The dramatic sell-off of the stocks of Indian conglomerate Adani Group [NSE: ADANIENT] eased off on Tuesday after the group took a series of decisive measures to restore investor confidence. A devastating report from New York-based Hindenburg Research alleged the group’s valuation was due to stock manipulation and illegal accounting practices, in what it describes in a pinned Tweet as “the largest con in corporate history”.
Within weeks of the report’s publication on 24 January, the Adani company shares together lost some $110bn in paper value, about half their then combined market value of $218bn, but by Wednesday, seven out of 10 Adani company shares were rallying, with Adani Enterprises recouping 20%, Adani Ports 9.4% and shares in Adani Wilmar, Adani Power and Adani Transmission gaining 5%.
Shareholder reassurance
Founder and chairman Gautam Adani is fighting hard to reassure investors. He has cancelled the fully subscribed IPO of the flagship Adani Enterprises, handing back the $2.5bn raised from investors, and shelved plans to raise $122m in bonds. He has also repaid a $1.1bn loan that was not due to be repaid until September 2024. Adani Ports, the jewel in the conglomerate’s crown, run by his son, has pledged to pay back loans by March to improve its debt ratio.
Hindenburg is alleging that the Adani Group has used a network of offshore shell companies to inflate revenue and valuations of its listed companies. Its report said that key listed Adani companies “have taken on substantial debt, including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing”.
Margin calls on outstanding loans
A measure of the crisis facing the conglomerate is that the group’s shares have been pledged as collateral for loans. With its share values collapsing, the group has faced margin calls and been forced into emergency repayment of some of the outstanding loans.
The report noted that “even if you ignore the findings of our investigation and take the financials of Adani Group at face value, its 7 key listed companies have 85% downside purely on a fundamental basis owing to sky-high valuations.” The report warned that the Adani Group’s “use of extreme leverage spells danger for creditors”.
The Adani Group rejected the allegations, saying they have ‘no basis’, are based on an ignorance of Indian law and that the group always makes the necessary regulatory disclosures.
Hindenburg, famous for shorting truck manufacturer Nikola Motors in 2020, which forced the resignation of its founder, holds short positions in Adani companies through US-traded bonds and non-Indian-traded derivative instruments.
The reaction to the crisis has been widespread. Global index provider MSCI is reducing the amount of Adani Group freely tradable stocks in its indices. Dow Jones has removed Adani Enterprises from its Sustainability Indices. Standard Chartered and Citigroup’s wealth arm have stopped accepting the group’s securities as collateral for margin loans, and Credit Suisse has stopped accepting bonds sold by three of the Adani companies.
Adani’s credit rating cut
Other US and European banks have continued, so far, to lend against Adani bonds, though this may change if the bond’s ratings are downgraded. In a statement last Friday, S&P cut its rating outlook on Adani Ports and Adani Electricity from stable to negative, reflecting “the risk of a deterioration in the credit profile of Adani Ports and Adani Electricity Mumbai due to governance risks and funding challenges for the larger Adani Group.” To date, Moody’s has left the ratings unchanged but warned the sell-off in Adani shares would hurt the group’s ability to “raise capital to fund committed capex or refinance maturing debt over the next 1-2 years”.
