TOKYO: In recent weeks, the financial world has been transfixed by the stock-market collapse of India’s Adani Group. Following a scathing report by US short-seller Hindenburg Research, companies in Gautam Adani’s conglomerate have lost around half their value – more than US$110 billion.
But even after the fall, Adani companies remain richly valued according to traditional stock-market measures, with price-to-earnings ratios that are far higher – sometimes several times higher – than many of India’s or the world’s most high-powered businesses.
The seven core companies in the Adani Group had an average price-to-earnings ratio of 141.45 times their earnings in the previous 12 months as of last Thursday’s close, according to Reuters data. By comparison, the comparable PE multiples were 25 for India’s sprawling Reliance Industries, 25.8 for Apple, 56.6 for Tesla, 59 for Warren Buffett’s Berkshire Hathaway and 98.6 for Amazon.
The still-lofty valuations for Adani are not only a concern for investors. Bankers have a reason for worry, too, because the Indian infrastructure behemoth has financed its growth by pledging tens of millions of its shares for loans from lenders around the world. A further re-rating of the group – even to somewhat less stratospheric levels – could trigger margin calls seeking additional collateral.
“This is a critical issue because recent big acquisitions have been debt-funded, and a lot of this debt capacity has been created by pledging the owner’s own shares and intercorporate holdings as margin collateral,” said Anand Batepati, co-founder at GFM Asset Management in Hong Kong. “Any big decline in equity valuations, such as what has happened, will trigger margin calls, with the worst-case scenario of this turning into a downward spiral that unravels the conglomerate structure.”
The Adani Group has accumulated debts of US$30 billion, according to its chief financial officer, as it became a central player in India’s push to develop world-class infrastructure, with stakes in everything from ports, airports and roads to mining, electricity and green hydrogen. Gautam Adani became one of the world’s wealthiest people in the process, accumulating a fortune estimated at more than US$120 billion at the start of this year.
The worry for analysts is how much of that debt has been secured with shares. According to stock exchange data, the Adani family has pledged as much as 25% of their holding in Adani Power and 17.3% in Adani Ports and Special Economic Zone to secure financing.
“It’s not the quantum (of loans) but the (promoter) pledges that has raised the eyebrows,” said Amin Rajan, chief executive at UK-based research firm Create Research.
The Financial Times reported last week that the conglomerate this month repaid a US$1.1 billion share-backed loan, due to mature in September 2024, after receiving a margin call. It quoted the group as saying that it did not receive a formal request for a margin call and that the full loan was repaid early according to its “prepayment planning”.
Shares in the core Adani companies had gained 706.95% on average in the three years to Jan 24, the day before the Hindenburg report. In part, this reflected global investor enthusiasm for India, particularly in comparison with China during its zero-Covid period.
The Indian market traded at 23.59 times forward earnings in January, compared with 12.89 in South Korea, 14.53 in Singapore, 15.5 in Japan, 17.83 for the US and 24.94 in China, according to a report by the New York University Stern School of Business.
About 50 large-cap companies in India commanded a PE multiple of more than 50, according to database provider Equitymaster, including engineering company ABB India, insurers SBI Life Insurance and HDFC Life Insurance and consumer goods companies such as Britannia and Dabur.
“The stock market is saying that while the world economy is likely to head into a recession, India is standing out and doing relatively better,” said Madan Sabnavis, chief economist at Bank of Baroda. “The hope is that Indian companies will perform better in the next fiscal than they did in the previous two, hence the prices appear to be relatively higher than warranted.”
But Adani stood out from the Indian large-cap crowd, and Hindenburg alleged on Jan 25 that the group’s superior performance reflected stock-market manipulation. In particular, it accused the group of skirting Indian regulations that cap the holdings of promoters at 75% by employing offshore shell companies and funds that were tied to the Adani Group. The Adani Group has denied the allegations, describing them as “baseless” and a “calculated attack on India”.
The question facing the Adani Group now is how it will pay off debts without being able to sell more shares. Adani already opted to call off a fully subscribed US$2.5 billion secondary share sale of flagship Adani Enterprises, after its shares fell 30% below the floor price of the offering. The group had intended to use about half of the proceeds for capital expenditures and about 20% for paying off debt.
The whole financial world will be watching. Among the conglomerate’s lenders were Deutsche Bank, Barclays and Standard Chartered, which underwrote about US$5 billion of loans to finance Adani Group’s acquisition of the Indian cement business of Switzerland-headquartered Holcim last year. Barclays and Standard Chartered, along with Apollo, separately lent the firm US$1 billion to expand its airport business.
Credit Suisse, Citi and Standard Chartered have reportedly stopped accepting Adani Group bonds as collateral for margin loans. Rating agency Moody’s Investors Service has cut its outlook on four group companies – Adani Green Energy, Adani Green Energy Restricted Group, Adani Transmission Step-One and Adani Electricity Mumbai – to negative, citing “significant and rapid decline in the market equity values of the Adani Group companies”. S&P Global Ratings has cut its outlook on Adani Ports and Special Economic Zone and Adani Electricity Mumbai.
“In their eagerness for fees, it seems that the banks may have not done enough due diligence,” said Didier Cossin, professor of governance and finance at the IMD Business School in Switzerland. “They have a history of getting involved in relationships that appear to be lucrative but that subsequently derail. For anyone doing due diligence, there were clear signs that Adani was overvalued.”
