Adani Group's Hindenburg Moment

and thirty billion dollars in shareholder wealth. It also knocked founder Galtam Adani out of the ranks of the world's ten wealthiest people, spotting a crisis of confidence and a scramble for a damage control. How could a single report from a little known research firm send an entire corporate empire sprawling into crisis despite its denials And what does this mean for emerging market investors? Let's bring in three experts from Bloomberg Intelligence to sort it all out. Kumar

Galta are emerging markets quant strategist. I think quality of auditors is important, but I think one can't based conclusion on the size of the Farmer loan. Sharon Chen, senior credit analyst, transparency has actually improved. Nittan Chanduka, India equity strategist. Adani is not India and India is not Dani Doll three of them from Singapore. Everybody welcome as a credit analyst who covers some of the Adani companies. How shocked

were you when the Hindenberg research report came out? So John, the allocations in the Hindenburg research report, actually most of them were already in the public domain. So to give you an example, you know, the research report talked about stock price manipulation using Offshan Mauritius funds, and there were already reports of this like two years ago, and the market regulator was looking into it as well, although we

didn't hear much after that. So it is surprising in terms of the market reaction, and also putting everything together might have been surprising, but actually some of this were already concerns in the past, even though auditors like some of them being not being audited by the Big Four was known to the market. So the way the whole report was packaged maybe probably that was a surprising event

for the market. And these shares were actually trading at very high valuations, which is quite unheard of for an infrastructure based group. So like maybe it just proved to be a catalyst to click the bubble. Can you talk about some of the valuations. The Hindenberg report mentioned that these stocks, some of the Adani stocks went up ten

to twenty times over a three year period. They did mention that I think Adwanni Enterprise and Total Gas were training on like five hundred to eight hundred times pear. They did seem quite expensive, as you mentioned for infrastructure stocks, Yeah, I mean because of the sharp run up in the shape prices, the stocks were actually been up to quite unreasonable valuations, which you also point out to part of this is probably because of like a low free float

of the group shares. So whenever a lot of liquidity gushes into stocks with very low free float, they tend to have more impact on the market, and maybe that was the reason why they were fading at such high valuations. In the Supreme Court is taking steps to probe deeper in the Hindenberg's allegations. What signaled do you think that

sends to the public and the investment community. Ordani's well starting the snowball or is the court stepping in because it sees an opportunity to pull order from the jaws of chaos. So it's difficult to comment at this point

of time why they are intervening. But actually maybe the committee that they have appointed is actually quite quite robust and like they comes with a very strong pedigree, and I'm sure that will have a and like a clear verdict on on this ongoing issue because these allegations keep cropping up our periodic basis, So it will be good for the market to have a final clarity on what who is right and who is wrong? Sure, and chan

any thoughts on that. Obviously, Hendenburgh's report resonated with somebody quite high up in the Indian legal and regulatory system. Well, you know, looking in from outside, I would say that this in a way is positive as it could increase the chances of some sort of clarity coming out of these sort of investigations. You know, when we talk about some of the allegations, the focus here is really on the alleged stock price manipulation and the related party disclosures.

So for the first one to do with the Mauritius funds two years ago, the regulator Sabio already started an investigation, but it when quiet. So with increased scrutiny and you know the Supreme Court paying attention to this issue, there seems to be more urgency to finalize the investigation and come up with some sort of outcome. Now I think the Court has ordered sab to report on their finding

within two months. I do believe there's some there's a chance it could drag on beyond two months, but at least the intention seems to be there and the scrutiny is there. So in your assessment, this is a good thing, not a negative for Adani and for India. Well, for Adani, it's hard to tell because obviously it depends on the outcome of the investigation, right, But for India, I do think as of now, based on what I can see,

I'm looking at it more positively. Sharon A. Doney Group does have five hundred and seventy eight subsidiaries under seven listed companies. Now, the Hindenburg report mentioned that there was six thousand intercompany transactions over the last year. This must be a nightmare to analyze for a credit analyst. Um

So again, this is not unusual. I guess for such a large conclus So to give you an example, under a Doney Transmission, which is the power transmission company, every time it bids for a new project, it tends to set up a new subsidiary because then you know, you have that subsidiary just focused on that project, and it's also easier for to raise funding. So that's how you end up with so many subsidiaries. And in terms of the related party transactions, even in a normal course of business.

So for example, Doney Green Energy sells power to a Doney Electricity Mumbai, which distributes it in Mumbai. That's in a normal course of business, so you'd kind of expect this related party transactions. Where I guess we might have some concern from a credit perspective is in terms of related party loans. And what we've seen there, for example, is a Doney Ports. It does have this line item called intercorporate deposits, which is made to unrelated parties, but

it's guaranteed by a related party. So these sort of transactions, you know, without more explanation from a business perspective, could seem a bit unusual. It's been about two months, maybe a little more since Hindenberg Research issued its initial report on a Donnie, How would you assess the way management has handled the crisis so far and the amount of

damage the reporter is done. Yeah, sure tough. So from a credit market perspective, I would say the company is you know, they did issue a rebuttal very quickly, and they have lined up obviously a series of calls for their key dollarbone issuers and they are currently on the road as we speak, you know, meeting investors. So they are trying. But from a transparent se perspective, we do believe there are still some information that that is missing.

So for example, they've provided that maturity profile for all the key listed companies, but as as we've come to find out, they are also promoted level debt and there's very little information on debt, and there's always concerned that when these matures would there be cash leakage from some of its operating companies to help support the promoter. So I would say that they've done some of it, but

there are still questions unanswered. Do you think in this case, Adani's management has done enough to win back the confidence of foreign investors or is there more work to do as part of investing in emerging markers. I would say that investors do understand that there are risks involved and

you price it in. But given just how high profile this has could become, I do think, you know, there needs to be some clarity and maybe cleaning up of some of the issues around their shareholding structure and around related party transactions. What about the auditing? The Hindenberg Research report shed light on a little known auditing firm with less than I think fifteen employees. They also mentioned that the auditors at the time were less than twenty five

years old, but they signed off on the accounts. Has a Danney Group allayed some of these fees? Um? So I haven't heard anything. And you know, for the companies that we do cover, so they're bigger companies that are dollar bone issues, they are audited by you know, well

known typically big four audit firms. So this auditor that the Hinden Word Research report refers to is specifically for Adani Total Guests and also the holding company financial statements, So the parent financial statements for Adanney Enterprises, although a Danny Enterprises subsidiaries are audited by better known firms. So I haven't heard anything in terms of you know, what

the company is going to do to address this. But um, you know, for the other companies that we cover, it's not as major an issue now as far as Adanni Group is concerned and talk about bout the size and

the quality of the auditors. I think quality of auditors is important, but I think one can't based conclusion on the size of the firm alone, because if it's think about it, many of the accounting scandals in the past beat and Ron are more recently wild card regulators or investors have blamed auditors for failure on their part, and these are all big accounting firms. So having large auditor may help companies to signal good corporate garnance to investors,

but not having one shouldn't imply lack of governance. You're listening to Asia Centric. By the way, If you like what you're hearing, please subscribe or give us a rating. More stars are better. It helps other listeners find our podcast and improves our visibility. Charon Chen many in the Financial Commentary and have likened the Adani drama as Indians quote en Ron moment or its Leman moments, echoing two of the biggest corporate failures in the US of the

past twenty years. Do you think those are fair comparisons? Not at this stage, given that you know, nothing is proven yet, right. Um. The other thing is also like

going back, you know, to the contagion risk. I would say even in the debt market, this is being viewed in isolation in terms of a Doney specific bonds being sold off, but not so much other Indian bonds because ultimately this is a private group and so you know, um so for example, those that have similar sort of risk profile with a conglomerate issue or high promoter share pledges, those have suffered. So for example of a Danta is

one of them. Um. But companies that have strong sponsors and you know, are managing their debt profile correctly and governance isn't as much of a risk have held in. Does a Doney group have enough liquidity in cash to meet the debt obligations and for how long as well? Um, I do think that immediate liquidity so dissars liquidity is not a concern because the amounts maturing, at least from what we can tell in their key listed companies are

not large. And I've mentioned that you know, again the companies invest in strong assets that are cash generatives, so you would think that if they can offer these as collateral, they should be able to raise the required funds. Where we see some risk is mainly coming from refinancing as we hit into twenty twenty four, and that's mainly in

a dining green energy. So the renewable company has one point two five billion dollars worth of bonds coming due next year and management has said that they're working on lining up refinancing as we speak and they expect these to be in place by the end of June. Having said that, one of the bonds, worth seven hundred and fifty million, is an unsecured bond as an it's not pledged by project assets, so that's where we see the

higher risk. On top of that, according to Bloomberg data, we see there's about four billion dollars of debt which was used to fund the acquisition of Ambuja Cements and acc which they also come due next year. So that's that's a pretty large amount that needs to be refinders. But you know, obviously these cement companies are good assets and Ambujah in particular has a cash position. Nittan Adani Group responded to the Hindenburg allegations saying that this was

an attack on India. Do you see this as an attack on the country or do you think this is more of an isolated issue. I think it's more of an isolated issue, and probably like it's a key learning for other companies not to respond in such a nationalistic way when a governance issues come up, because like if if they had like responded to their allegations in a more structured manner rather than bringing nationalism into the equation,

maybe the scenario would have been different. So, like, because Dani is not India and India is not adanis Indian still seems to be a worldlike country by foreign investors amongst emerging markets. Do you think foreign investors see India as an alternative to investing in China given the geopolitical risks. Yeah, I think we can look at the data to answer it. First of all, if you look at the nature of the both the asset classes China and Indian equities, they

are both high beta assets. Now what this means is if global markets are a X person, these two will go up one point two X and if the market is down X person, they will go down one point two X. Now, what this also means is any rational global investor should put extra dollars in these two markets together when he expects a risk on environment, and we'll pull out money from both the markets at the same

time when he expects a risk of environment. Now that's a rationality argument, But then the question is our global investors actually rational? Now we can look at the foreign flows for these two markets, and what we see there is tronically foreign flows to India and China equities do show significant positive correlation. This means that global investors are investing in these two markets and pulling out money at

the same time. Now, if we talk about the last two years geopolitical risk for Chinese equities, going by the usual narrative, you would have expected negative foreign flows to Chinese equities and positive flows to Indian equities, but that hasn't happened. Actually, aggregate flows in the last two years for the Chinese equities was positive and negative for the Indian equities. So maybe this narrative India versus China holds for business investments, but it's not true for portfolio decisions,

at least not for now. We've talked a lot about the negative news surrounding Hindenburg Report. Let's talk about some of the positives. There are some real value in some of these companies, right, yes, certainly, I would say pretty much all the companies. I mean, if you look at the sectors that Attorney invest in, their primary really infrastructure. So we're talking about ports, airports, you know, power transmission lines,

to distributions, renewable energy projects. These are all typically very stable, long term assets. And you know, over the years we've seen increasing um investor appetite to invest in these types of infrastructure assets. Taking aside the corporate governance issues, Adneys an actual business, you know, in terms of their operations, is actually well known to be very well run, you know, um.

So for example, in ports, Adney Ports is basically the group's crown jewel and it's Mundra Port is basically the biggest port in India, and like Nittin suggested, Doney Ports is the market leader there and it has been gaining market share because it's well operated. So you know, the shipping companies, the shipping lines want to stop there because it's more efficient. Is the company has been investing in logistics as well, so that it takes less time and

costs for these companies to transport their cargo. So you know, there's definitely a positive in terms of how they've invested in infrastructure side. It's just that unfortunately they have used quite a lot of debt to fund some of its expansion. So for they like they have played a very pivotal role in like bridging the infrastructure gap. And we also analyze like investing on infrastructure basically leads to um like almost two to three times growth in GDP over the

long runs. And India is an infrastructure deficit country, so it is an important part of the Holy ecosystem. NITT and how is the Atani group viewed in India? Give

us the insider's view. It's difficult to comment. I was reading a report basically, like if you visit Goat, which is the hometown of Adani, and like you will see a lot of holdings, a lot of advertisement, and a lot of work that he has done for the date as such, and he has given a lot of employment to basically the people who have benefited out of him

definitely acknowledge and respect him. But on the other hand, there is another group, for example, like the Onshore Funds or basically retail investors which were not comfortable probably and never invested in those shares. So it is like it's kind of a dichotomous view. Some people respect him, some people probably like do not and try to Like there's been a lot of press reports talking about the close

relationship between Attani and the Modi government. Given what's happened with the Hindenburg report and the debacle, do you think it's going to be more difficult for Attani to win

more government orders. I think it's quite difficult to comment at this point of time whether they will win more contracts, but definitely, as I mentioned, like, they will definitely need to slow down their revenue growth and pay down the KPEX plans like currently they of late, they have come out with a slowdown in KPEX announcements in several of their forms. So basically, if the KPEX plans slow down, then naturally the other government contracts will go to some

other party. But it's difficult to comment like any future government contracts will be awarded them or not, but it will be politically sensitive, like at this point of time to just go and award another contract to them when this news is ongoing. We've been talking a lot about Adanni Group's woes and the dustop focused on the Hindenburg report. Let's take a look on the bright side to what extent has this controversy, all this scrutiny been good for

a Donnie and good for India. I think it's hard to say what's been good for Adani other than perhaps good for an investor in Adani is that transparency has actually improved for the group as a whole. So for example, the company disclosed the debt maturity for profile, the annual debt maturity profile for all its key listed companies. You know, the company has been doing investor meetings and we've made themselves more available generally to investors. So I think that

would probably be the good thing. And also in the past has obviously been talks about scrutiny and Adani growing too rapidly and a lot of that being debt funded at least, you know, for example, in the renewable energy with the acquisition of the cement companies. So what we've seen also is the company is dialing back some of

their growth ambitions at least in the near term. If allegations do indeed come out to be true, then they could lead to better regulatory norms and better shareholding disclosures and those kinds of things. So so it will be in the long run good for corporating India as well and good for financial markets as well. Well. The Adani Group drama is still unfolding. I'm sure we're going to hear a lot more about it in the weeks of the months to come. Kumar Galtam, Sharon Chen and Nitten

Chanduka all from Singapore. It's been a pleasure having you on asia Centric. Thanks for having us, Thanks for having Thanks for having us. Asia Centric is edited by Clara Chen. I'm Tom Corbett in Hong Kong and I'm John Lee, and you've been listening to asia Centric podcast.