Adani: short-seller reinforces concerns about group’s opacity

We may surmise Hindenburg Research does not start with the premise “let’s give this business the benefit of the doubt”. Short-seller status aside, the name of the hedge fund implies its targets are bloated, explosive and doomed to disaster. And in the case of Indian billionaire Gautam Adani’s investment vehicles, doubts were widely held before Hindenburg intervened.

The short-seller’s report focuses on seven listed Adani companies including holding company Adani Enterprises. Hindenburg alleges extensive fraud, which is denied by the group. Lex, bearish on Adani businesses previously, thinks there are plenty of uncontentious reasons for investors to steer clear.

Indian stocks are sometimes pricey. MSCI’s India index, at 24 times earnings, trades at an over 50 per cent premium to the broader All-World index. Adani group companies are even dearer. The biggest seven Adani companies, including Adani Total Gas, Adani Transmission and Adani Enterprises, have an average multiple of 374 times. Shares of these three, and Adani Green Energy have leapt between seven and 20 times in three years.

There seems little evidence of sufficient earnings growth to justify these multiples. Few analysts, local or international, cover the companies. Low earnings visibility means risks are high. Already, Adani Enterprises stock has stumbled nearly a fifth in the past month.

Adani Green Energy has plenty of potential given India’s high dependence on coal-fired electricity. Coal supplies 44 per cent of its energy needs, says the International Energy Agency. But Adani Green Energy carries net debt worth 9 times forecast March 2023 ebitda. Group holding company Adani Enterprises has a multiple of 6 times.

That explains a discounted $2.5bn equity issue due this month from the latter. Local investors previously fuelled the jet-propelled share price rise. This time the Adani group has sought out Middle Eastern investors, including the Abu Dhabi Investment Authority. That equity would halve Adani Enterprises’ leverage.

By issuing more equity for his flagship company, Adani may forestall near-term concerns about leverage. But high valuations and minimal earnings visibility suggest that Adani companies are sustained more by hope than sound finances.