’s existing equity and helped him improve his debt-equity numbers, invest in the new businesses, etc. – but it’s not the main news.
The biggest news of last week is the repricing of Adani shares/bonds by Indian/global markets.
In India, Adani group companies plummeted through the week. Adani Enterprises, which had crossed Rs 4,000 a share in November 2022, fell to Rs 1,017 on 3 February, before recovering to Rs 1,500. All group companies – Power, Ports, Transmission, Wilmar and Total Gas – have also plummeted. Even at these rates, as veteran business editor TN Ninan wrote, the group’s shares are still over-valued. “By the standards of normal valuation, many Adani shares still have a long way to fall,” he said.
Globally, the company’s bonds took a hammering as well. Adani bonds slipped into junk bond territory. Credit Suisse, CitiGroup and Standard Chartered said they would not accept Adani bonds as collateral. Moody and S&P raised alarms about the group. The importance of these developments cannot be over-stated. Over the last five or so years, Adani has pivoted from bank borrowings to fund-raising through international bonds. These account for half of all his borrowings.
Those days of vast low-cost borrowings via bonds seem to have ended, at least for the time being. A bunch of investors will shun Adani. Or, they will invest only in businesses with robust assets (like ports), which means new arms like Adani Green or Adani New Industries Limited (which wanted to work on green hydrogen) will struggle to raise funds. They will have to pay fat premiums – or borrow from traders of junk bonds or cash-rich entities (like UAE’s IHC), which will drive their hard bargains. Either way, the pool of available overseas capital looks set to shrink. We saw one early sign of this trend. The group shelved plans to raise $122 million through bonds.
A similar tightening of funding can be seen in India. As share prices fall, the group’s capacity to borrow money by pledging shares will fall. If it tries to prop up share prices, it will lose some money there as well. The group made statements last week about relying on internal accruals for growth.
What all this adds up to, in essence, is a group whose days of unbridled expansion seem numbered. Announcements of fresh acquisitions, which had become an almost weekly routine over the past few years, are likely to become much rarer as the group's ability to borrow takes a big hit, and cash becomes scarce. Adani-owned entities will also have to find reserves to boost collateral if shares dip too low to refinance their acquisitions and bonds. In this arrangement, some parts of the business will be more bankable than others. Moonshot ventures (and loss-making ones) will likely have to take a backseat.
That, mind you, is among the best-case scenarios for Adani. We do not know what the group’s financial position is really like. Given relatively low cash flows from its mature businesses, the group has used constant expansion as one source of funds – it creates new businesses, pledges its shares, and circulates those funds across the group – as debt and equity. What happens to such a model when funds abruptly dry up?
Asset sales might happen. One wonders, however, about the realisations from such sales. One fallout of market concentration is a paucity of buyers. If Adani wants to sell, say, its cement business. It won’t be operating in a market with many buyers. Realisations, ergo, might be low.
One casualty of all this will be India. Not only does this episode raise questions about the quality of India’s financial institutions, but Adani is also now one of the biggest players in India's decarbonisation plans. The rapid devaluation of Adani-backed bonds, including those connected to Adani Green and Adani Power, could carry severe implications for the country's "green growth" narratives.
The Bigger Picture
All this adds up to a larger question. Where is the Adani group headed?
There are no clear answers yet. But here is some of the best reportage from last week, looking at the evolving situation.
Adani/TotalEnergies: French company’s due diligence was inadequate (FT)
Hindenburg bet against India's Adani puzzles rival U.S. short sellers(Reuters)
The Adani affair: the fallout for Modi’s India (FT). This report is politely scathing about Indian journalism. Which is inevitable, given the commentariat has mostly been producing fawning tripe like this.
Jo Johnson quits as director of UK firm with Adani ties (FT). That is Boris Johnson’s brother. Between Amicorp working for Adani and Jo Johnson, the connections between global parasitic elite seem clearer than ever.
Dented hubris, Mukul Kesavan on the Adani-Hindenburg saga.
Billionaires From Hong Kong to Arkansas Exposed to Adani Crash (Bloomberg)
There is interesting news from India as well. A clutch of domestic institutions are hardening their stances as well. The Supreme Court uphelds an order to raze edible oil tanks of an Adani JV in Tamil Nadu. The Directorate of Revenue Intelligence moved the apex court challenging the Customs, Excise & Service Tax Appellate Tribunal’s order quashing its case re over-invoicing allegations against two Adani group firms. Bangladesh wants to rework its highly controversial power purchase pact with Adani’s Godda plant. Adding to the messiness of the moment, the project is lagging on timelines – and cost overruns due to delays are one more thing the group cannot afford right now.
Adani short seller has opened a Pandora’s Box (Bloomberg). This is from 31 January, but very worthwhile reading.
Other news this week
While the market was absorbing the Adani train-wreck, India's Finance Minister presented the government's last full budget before next year's general elections. Prominent in this year's balancing act were considerations around fiscal consolidation, economic growth and the budget's electoral dividend.
"Green growth", once again featured heavily, in the jumble of priorities. One of the government’s major announcements – a Rs 35,000 crore fund for energy transition – raised eyebrows in energy circles. The entire sum has been given to the Petroleum ministry without clear disbursement details. Apart from that, there were a clutch of other green initiatives.
All of these, however, are not benign. The government is planning a giant solar push in eco-fragile Ladakh, for one.
Another interesting announcement in Niramala Sitharaman's budget presentation was the "green credits" programme, to incentivise environmentally friendly choices among individuals and businesses. How these credit scores would be evaluated and how they will translate to benefits and entitlements will be detailed in an upcoming amendment to India's Environment Protection Act, the Finance Minister stated.
Climate Longreads
The radical plan to build world’s biggest green electrolyser and hydrogen power plant (Renew Economy)
Competitive Nation-Building: The geopolitical economy of deglobalization (Noema)
Climate fiction is growing, but it’s waiting for a Chetan Bhagat (The Print)
How Putin’s plans to blackmail Europe over gas supply failed (Guardian)
Book of the week
Business history is replete with firms that manipulated their numbers.
Enron massaged its numbers to drive share valuations, which it used for acquisitions. GE did the same. Enron collapsed when the lie stood revealed – again by short-sellers. GE collapsed more slowly. Its focus on financial returns under Jack Welch and his inheritors – shaped by the Milton Friedman theory that a company’s only loyalty is to its shareholders -- stripped the company bare.
Employees were laid off – and the money saved went into share buybacks and the bottom line. Buttressed by the ever-rising share price, the company went on an acquisition spree, using M&A to keep growing. This magic sauce worked for a while. Over the long term, however, it stripped GE of its traditional strengths in engineering and manpower. It reduced it to an unwieldy conglomerate that ended up with everything from subprime loans to television news to jet engines. The costs ran deeper yet. As firms, led by GE, moved jobs to non-unionised regions and other countries, the American middle class slipped into penury, which set the stage for the rise of Trump.
In The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America—and How to Undo His Legacy, reporter David Gelles describes the costs of Welch’s overriding (and self-serving) emphasis on shareholders and talks about the need to move to a more compassionate corporate sector.
Here is an interview with the author.