Adani short seller has opened a Pandora’s Box

In the news: The Adani Group headquarters in Mumbai. Shares of Adani Group’s companies have lost more than US$50bil (RM212bil) in market value. — Bloomberg

FLEEING from China’s incessant drama, global investors have been seeking the comfort of India, a fast-growing neighbour with a younger population and brighter prospects.

But a high-profile short-seller report on Adani Group and Asia’s richest man rattled them. New York-based Hindenburg Research has opened a Pandora’s Box on India – and more broadly, on emerging markets, which have been seeing near-record inflows this year.

Hindenburg is not your ordinary research outlet. It is well-respected in New York’s finance circles. Its founder Nathan Anderson had worked with Harry Markopolos, the analyst who uncovered Bernie Madoff’s Ponzi scheme.

Even activist hedge fund billionaire Bill Ackman voiced his support on Twitter, calling the bearish report “highly credible and extremely well researched.”

So when Hindenburg describes the company’s dealings as the “largest con in corporate history,” US-based money managers will at least read the first few pages of its report.

What they’ve read is deeply unsettling, but eerily familiar. The auditor for billionaire Gautam Adani’s flagship Adani Enterprises Ltd is a tiny firm with no current website and a dozen employees; a labyrinth of shell companies – offshore entities in particular – was used for stock manipulation and money laundering, according to Hindenburg.

Adani Group said it’s exploring legal action over what it described as Hindenburg’s “maliciously mischievous, unresearched” report. Global investors have heard these allegations before, but mostly from other nations.

China, for instance, just finished a world-famous spat with the United States over accounting quality, with the latter demanding the rights to audit New York-listed Chinese companies.

Meanwhile, its big corporates are adroit users of offshore shells. Chinese real-estate developers have deployed them to issue off-balance-sheet debt that circumvented the scrutiny of regulators and accountants.

But allegations of these dirty governance tactics coming from India?

That surely hurts foreigners’ investment thesis for the nation of 1.4 billion. Judging by their portfolio flows, global investors turned bullish on Indian stocks in the second half of 2022.So far, the unwind has been swift. In the two trading sessions after the Hindenburg report’s publication last week in the United States, Adani’s corporate empire lost more than US$50bil (RM212bil) of market value.

Investors know Indian stocks are eye-wateringly expensive.

The benchmark MSCI India Index trades at 25.4 times earnings, almost double that of China’s 14.6 times.

Whereas the risks in China are by now largely understood and priced in, the Hindenburg research shows that we may be just at the tip of the iceberg with India.

And are these lofty valuations well-deserved? With China Evergrande Group’s spectacular fall still recent in people’s memory, global investors should look into Indian banks’ exposure to Adani, which fuelled its business expansions from ports to green energy with debt.

In just two years, the conglomerate’s borrowings doubled to 2.6 trillion rupee (US$32bil or RM136bil), with about 18% financed by domestic banks, according to estimates from Credit Suisse Group AG.

And yet it’s common that Indian banks trade at more than two times their book value.

Even the State Bank of India commands 1.5 times book, more than the valuation received by China Merchant Bank Co, which is arguably the nation’s best lender with a solid retail operation.

Bullish sell-side analysts can argue that banks have limited exposure to Adani, just like their counterparts in China had done with the Evergrande saga.

However, when things turn sour, Indian banks are nonetheless on the hook for US$5.8bil (RM24.6bil) of Adani’s debt, plus any other ripples that would inevitably course through its financial system.

Global markets might be taken aback too – about 30% of Adani’s borrowings are denominated in foreign currencies, with most of it in the form of loans from overseas banks.

As such, the Hindenburg report is a wake-up call. It is a reminder that India Inc may well not be as sunny as it looks from thousands of miles away.

One of its biggest conglomerates is alleged to have used the same dirty tactics as Chinese companies to cement control, boost its valuation and fuel its expansion with debt.

In other words, India is just like any other emerging market, except with a loftier valuation. But does it deserve that premium?

Hindenburg is now forcing global investors to ask that question. — Bloomberg

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. The views expressed here are the writer’s own.

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