Why The Adani Endgame May Not Be The Disaster His Enemies Wish For

Even as the political slugfest over Gautam Adani’s alleged “con” job on investors plays out in the public arena, the real question to ask is not whether he is a business saint, but whether he can weather two storms.

One challenge is, of course, the possibility of having to reply to probes by the banking and market regulators, and the company affairs department, which will forensically examine if Adani group companies had done anything fishy in the past.

The second challenge is to meet the obvious threat from short-sellers, both abroad and in India.

Aswath Damodaran, one of the best-known experts on stock valuations and professor of finance at New York University’s Stern School of Business, makes one thing clear about the Hindenburg report on Adanis.

He writes in his blogspot:

The blog seems to suggest that the primary problem for Adani is that he has chosen to finance his long-gestation infrastructure projects with debt, and his interest coverage ratio (ie, the earnings before interest and taxes as a multiple of its interest outgo) is low at 1.4.

Put another way, Adani is at no risk of default in the foreseeable future, but has to now go easy on debt-fuelled expansion. If possible, he should pare down debt.

Arvind Panagariya, former deputy chairman of NITI Aayog, and Professor of Economics at Columbia University, wrote in The Times of India today (6 February), that short-sellers like Hindenburg Research — which is under investigation by the US Justice Department — tend to have a murky history.

They profit by making allegations to set off panic in the markets, and then collect their booty by short-selling and exiting before the sky caves in. Victims of such short-sellers have little or no recourse to the law, since mala fide intentions are very difficult to prove in the USA.

Panagariya’s advice is simple: Indian companies with international exposures should make sure that their corporate governance is above reproach.

The problem with this advice is that, given India’s history of the licence-permit raj, and also the continuing large role of government and regulatory agencies in corporate profitability, it would be difficult for almost any firm or group to assert that it never has done anything wrong.

In the last few years, companies with even pristine governance records, including Infosys and Tata Consultancy, faced allegations of corporate misgovernance, including some suits in the US alleging discrimination in hiring practices. 

The US has dual standards on corporate governance; it protects its icons, while going after those with few godfathers or where the collateral damage to American interests is low.

In 2012, Rajat Gupta, former head of McKinsey, went to prison for alleged insider trading, but questionable actions by established American business icons were overlooked.

In this article that I wrote more than a decade ago, I show how the actions of Hank Paulson (Treasury Secretary at the time of the 2008 Lehman collapse), Warren Buffett, Steve Jobs and Michael Dell faced no consequences.

Another business icon, Hank Greenberg, ran insurance company AIG for two decades. But when a probe disclosed that accounts had been manipulated, Greenberg was merely asked to pay a fine and settle. No criminal action was initiated against him.

When it comes to its allies and icons, America’s attitude is best exemplified by a quote attributed to Franklin Roosevelt (FDR) about Nicaraguan dictator Anastasio Salazar: “He may be an SOB, but he is our SOB.” 

This brings us to what the Adani endgame will be — or should be. 

First, if the probe by Indian regulators finds any wrongdoing by Adani, it should be “settled” with a quick financial penalty and not become a political football. It is one thing to penalise Adani for his alleged misdemeanours, quite another to ruin his businesses.

While it is fair to say that Adani’s interests are not coterminous with India’s, the fact remains that successful investors with the capacity to execute high-cost infrastructure projects are rare.

Adani does not deserve to go down and bring down a successful business with him.

When government does not have the capacity to invest too much in infrastructure, it does not make sense to bring down a private businessman who has managed to do so.

Second, short-selling is a self-limiting exercise. A short-seller can make money only if he can square up his positions after a share or bond reaches its logical bottom.

After that, he will end up losing money by holding on to his short positions. This implies that if enough investors, including Adani, start acquiring undervalued bonds and shares at rock-bottom prices, the short-seller will be caught with his trousers down.

Adani shares and bonds may be close to their bottom. To test this hypothesis, I myself bought a few shares (100) in ACC a few days ago.

I can write this off if I am wrong, but I am betting that a good cement business cannot be short-sold endlessly. With news reports suggesting that Adani may be buying back some of his outstanding debts abroad, bonds may be bottoming out even abroad.

Third, Adani has only bonds listed abroad, but it is his shares that took a beating in India.

One must assume that strong rivals are doing the short-selling at home to take advantage of the Hindenburg report’s fallout. They too cannot endlessly short these shares, since the institutions are clearly not selling.

Also remember, Adani is not without resources: he has cash flows in companies abroad, and owns the world's largest coal mine in Australia.

Fourth, the general assumption that Adani shares are widely held is wrong, for the group holds substantial majority holdings in almost all its companies, and retail holders account for very little in Adani Enterprises, the holding company.

A Moneycontrol report on shareholding structure shows that nearly 73 per cent is with various Adani entities, 15 per cent with FIIs, and under 6 per cent with domestic institutions.

The “public” held 6.3 per cent as at the end of December 2022. The actual retail holding is less than 1 per cent. So, no, the Adani crash is not causing untold misery to retail shareholders.

Fifth, while Adani may find it difficult to refinance his bonds when they fall due, he has many marketable assets that can be put on the block to raise resources.

The two cement companies (ACC and Ambuja Cements) and the FMGC company (Adani Wilmar) together have a market value (even after the crash) of more than Rs 1.5 lakh crore. So, no, Adani may be under pressure, but he is not without the resources to make a comeback.

The only two messages he needs to take to heart are those by Aswath Damodaran and Arvind Panagariya above. Deleverage steadily, and improve corporate governance.