Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain on global business so you
Speaker 1: can invest better across the Pacific rim. I'm Tom Corvette
Speaker 1: in Hong Kong, and I'm John Lee. India's Adani Group
Speaker 1: is a sprawling corporate empire with ports, power and mining
Speaker 1: driving its growth. But a bombshell report from US short
Speaker 1: seller Hindenburg Research turned Adani's fortunes upside down almost overnight.
Speaker 1: The resulting stock selloff wiped out more than one hundred
Speaker 1: and thirty billion dollars in shareholder wealth. It also knocked
Speaker 1: founder Galtam Adani out of the ranks of the world's
Speaker 1: ten wealthiest people, spotting a crisis of confidence and a
Speaker 1: scramble for a damage control. How could a single report
Speaker 1: from a little known research firm send an entire corporate
Speaker 1: empire sprawling into crisis despite its denials And what does
Speaker 1: this mean for emerging market investors? Let's bring in three
Speaker 1: experts from Bloomberg Intelligence to sort it all out. Kumar
Speaker 1: Galta are emerging markets quant strategist. I think quality of
Speaker 1: auditors is important, but I think one can't based conclusion
Speaker 1: on the size of the Farmer loan. Sharon Chen, senior
Speaker 1: credit analyst, transparency has actually improved. Nittan Chanduka, India equity strategist.
Speaker 1: Adani is not India and India is not Dani Doll
Speaker 1: three of them from Singapore. Everybody welcome as a credit
Speaker 1: analyst who covers some of the Adani companies. How shocked
Speaker 1: were you when the Hindenberg research report came out? So John,
Speaker 1: the allocations in the Hindenburg research report, actually most of
Speaker 1: them were already in the public domain. So to give
Speaker 1: you an example, you know, the research report talked about
Speaker 1: stock price manipulation using Offshan Mauritius funds, and there were
Speaker 1: already reports of this like two years ago, and the
Speaker 1: market regulator was looking into it as well, although we
Speaker 1: didn't hear much after that. So it is surprising in
Speaker 1: terms of the market reaction, and also putting everything together
Speaker 1: might have been surprising, but actually some of this were
Speaker 1: already concerns in the past, even though auditors like some
Speaker 1: of them being not being audited by the Big Four
Speaker 1: was known to the market. So the way the whole
Speaker 1: report was packaged maybe probably that was a surprising event
Speaker 1: for the market. And these shares were actually trading at
Speaker 1: very high valuations, which is quite unheard of for an
Speaker 1: infrastructure based group. So like maybe it just proved to
Speaker 1: be a catalyst to click the bubble. Can you talk
Speaker 1: about some of the valuations. The Hindenberg report mentioned that
Speaker 1: these stocks, some of the Adani stocks went up ten
Speaker 1: to twenty times over a three year period. They did
Speaker 1: mention that I think Adwanni Enterprise and Total Gas were
Speaker 1: training on like five hundred to eight hundred times pear.
Speaker 1: They did seem quite expensive, as you mentioned for infrastructure stocks, Yeah,
Speaker 1: I mean because of the sharp run up in the
Speaker 1: shape prices, the stocks were actually been up to quite
Speaker 1: unreasonable valuations, which you also point out to part of
Speaker 1: this is probably because of like a low free float
Speaker 1: of the group shares. So whenever a lot of liquidity
Speaker 1: gushes into stocks with very low free float, they tend
Speaker 1: to have more impact on the market, and maybe that
Speaker 1: was the reason why they were fading at such high valuations.
Speaker 1: In the Supreme Court is taking steps to probe deeper
Speaker 1: in the Hindenberg's allegations. What signaled do you think that
Speaker 1: sends to the public and the investment community. Ordani's well
Speaker 1: starting the snowball or is the court stepping in because
Speaker 1: it sees an opportunity to pull order from the jaws
Speaker 1: of chaos. So it's difficult to comment at this point
Speaker 1: of time why they are intervening. But actually maybe the
Speaker 1: committee that they have appointed is actually quite quite robust
Speaker 1: and like they comes with a very strong pedigree, and
Speaker 1: I'm sure that will have a and like a clear
Speaker 1: verdict on on this ongoing issue because these allegations keep
Speaker 1: cropping up our periodic basis, So it will be good
Speaker 1: for the market to have a final clarity on what
Speaker 1: who is right and who is wrong? Sure, and chan
Speaker 1: any thoughts on that. Obviously, Hendenburgh's report resonated with somebody
Speaker 1: quite high up in the Indian legal and regulatory system. Well,
Speaker 1: you know, looking in from outside, I would say that
Speaker 1: this in a way is positive as it could increase
Speaker 1: the chances of some sort of clarity coming out of
Speaker 1: these sort of investigations. You know, when we talk about
Speaker 1: some of the allegations, the focus here is really on
Speaker 1: the alleged stock price manipulation and the related party disclosures.
Speaker 1: So for the first one to do with the Mauritius
Speaker 1: funds two years ago, the regulator Sabio already started an investigation,
Speaker 1: but it when quiet. So with increased scrutiny and you
Speaker 1: know the Supreme Court paying attention to this issue, there
Speaker 1: seems to be more urgency to finalize the investigation and
Speaker 1: come up with some sort of outcome. Now I think
Speaker 1: the Court has ordered sab to report on their finding
Speaker 1: within two months. I do believe there's some there's a
Speaker 1: chance it could drag on beyond two months, but at
Speaker 1: least the intention seems to be there and the scrutiny
Speaker 1: is there. So in your assessment, this is a good thing,
Speaker 1: not a negative for Adani and for India. Well, for Adani,
Speaker 1: it's hard to tell because obviously it depends on the
Speaker 1: outcome of the investigation, right, But for India, I do
Speaker 1: think as of now, based on what I can see,
Speaker 1: I'm looking at it more positively. Sharon A. Doney Group
Speaker 1: does have five hundred and seventy eight subsidiaries under seven
Speaker 1: listed companies. Now, the Hindenburg report mentioned that there was
Speaker 1: six thousand intercompany transactions over the last year. This must
Speaker 1: be a nightmare to analyze for a credit analyst. Um
Speaker 1: So again, this is not unusual. I guess for such
Speaker 1: a large conclus So to give you an example, under
Speaker 1: a Doney Transmission, which is the power transmission company, every
Speaker 1: time it bids for a new project, it tends to
Speaker 1: set up a new subsidiary because then you know, you
Speaker 1: have that subsidiary just focused on that project, and it's
Speaker 1: also easier for to raise funding. So that's how you
Speaker 1: end up with so many subsidiaries. And in terms of
Speaker 1: the related party transactions, even in a normal course of business.
Speaker 1: So for example, Doney Green Energy sells power to a
Speaker 1: Doney Electricity Mumbai, which distributes it in Mumbai. That's in
Speaker 1: a normal course of business, so you'd kind of expect
Speaker 1: this related party transactions. Where I guess we might have
Speaker 1: some concern from a credit perspective is in terms of
Speaker 1: related party loans. And what we've seen there, for example,
Speaker 1: is a Doney Ports. It does have this line item
Speaker 1: called intercorporate deposits, which is made to unrelated parties, but
Speaker 1: it's guaranteed by a related party. So these sort of transactions,
Speaker 1: you know, without more explanation from a business perspective, could
Speaker 1: seem a bit unusual. It's been about two months, maybe
Speaker 1: a little more since Hindenberg Research issued its initial report
Speaker 1: on a Donnie, How would you assess the way management
Speaker 1: has handled the crisis so far and the amount of
Speaker 1: damage the reporter is done. Yeah, sure tough. So from
Speaker 1: a credit market perspective, I would say the company is
Speaker 1: you know, they did issue a rebuttal very quickly, and
Speaker 1: they have lined up obviously a series of calls for
Speaker 1: their key dollarbone issuers and they are currently on the
Speaker 1: road as we speak, you know, meeting investors. So they
Speaker 1: are trying. But from a transparent se perspective, we do
Speaker 1: believe there are still some information that that is missing.
Speaker 1: So for example, they've provided that maturity profile for all
Speaker 1: the key listed companies, but as as we've come to
Speaker 1: find out, they are also promoted level debt and there's
Speaker 1: very little information on debt, and there's always concerned that
Speaker 1: when these matures would there be cash leakage from some
Speaker 1: of its operating companies to help support the promoter. So
Speaker 1: I would say that they've done some of it, but
Speaker 1: there are still questions unanswered. Do you think in this case,
Speaker 1: Adani's management has done enough to win back the confidence
Speaker 1: of foreign investors or is there more work to do
Speaker 1: as part of investing in emerging markers. I would say
Speaker 1: that investors do understand that there are risks involved and
Speaker 1: you price it in. But given just how high profile
Speaker 1: this has could become, I do think, you know, there
Speaker 1: needs to be some clarity and maybe cleaning up of
Speaker 1: some of the issues around their shareholding structure and around
Speaker 1: related party transactions. What about the auditing? The Hindenberg Research
Speaker 1: report shed light on a little known auditing firm with
Speaker 1: less than I think fifteen employees. They also mentioned that
Speaker 1: the auditors at the time were less than twenty five
Speaker 1: years old, but they signed off on the accounts. Has
Speaker 1: a Danney Group allayed some of these fees? Um? So
Speaker 1: I haven't heard anything. And you know, for the companies
Speaker 1: that we do cover, so they're bigger companies that are
Speaker 1: dollar bone issues, they are audited by you know, well
Speaker 1: known typically big four audit firms. So this auditor that
Speaker 1: the Hinden Word Research report refers to is specifically for
Speaker 1: Adani Total Guests and also the holding company financial statements,
Speaker 1: So the parent financial statements for Adanney Enterprises, although a
Speaker 1: Danny Enterprises subsidiaries are audited by better known firms. So
Speaker 1: I haven't heard anything in terms of you know, what
Speaker 1: the company is going to do to address this. But um,
Speaker 1: you know, for the other companies that we cover, it's
Speaker 1: not as major an issue now as far as Adanni
Speaker 1: Group is concerned and talk about bout the size and
Speaker 1: the quality of the auditors. I think quality of auditors
Speaker 1: is important, but I think one can't based conclusion on
Speaker 1: the size of the firm alone, because if it's think
Speaker 1: about it, many of the accounting scandals in the past
Speaker 1: beat and Ron are more recently wild card regulators or
Speaker 1: investors have blamed auditors for failure on their part, and
Speaker 1: these are all big accounting firms. So having large auditor
Speaker 1: may help companies to signal good corporate garnance to investors,
Speaker 1: but not having one shouldn't imply lack of governance. You're
Speaker 1: listening to Asia Centric. By the way, If you like
Speaker 1: what you're hearing, please subscribe or give us a rating.
Speaker 1: More stars are better. It helps other listeners find our
Speaker 1: podcast and improves our visibility. Charon Chen many in the
Speaker 1: Financial Commentary and have likened the Adani drama as Indians
Speaker 1: quote en Ron moment or its Leman moments, echoing two
Speaker 1: of the biggest corporate failures in the US of the
Speaker 1: past twenty years. Do you think those are fair comparisons?
Speaker 1: Not at this stage, given that you know, nothing is
Speaker 1: proven yet, right. Um. The other thing is also like
Speaker 1: going back, you know, to the contagion risk. I would
Speaker 1: say even in the debt market, this is being viewed
Speaker 1: in isolation in terms of a Doney specific bonds being
Speaker 1: sold off, but not so much other Indian bonds because
Speaker 1: ultimately this is a private group and so you know,
Speaker 1: um so for example, those that have similar sort of
Speaker 1: risk profile with a conglomerate issue or high promoter share pledges,
Speaker 1: those have suffered. So for example of a Danta is
Speaker 1: one of them. Um. But companies that have strong sponsors
Speaker 1: and you know, are managing their debt profile correctly and
Speaker 1: governance isn't as much of a risk have held in.
Speaker 1: Does a Doney group have enough liquidity in cash to
Speaker 1: meet the debt obligations and for how long as well? Um,
Speaker 1: I do think that immediate liquidity so dissars liquidity is
Speaker 1: not a concern because the amounts maturing, at least from
Speaker 1: what we can tell in their key listed companies are
Speaker 1: not large. And I've mentioned that you know, again the
Speaker 1: companies invest in strong assets that are cash generatives, so
Speaker 1: you would think that if they can offer these as collateral,
Speaker 1: they should be able to raise the required funds. Where
Speaker 1: we see some risk is mainly coming from refinancing as
Speaker 1: we hit into twenty twenty four, and that's mainly in
Speaker 1: a dining green energy. So the renewable company has one
Speaker 1: point two five billion dollars worth of bonds coming due
Speaker 1: next year and management has said that they're working on
Speaker 1: lining up refinancing as we speak and they expect these
Speaker 1: to be in place by the end of June. Having
Speaker 1: said that, one of the bonds, worth seven hundred and
Speaker 1: fifty million, is an unsecured bond as an it's not
Speaker 1: pledged by project assets, so that's where we see the
Speaker 1: higher risk. On top of that, according to Bloomberg data,
Speaker 1: we see there's about four billion dollars of debt which
Speaker 1: was used to fund the acquisition of Ambuja Cements and
Speaker 1: acc which they also come due next year. So that's
Speaker 1: that's a pretty large amount that needs to be refinders.
Speaker 1: But you know, obviously these cement companies are good assets
Speaker 1: and Ambujah in particular has a cash position. Nittan Adani
Speaker 1: Group responded to the Hindenburg allegations saying that this was
Speaker 1: an attack on India. Do you see this as an
Speaker 1: attack on the country or do you think this is
Speaker 1: more of an isolated issue. I think it's more of
Speaker 1: an isolated issue, and probably like it's a key learning
Speaker 1: for other companies not to respond in such a nationalistic
Speaker 1: way when a governance issues come up, because like if
Speaker 1: if they had like responded to their allegations in a
Speaker 1: more structured manner rather than bringing nationalism into the equation,
Speaker 1: maybe the scenario would have been different. So, like, because
Speaker 1: Dani is not India and India is not adanis Indian
Speaker 1: still seems to be a worldlike country by foreign investors
Speaker 1: amongst emerging markets. Do you think foreign investors see India
Speaker 1: as an alternative to investing in China given the geopolitical risks. Yeah,
Speaker 1: I think we can look at the data to answer it.
Speaker 1: First of all, if you look at the nature of
Speaker 1: the both the asset classes China and Indian equities, they
Speaker 1: are both high beta assets. Now what this means is
Speaker 1: if global markets are a X person, these two will
Speaker 1: go up one point two X and if the market
Speaker 1: is down X person, they will go down one point
Speaker 1: two X. Now, what this also means is any rational
Speaker 1: global investor should put extra dollars in these two markets
Speaker 1: together when he expects a risk on environment, and we'll
Speaker 1: pull out money from both the markets at the same
Speaker 1: time when he expects a risk of environment. Now that's
Speaker 1: a rationality argument, But then the question is our global
Speaker 1: investors actually rational? Now we can look at the foreign
Speaker 1: flows for these two markets, and what we see there
Speaker 1: is tronically foreign flows to India and China equities do
Speaker 1: show significant positive correlation. This means that global investors are
Speaker 1: investing in these two markets and pulling out money at
Speaker 1: the same time. Now, if we talk about the last
Speaker 1: two years geopolitical risk for Chinese equities, going by the
Speaker 1: usual narrative, you would have expected negative foreign flows to
Speaker 1: Chinese equities and positive flows to Indian equities, but that
Speaker 1: hasn't happened. Actually, aggregate flows in the last two years
Speaker 1: for the Chinese equities was positive and negative for the
Speaker 1: Indian equities. So maybe this narrative India versus China holds
Speaker 1: for business investments, but it's not true for portfolio decisions,
Speaker 1: at least not for now. We've talked a lot about
Speaker 1: the negative news surrounding Hindenburg Report. Let's talk about some
Speaker 1: of the positives. There are some real value in some
Speaker 1: of these companies, right, yes, certainly, I would say pretty
Speaker 1: much all the companies. I mean, if you look at
Speaker 1: the sectors that Attorney invest in, their primary really infrastructure.
Speaker 1: So we're talking about ports, airports, you know, power transmission lines,
Speaker 1: to distributions, renewable energy projects. These are all typically very stable,
Speaker 1: long term assets. And you know, over the years we've
Speaker 1: seen increasing um investor appetite to invest in these types
Speaker 1: of infrastructure assets. Taking aside the corporate governance issues, Adneys
Speaker 1: an actual business, you know, in terms of their operations,
Speaker 1: is actually well known to be very well run, you know, um.
Speaker 1: So for example, in ports, Adney Ports is basically the
Speaker 1: group's crown jewel and it's Mundra Port is basically the
Speaker 1: biggest port in India, and like Nittin suggested, Doney Ports
Speaker 1: is the market leader there and it has been gaining
Speaker 1: market share because it's well operated. So you know, the
Speaker 1: shipping companies, the shipping lines want to stop there because
Speaker 1: it's more efficient. Is the company has been investing in
Speaker 1: logistics as well, so that it takes less time and
Speaker 1: costs for these companies to transport their cargo. So you know,
Speaker 1: there's definitely a positive in terms of how they've invested
Speaker 1: in infrastructure side. It's just that unfortunately they have used
Speaker 1: quite a lot of debt to fund some of its expansion.
Speaker 1: So for they like they have played a very pivotal
Speaker 1: role in like bridging the infrastructure gap. And we also
Speaker 1: analyze like investing on infrastructure basically leads to um like
Speaker 1: almost two to three times growth in GDP over the
Speaker 1: long runs. And India is an infrastructure deficit country, so
Speaker 1: it is an important part of the Holy ecosystem. NITT
Speaker 1: and how is the Atani group viewed in India? Give
Speaker 1: us the insider's view. It's difficult to comment. I was
Speaker 1: reading a report basically, like if you visit Goat, which
Speaker 1: is the hometown of Adani, and like you will see
Speaker 1: a lot of holdings, a lot of advertisement, and a
Speaker 1: lot of work that he has done for the date
Speaker 1: as such, and he has given a lot of employment
Speaker 1: to basically the people who have benefited out of him
Speaker 1: definitely acknowledge and respect him. But on the other hand,
Speaker 1: there is another group, for example, like the Onshore Funds
Speaker 1: or basically retail investors which were not comfortable probably and
Speaker 1: never invested in those shares. So it is like it's
Speaker 1: kind of a dichotomous view. Some people respect him, some
Speaker 1: people probably like do not and try to Like there's
Speaker 1: been a lot of press reports talking about the close
Speaker 1: relationship between Attani and the Modi government. Given what's happened
Speaker 1: with the Hindenburg report and the debacle, do you think
Speaker 1: it's going to be more difficult for Attani to win
Speaker 1: more government orders. I think it's quite difficult to comment
Speaker 1: at this point of time whether they will win more contracts,
Speaker 1: but definitely, as I mentioned, like, they will definitely need
Speaker 1: to slow down their revenue growth and pay down the
Speaker 1: KPEX plans like currently they of late, they have come
Speaker 1: out with a slowdown in KPEX announcements in several of
Speaker 1: their forms. So basically, if the KPEX plans slow down,
Speaker 1: then naturally the other government contracts will go to some
Speaker 1: other party. But it's difficult to comment like any future
Speaker 1: government contracts will be awarded them or not, but it
Speaker 1: will be politically sensitive, like at this point of time
Speaker 1: to just go and award another contract to them when
Speaker 1: this news is ongoing. We've been talking a lot about
Speaker 1: Adanni Group's woes and the dustop focused on the Hindenburg report.
Speaker 1: Let's take a look on the bright side to what
Speaker 1: extent has this controversy, all this scrutiny been good for
Speaker 1: a Donnie and good for India. I think it's hard
Speaker 1: to say what's been good for Adani other than perhaps
Speaker 1: good for an investor in Adani is that transparency has
Speaker 1: actually improved for the group as a whole. So for example,
Speaker 1: the company disclosed the debt maturity for profile, the annual
Speaker 1: debt maturity profile for all its key listed companies. You know,
Speaker 1: the company has been doing investor meetings and we've made
Speaker 1: themselves more available generally to investors. So I think that
Speaker 1: would probably be the good thing. And also in the
Speaker 1: past has obviously been talks about scrutiny and Adani growing
Speaker 1: too rapidly and a lot of that being debt funded
Speaker 1: at least, you know, for example, in the renewable energy
Speaker 1: with the acquisition of the cement companies. So what we've
Speaker 1: seen also is the company is dialing back some of
Speaker 1: their growth ambitions at least in the near term. If
Speaker 1: allegations do indeed come out to be true, then they
Speaker 1: could lead to better regulatory norms and better shareholding disclosures
Speaker 1: and those kinds of things. So so it will be
Speaker 1: in the long run good for corporating India as well
Speaker 1: and good for financial markets as well. Well. The Adani
Speaker 1: Group drama is still unfolding. I'm sure we're going to
Speaker 1: hear a lot more about it in the weeks of
Speaker 1: the months to come. Kumar Galtam, Sharon Chen and Nitten
Speaker 1: Chanduka all from Singapore. It's been a pleasure having you
Speaker 1: on asia Centric. Thanks for having us, Thanks for having
Speaker 1: Thanks for having us. Asia Centric is edited by Clara Chen.
Speaker 1: I'm Tom Corbett in Hong Kong and I'm John Lee,
Speaker 1: and you've been listening to asia Centric podcast.