The Adani Saga Continues To Unfold
The Adani-Hindenburg saga, India’s Lithium discovery, and the probability of an El Nino onset this year, among other developments
The Big Picture
Three weeks have passed since Hindenburg Research released its report on Adani – and the full extent of the fallouts is slowly becoming evident.
If the first week saw tanking bond/share prices, rebuttals and counter-rebuttals, the second week saw the company conclude and then abort its FPO in which funds close to the group had invested. As Adani scrambled to avoid a margin call, the second week also saw stock rally despite uncertainties. The share market rally, though, was short-lived and was doused by the following week. A clutch of developments — Moody’s downgrade, MSCI’s decision to reduce its weightage for Adani shares, Total’s decision to pause investments into Adani’s Green Hydrogen plans; SBICAP asking for more collateral — were responsible. Also came news that SEBI is making enquiries.
The first tangible signs of financial strain inside the group also became visible. The group began selling coal cargoes at a discount, leading Bloomberg to wonder if it was trying to raise cash. Then came the news that the group would cut capex plans. The big question, however, remains unanswered.
Over the last 20 years, the group has borrowed heavily to support its growth plans. More consequentially, seeking to borrow heavily, it has inflated the prices of its shares – which is one of the central allegations of Hindenburg.
The catch is the group’s actual cash flows, given its relatively dull infrastructure businesses, are far smaller than the debt eddying around the group. In his column in Business Standard, MoneyLife editor Debashis Basu alludes to this. “The Adanis have an asset-heavy model, which they wanted to grow at the speed of tech unicorns. There is no example of this working anywhere in the world.”
This is where the questions lie. In the coming weeks, we will see if capex cuts can rebalance cash flows and the group’s expenditure. This will not be an easy balancing act. The group uses debt to prop up struggling parts of its empire. We do not know if existing cash flows are large enough to keep group firms stable while meeting debt repayment schedules. If not, we might see asset sales. Not only will this further reduce the group’s cash flows, given the uncertainty around the group’s actual financial health, but we also cannot say if it will be sufficient to tide the group over.
In the meantime, there is no dearth of other questions. As CarbonCopy reports this week, we are not sure where Adani will cut capex. Given Total’s announcement, the Hydrogen plans (where the group was planning a Rs 400,000 investment over the next ten years) look like they will go on the back burner. It’s not clear where else the axe will fall. The company’s green plans look, all of a sudden, shaky. The business will struggle to raise funds.
Adani Reads Of The Week
“What the Ambani group achieved in 25 years, the Adani conglomerate wanted to pull off in five. And to achieve it, the tactics used were exorbitant valuation, adding Adani stocks to benchmark stock indices, and obvious proximity to the Modi government. But they achieved exactly the opposite.” Like we said above, you have to read this column by Debashis Basu.
Questions continue to swirl around India’s capital markets governance. Here is the Economist. The humbling of Gautam Adani is a test for Indian capitalism
Why Adani’s $100 Billion Loss Hasn’t Tanked India’s Markets(NYT)
News of the week
On other fronts, too, this has been an eventful week. Among other developments, India discovered a large Lithium reserve in Kashmir. And veteran investigative reporter Seymour Hersh came out with an explosive report saying the USA, not Russia, had blown up the NordStream pipelines.
Lithium, first. On 9 February, India said it had found substantial lithium deposits, amounting to 5.9 million tonnes, in Jammu and Kashmir’s Reasi district. To put that number in perspective, global Lithium reserves stand at 98 million tonnes. At this stage, these are just “inferred resources” – their mineability is yet to be established. That said, if the news is correct, it will represent a giant push for India’s decarbonisation plans.
What it will mean for J&K is less clear. As Anuradha Bhasin writes in her recent book on Kashmir, the abrogation of Article 370 has been accompanied by a giant spree of hydel and road construction. Now, with this Lithium discovery, comes mining as well – and draws to mind Dolly Kikon’s book on the state’s coercive push for coal and oil in India’s northeast.
This week, Indore provided a glimpse into the odd coexistence of ecologically-sensitive planning and despotic political narratives. The Indore Municipal Corporation, which has transformed the city into one of the cleanest in all of India, mopped up Rs 661.5 crore on the first day of its public issue of green bonds to raise capital for setting up a solar power plant. The city’s police, however, responded to an article on love jihad vigilantes by calling the reporter in for questioning.
In other news, there is a high probability of an El Nino onset this year. Brace for more heat waves and unsettled monsoons this year as well. We are already seeing some signs of abnormal weather this year. The country is heating up faster than usual. In the first week of February, Odisha logged more forest fire incidents than last year – considered, as Down To Earth wrote, one of the “worst years on this account”. Even in the northeast, rainfall is much lower than normal.
As this newsletter has been saying since last year, the battle against climate change cannot be won through recast energy infrastructure alone. The world needs far greater investments in human well-being as well – not to mention, obviously, far greater environmental protection. With the passage of time, we are now getting more nuanced assessments of how the latest Indian budget fares on those parameters. The government’s decision to cut back on education spends drew flak. Also, read this Scroll.in interview with economist Jean Dreze. Speaking of allocation cuts and human well-being, hunger remains the biggest elephant in the room.
Also see this assessment of this year’s allocations for India’s environment ministry.
In India's neighbourhood, Pakistan, which made the terrible mistake of thinking global gas prices would stay low — and promptly built up its gas-based power capacity — has been in trouble ever since Russia invaded Ukraine. Now comes the news that it is about to take on an IMF loan, with attendant bleak austerities for its people. “After revising the macroeconomic framework, the Pakistani authorities said that the real GDP growth is projected to slash from 5 per cent to 1.5 per cent to 2 per cent, and inflation is going to escalate from 12.5 per cent to 29 per cent in the current fiscal year.”
This is a bullet that India dodged. Our gas plans never got off the ground. Even so, the underlying lesson has not hit home. We still hear it talking about the need to up the share of gas in India’s energy mix.
There is also important news from the PLI front. The scheme is supposed to, among other things, reduce India’s dependence on other countries in critical sectors. Last week, however, came news that Reliance has signed an agreement to buy eight sets of HJT cell production lines from China’s Suzhou Maxwell Technology. If buying finished modules is one form of dependence, buying the manufacturing equipment has to be a deeper form of dependence as it opens up the risks of getting locked into technology and equipment supply chains.
Climate Long-reads of the week
How India is battling deadly rain storms as climate change bites (Nature)
On China’s Pork farms (NYT)
How Delhi ate up its village commons (Scroll)
Why The Global South Can't Go Green: The structural traps keeping them in debt
As LPG Prices Soar, Women Return To Toxic Traditional Stoves (Behanbox). The interconnections run deep. India’s economy is in trouble. Not only is agriculture lurching from crisis to crisis, but small businesses are also in trouble. One cannot solve the environmental crisis in isolation.
As man-animal conflict deepens in Kerala, there is a new enemy — environmentalists (The News Minute)
Video of the week
Karan Thapar interviews Aswath Damodaran, who wrote that widely-read blogpost on the valuation of Adani.
Another Video of the week
As we see from the reports by Forbes, Financial Times and Bloomberg, foreign media is reporting the hell out of the Adani-Hindenburg saga. Here is what Indian TV media is up to.
And a third Video of the week
How the US’ Inflation Reduction Act came into being.
Book of the week
Given the ongoing mess in Pakistan, we have Globalists: The End of Empire and the Birth of Neoliberalism, by Quinn Slobodian.
If the end of the empire was a heady, idealistic time in the global south, it pushed a set of thinkers in the west into a panic. Much of the well-being of their societies stood on the unequal trade relations created by colonialism. As countries turned independent – and wanted to boost their industrial sectors – there was a risk that the larger edifice of world trade on which European countries built their prosperity would be attacked. In the Globalists, Slobodian shows how a clutch of thinkers, like Ludwig von Mises, tried to insulate world trade from democratic politics and paved the way for the rise of institutions like GATT and WTO.
If you are trying to understand why trade relations between the first world and the third world did not change dramatically – and why the world went from colonialism to neocolonialism, this is one book to read. A sister book to read is Vincent Bevins’s The Jakarta Method, on how the cold war roiled the third world experiment.