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Business News/ Companies / News/  Adani group saga is credibility test for India’s markets, institutions
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Adani group saga is credibility test for India’s markets, institutions


How New Delhi reacts will greatly affect foreign investors’ perception of the country’s attractiveness

News about Adani appeared on a sign at the Bombay Stock Exchange, where shares of the group’s companies have plunged. (Photo: AFP)Premium
News about Adani appeared on a sign at the Bombay Stock Exchange, where shares of the group’s companies have plunged. (Photo: AFP)

The sprawling conglomerate built by Gautam Adani is under attack by short seller Hindenburg Research, which successfully deflated electric-vehicle maker Nikola Motors in 2020. At stake is both Mr. Adani’s empire and, potentially, India’s own ambitions to position itself as a credible alternative to China—as a manufacturing giant and a must-have part of an emerging-markets portfolio.

U.S.-based Hindenburg Research, which last week said it held short positions in Adani Group through its US-traded debt and offshore derivatives, has accused the conglomerate of accounting fraud and stock manipulation through opaque offshore entities. Adani Group denies the allegations and says the short seller is trying to smear its reputation and derail a public stock offering. Shares of the group’s companies have plunged since Hindenburg’s report, wiping out nearly $64 billion in market value. Hindenburg’s report comes amid a $2.5 billion secondary share sale by Adani Enterprises that closes on Tuesday.

The Indian government now faces a stark choice.

Reuters reports that India’s markets regulator is already looking into Hindenburg’s allegations as an extension of its own, previously stalled investigation. Foreign investors, who hold a large chunk of the conglomerate’s sizable debt, may be reluctant to keep financing it until they are confident that the regulator has thoroughly assessed Hindenburg’s claims. Yields on the group’s dollar bonds have leapt: an Adani Ports & Special Economic Zone Ltd. dollar bond maturing in 2027 was yielding 12% on Monday, according to FactSet, up from less than 7% in mid-January. Yields on an Adani Green Energy Ltd. bond maturing in 2024 have risen to 15%.

On the other hand, if a government investigation were to unearth real financial problems, India’s public-sector banks and insurers might end up holding the bag: Brokerage CLSA estimates, for example, that state-controlled banks have lent Adani Group companies the equivalent of about 6% of their fiscal year 2024 net worth. And Adani Group is a major part of the effort to upgrade India’s chronically poor infrastructure and thus its competitiveness.

Infrastructure is a capital-intensive business, so it is little surprise that Adani Group has a heavy debt load. Still, the group’s debt has risen precipitously in recent years. Net debt sits at 1.6 trillion Indian rupees, equivalent to $19.63 billion, while consolidated gross debt is 1.9 trillion Indian rupees, or $23.31 billion, according to Jefferies. Total debt at five major Adani companies rose about 76% from fiscal year 2019 to fiscal year 2022, according to data from CLSA, while earnings before interest, taxes, depreciation and amortization is up 120%. Flagship firm Adani Enterprises’ ratio of net debt to trailing Ebitda is 5.8, according to FactSet. That is much higher than peer Reliance Industries, which stands at 1.5. And Adani Enterprises shares fetch 112 times prospective earnings.

Foreign investors have also played an increasing role in financing Adani Group’s expansion in recent years, leaving it vulnerable to a change in sentiment. CLSA calculates that 29% of total debt at five major group companies—Adani Power, Adani Green, Adani Ports, Adani Enterprises and Adani Transmission—is in foreign-currency bonds. But the brokerage estimates that 49% of the debt increase from fiscal year 2019 to fiscal year 2022 came from foreign-currency bonds.

Mr. Adani, the Adani Group chairman, is from the same state as Prime Minister Narendra Modi and has frequently appeared with him, which could put pressure on the government to back a robust regulatory probe—especially when there is a little over a year to go before national elections. But unapologetic nationalism is also a hallmark of the current administration in New Delhi.

The stakes could hardly be higher for both India and Adani Group. Even after the selloff, Adani’s group companies, including those it recently acquired, account for about 5% of the total market capitalization of all listed firms on the Bombay Stock Exchange. Riding out the uproar and hoping for the best will be tempting for the government. But the cost to India’s and Adani Group’s credibility—and ability to keep raising foreign capital—might be steep.

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