Why Adani Should Thank Hindenburg: He Can Now Focus On The Right Things

Gautam Adani, the man whose ports-to-FMCG conglomerate is at the centre of a storm raised by a Hindenburg report alleging fraud and other illegalities, has taken the first step towards redeeming his reputation by choosing to return the money raised by Adani Enterprises in the recent Rs 20,000 crore FPO (follow-on public offer). 

It is possible that he got those investments from institutions and business houses on the promise that if the share price crashes, they would be compensated. Or, maybe the purpose of showing full subscription was to enable Adani to exit the FPO on a moral high.

He can now claim that he could raise large amounts of money despite all the adverse comments in the media and the crash in the group’s shares. But, whatever the truth, this is the right way to go.

In many ways, Adani should be thanking Hindenburg for the crash in his shares because credibility cannot be built on sand — the sands of fickle stock market valuations.

The media was focused on his alleged status as one of the world’s richest men, forgetting the fact that all this wealth is paper wealth, that can go up in smoke in a jiffy.

Also, he now does not have the option of funding his ambitions based on overvalued shares.

This will help him focus on his businesses rather than the surround-sound of wealth and fraud, which is what he needs to reckon with.

While the regulators and probe agencies must indeed start looking at any transgressions of the law, Adani himself needs a laser-sharp focus on only one thing: establishing the viability of his various businesses, which include not only ports, but also power, green energy, FMGC, cement, and media, the last two being recent acquisitions funded largely through debt.

Barring media, where profitability is always dicey, most of his other businesses are probably inherently bankable, but blighted by excess debt and unsustainable valuations.

The route to re-establishing his credibility with investors is by reducing his debt levels, improving cash flows and profitability and thus enabling investors to come back with renewed belief.

One of the first things ambitious businessmen must learn is to stay away from the media.

It is no coincidence that Adani’s own downfall was preceded by an India Today cover that crowned him Newsmaker of The Year 2022 and called him a Growth King.

In 2013, India Today had done another cover story on four Growth Kings, listing Dhirubhai Ambani, the GM Modi group, the Nandas of Escorts, and Vijay Mallya as these four.

Barring Dhirubhai’s son Mukesh Ambani, the rest are nowhere in the big leagues today. And even in the case of Ambani, the second son has not achieved the level of success that comes with the name. Mukesh himself must proceed on the assumption that Reliance’s success is not forever.

Gautam Adani would do well to read Phil Rosenzweig’s 2007 book, The Halo Effect, where the author points out that the mere fact of apparent success — high share prices, or high profits — are often used to deduce that there must be a high quality management underlying that success.

In fact, media tends to latch on to business icons only after the “success” is already visible to everyone, and when they put someone in their cover stories, they are essentially recognising something that is probably past its peak.

The same applies to stock market recommendations. If a broker says something is worth buying, it implies that he has already done so and wants you to follow suit so that he looks prophetic.

The lesson for all businessmen is clear: avoid the media, keep your heads down, keep debt down, grow quietly, and focus on the business, not publicity.

One of Rosenzweig’s pet ideas is that books like In Search of Excellence and Built To Last, which claimed to show the key elements of permanent or long-term business success, tend to err in terms of causality.

They connect the dots from outcome to causes post-facto, which can be dead wrong. Correlation is not causality. In the years after these books were published, most of the companies shown as great have faltered.

This is not to suggest that Adani’s best days are over, but it is best if he believes so and brings focus back to his business and emphasises corporate governance.

The probability is that many of his businesses are good in themselves for now, but they need careful execution and consistent effort — and some luck. The operative phrase in the previous sentence is “for now”.

Rosenzweig’s conclusion is that business success cannot last forever. Just as all humans must come to terms with their own ultimate mortality, so too must businesses.

Adani’s run of good luck ran out a week ago when Hindenburg decided that his balloon needed to be pricked. It is an ideal opportunity for Adani to prove the doomsayers wrong.