Most investors have not read Hans Christian Anderson’s The Emperor’s New Clothes. This is no surprise. It was written in 1837.
It is about a pompous Emperor who was found with his pants down. This tale may help us understand the Adani Group. The group had lost US$100 billion ($132 billion) in stockmarket value at one point. The story features two swindlers who pose as weavers. They tickle the vanity of the emperor by promising him fine clothes. The clothes that they promise are said to be lavish beyond imagination. The buttons are made from gold. The fabric is of the finest silk. However, the clothes are said to be invisible to the stupid.
The emperor then parades around town with these clothes. The people in the town pretend to be in awe. They applaud their leader. However, there is a young boy who sees through it. The child shouts out that the emperor has no clothes. It is only then that the crowd realise that they have been fooled.
Gautam Adani’s family has a background in the rag trade. His father ran a textile shop in the 1970s. This was long before Adani became the world’s richest person. The shop was similar to the sari shops in Little India. Hence, Adani is a rags-to-riches story in more ways than one.
I met Adani in 1999. He was then a 37-year-old commodity trader who was unknown beyond Gujarat. Infrastructure was his next venture.
He spoke softly, switching between English and his native Gujarati. Adani displayed a strong memory, reciting statistics by heart. He had immense confidence in India’s (and his) potential.
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The Hindenburg report accuses the Adani Group of stock manipulation and accounting fraud.
It alleges that the Adani family has created offshore vehicles to ramp up its own stocks. The report has had implications well beyond the stock market. Some US$30 billion of Adani’s bonds have fallen into default territory. Credit Suisse, Standard Chartered and Citi have stopped accepting Adani bonds as collateral.
Adani is said to have close ties with Indian Prime Minister Narendra Modi. India’s opposition parliamentarians have disrupted the House. They are demanding an inquiry from the government. The emperor’s nakedness was apparent to the awestruck onlookers. It was just that they were afraid to say it aloud.
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Magic carpet
Similarly, the issues that Hindenburg raises have long been in the public domain. A casual glance at the balance sheet would reveal the leverage. Adani Enterprises, the listed flagship entity of the group, has a net debt ratio to ebitda of 5x. This level is dangerous as interest rates are climbing.
Debt was the magic carpet that powered Adani’s ascent. His rapid rise could not have been achieved without a web of lenders. The total debt in the Adani Group stood at an estimated US$32 billion.
However, the group’s businesses are cash flow-generative and dominated by fixed assets. Also, the related-party transactions that Hindenburg is raising, were already disclosed.
The world’s top fund managers have long shunned Adani. This makes it hard to short.
The liquidity was too low. For example, the daily trading volume of Adani Enterprises was around US$40 million, which is only 0.1% of its market capitalisation. Tesla, whose founder Elon Musk is a rival for the world’s richest person tag, trades US$20 billion a day or 3% of its market capitalisation. Also, the group’s stock price had risen 20-fold in the two years prior to the report. The valuations were baffling. Adani Green was trading at 1,150x trailing P/E. Its close comparable, Tata Power, was at 48x.
The allegations of excessive debt and lofty valuations ring hollow. Hindenburg has merely repeated facts that were in the public domain. The related-party transactions that Hindenburg have highlighted were disclosed in Adani’s annual reports.
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Hindenburg is playing the role of the boy who said the emperor was naked. The leverage and unsustainable stock price were apparent. The analysts simply lacked the courage to say it.
The accusation that the Adani group has used company money to support the offshore entities is the most damning. Hindenburg’s report seems speculative and fails to provide evidence.
Until Hindenburg finds the smoking gun, Adani would remain unfettered. If proof is lacking, Adani could bounce back. He has just redeemed US$1.1 billion of loans. The Emperor in the story continued to walk proudly in his nakedness.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
