Markets Fall on Adani Blues
Stocks were once again scraping the bottom as the main indices ended Thursday's trading session in negative territory
On Episode 439 of The Core Report, financial journalist Govindraj Ethiraj talks to Shriram Subramanian, Founder and Managing Director at InGovern Research Services.
(00:00) The Take: The Adani Group Can't Outrun Its Shadow
(05:48) Markets fall on Adani Blues
(06:38) Goldman says markets Range Bound
(09:06) Will Indian markets take a credibility hit?
(14:57) The fight over a 90 year old British Airways route to India
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, its Friday, the 22nd of November and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai,
India’s financial capital.
THE TAKE: The Adani Group Can't Outrun Its Shadow
The responses to bribery allegations against the Adani Group that exploded across newswires early Thursday morning came from several, mostly predictable, quarters.
But this one took the proverbial cake.
The India research head of investment and wealth manager, Sanford Bernstein, said the market reaction—the fall in Adani’s stocks by around 20%—was short-term.
“These incidents were not specific to India. Such incidents tend to be short-term in nature, given the nature of the infrastructure business,” the research head told CNBC TV18.
He dug in further, saying they were not reading too much into the Adani Group news and that the news was unlikely to have lasting consequences for the broader market. Instead, he said, they were focused on the broader solar sector and said solar energy was a domestic and export opportunity.
If I were to decode what he said, it would go as follows.
First, allegations of corruption should be treated as routine because that is the nature of the infrastructure business in India. In effect, brokerages like his were building corruption into their sector analysis and modelling– my words not his.
Second, because such allegations or brouhahas are routine, it will be back to business as normal in a few days or so.
The frightening part is that he may be right.
Everyone assumes that large contracts are not landed without some form of give and take. Specifically, no one really thinks you are corrupt because you got a big power distribution contract at a price that the electricity distribution company, including the one in question, may not otherwise have bought.
All this is priced into the stock price eventually. Since this is a discussion on business and market price and not morals, let us focus on the former. Which is that Adani Group stock prices tanked more than 20%–no mean feat even in a generally weak and sliding market.
But before we go deeper into that, let’s pause to take stock of the allegations.
US Government prosecutors have charged Gautam Adani with helping drive a US $250 million bribery scheme to Indian government officials to win solar energy contracts and concealed the plan as they sought to raise money from US investors, Bloomberg reported.
More specifically, the Securities & Exchange Commission (SEC), which controls securities markets in the USA, has said that during Adani Green’s September 2021 note offering, which raised US $750 million, the offering materials misrepresented the company’s anti-corruption efforts, despite ongoing bribery activities.
The five-count indictment also accuses Gautam’s nephew, Sagar R. Adani, and Vneet S. Jain, both executives at an Indian renewable-energy company, of breaking federal laws.
Adani has denied the US allegations and said it would seek legal recourse, even as it scrapped a $600 million bond sale.
There have been other collateral damages, including to the holdings of several mutual funds, which took what seemed like contrarian bets on the Adani Group.
Which brings us to the price.
While the debates are already turning shrill, with considerable political grandstanding, the fact remains that the markets, where the ultimate power lies, have voted down the Adani stock prices again.
This is the third, perhaps major, shock to the company’s reputation and its stock prices, starting in January 2023 when New York-based short-seller Hindenburg Research claimed in a report that Adani was involved in stock manipulation, accounting fraud, and money laundering. The report also alleged that the Adani Group was using offshore shell companies to inflate its stock prices and hide its true ownership structure.
A long investigation by the Securities & Exchange Board of India (SEBI) has gone pretty much nowhere, and allegations that the SEBI chairperson, Madhabi Puri Buch, had prior links to the Adani Group and may have influenced SEBI's investigation have also not really touched anyone. These allegations, also made by Hindenburg in a follow-up report in August 2024, claimed that Madhabi Puri Buch's husband had provided legal counsel to Adani Group, potentially creating a conflict of interest.
It is highly unlikely that any other company or business group could have survived such scrutiny.
But the markets don’t care. In each instance, Adani Group stock prices have been hammered to the floor.
Kotak Alternate Asset Managers have said they have advised exercising caution with Adani Group stocks, following the recent correction.
Serious bribery allegations have been levelled by the US Prosecutors directly against the Chairman and his nephew. Also, this development raises valuation concerns, particularly for PSU banks that have extended credit to the group.
And it's not just equity.
Moody’s Ratings said that the indictment of the Adani Group's chairman and other senior officials on bribery charges is credit negative for the group’s companies
“Our main focus when assessing the Adani Group is on the ability of the group’s companies to access capital to meet their liquidity requirements and on its governance practices,” Moody’s Ratings said in a statement
Given Adani’s past record of managing its problems within India, it will perhaps emerge unscathed from this round of battering too.
But the markets clearly know and neither forgive nor forget.
And that is something the Adani Group cannot easily negotiate or navigate its way out of easily. This is the third time unlucky for the group.
And that brings us to the top stories and themes
Markets fall on Adani Blues
Goldman says markets Range Bound
Will Indian markets take a credibility hit ?
The fight over a 90 year old British Airways route to India.
Markets Tank Again
Stocks were once again scraping the bottom as the main indices ended Thursday's trading session in negative territory.
The BSE Sensex plunged 421.80 points or 0.54 per cent to 77,156.80 after the usual gyrations.
Meanwhile, the NSE Nifty50 dropped 168.80 points or 0.72 per cent to 23,349.90, after trading between 23,263.15-23,507.30 levels.
The Adani Group stocks took the maximum beating.
"Investors do not like any lapse of corporate governance, and till there is clarity, investors will shy away from the group," a research analyst at SMC Global Securities told Reuters.
The news triggered dollar bond prices for Adani companies to fall sharply in early Asia trade, also affecting other sectors.
Analysts are also watching banks closely as many of them have significant exposure to the Adani group.
The RangeBound Markets
The question uppermost on most people’s minds, till the Adani bombshell landed on Thursday was what is the general direction for Indian equities and markets at this point.
Well, Goldman Sachs, the perennial bull, has an answer wherein it also expresses a more bearish opinion than what it had held a month ago.
According to them, Indian equities are likely to remain rangebound over the next three months, following their recent slide into correction territory after the worst earnings season in four years and nursing still-high valuations, Reuters reported.
"We expect the market to remain rangebound over the next 3 months and for a back-loaded recovery as growth picks up," Goldman analysts said in a note published late on Tuesday.
They expect the Nifty to hit 27,000 in 12 months, implying a nearly 16% gain from current levels and surpassing its record high of 26,277.35.
Goldman remains tactically "marketweight" on Indian equities and expects the benchmark Nifty 50 to hit 24,000 points in the next three months, implying a gain of a little under 3% from current levels.
Still, that is a reversal from last month when it had predicted the Nifty would fall about 1% to around 24,500 in three months, Reuters points out adding that since that prediction, the Nifty and the BSE Sensex have slipped into the correction territory, having fallen more than 10% from their respective all-time highs on Sept. 27.
This is as we have been cataloguing due to record foreign outflows and slowing corporate earnings.
However, Goldman said Indian equities run the risk of further de-rating as, despite the recent slide, valuations still remain above a 'fair-value' estimate of 21 times forward earnings (PE).
"Valuations have de-rated 8% after the recent pullback, but still trade at nearly 23x forward PE for MSCI India, which is 1.4 standard deviation above its 10-year mean."
The MSCI India index is also not surprisingly in correction mode, or down more than 10% from its record high.
Goldman expects Indian companies to post 13%-16% earnings growth over 2025, which is factored into their long-term Nifty target.
For the July-September quarter, around half of the 50 firms on the Nifty have beaten analysts' estimates, the lowest since 20% of companies topped estimates in the March 2020 quarter at the start of the COVID-19 pandemic, per data compiled by LSEG.
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Back on Adani, what does this latest episode mean from an overall governance perspective and will this hurt perceptions of Indian companies
I also reached out to Shriram Subramanian, Founder of InGovern, India’s first proxy advisory firm.
INTERVIEW TRANSCRIPT
Shriram Subramanian: Yes, there is definitely an implication for the Adani Group itself. Its reputation has been time and again brought to question. It is by far the largest infrastructure company.
So, to that extent, they have their naysayers. They have a number of projects in the pipeline. So, to that extent, they definitely will get affected.
The project financing costs, the project borrowing costs will go up. Long-running investors will shy away from equity investing in many of the Adani Group stocks. Definitely, but will it hinder their projects from a perspective of raising financing itself?
Definitely no. There is always someone who is willing to give money for such marquee infrastructure projects in an emerging country and a large country like India.
Govindraj Ethiraj: So, you know, I was seeing one of the brokerages said that, you know, this is normal in any such infrastructure project. As in, he didn't exactly say what was normal, but he did say that these incidents are not specific to India and they tend to be short-term in nature, given the nature of the infrastructure business. So, my question really is that, therefore, because it's infrastructure, is it assumed in some ways that there will be, let's say, some cutting of corners in the way deals are structured or negotiated?
Shriram Subramanian: This is happening globally, right? I mean, even for that matter, even a country like the US, I would be very surprised if everything is kosher for large infrastructure projects. So, to that extent, globally, this is sort of a norm.
It is priced into projects. Investors have accepted it. They go with it.
They go with the flow. And at the end of the day, these are projects where large capital can also be deployed. And they are unique to the extent that infrastructure tends to have monopolistic characteristics and pricing and everything.
The returns are fairly stable also. So, to that extent, investors like this type of projects and they are, I think, okay with it. They are fairly mature from a funding perspective.
Govindraj Ethiraj: And how do you see this affecting or playing out as far as the overall governance view on Indian companies is concerned or Indian markets? Again, looking at it from outside.
Shriram Subramanian: So, I don't think the implication on any one single group probably will have tarnished the entire Indian market. There are rotten apples. It's always a bell term in any market for them.
India also has its own bell curve. So, there will be a run and end spectrum of companies which are, I would think, follow the best practises, even in the global best practise. You benchmark them to any global company, they would stand out.
And at the other end of the spectrum, from corporate governance perspective, from these reputation perspective, etc., there will be companies which are down the line, so to say. Adani somewhere falls in between. Yes, there are a couple of Adani group stocks are part of the indices.
So, to that extent, ETFs and all will have to benchmark or go with those investing the Adani group stocks. And they have no other way out. But that's a no.
Govindraj Ethiraj: Right. And if you look ahead, what would you say is, let's say, the path that companies who are in infrastructure, who want to be, let's say, actively fundraising, and who want to be seen favourably by investors? Are there some do's and don'ts?
I know it sounds somewhat simplistic, but are there any do's and don'ts in this?
Shriram Subramanian: Govind, that's like a silver bullet in the first place. I think as long as we have a non-transparent political funding system, as far as we have a non-transparent, I think corruption is the norm. Even in our daily lives, your lives and my life, I think we are a long way to go to answer your question.
Govindraj Ethiraj: Right. And you feel that coming back to Adani, this will even out or settle down once again, and then things will be back to normal or back to what it was earlier. So, I'm also asking this question in the context of institutional investment.
Shriram Subramanian: Firstly, this is the first time that the Adani group is facing bribery charges and corruption charges. Earlier charges related to securities law in India and minimum public shareholding. So, this is the first time.
So, we should not conflate it with that issue which was there last year. And secondly, there is, I would think, a well-oiled and well-processed of this even in the US. So, it's not that the US is finding such a company for the first time.
US courts and US lawyers are well-known and there will be a well-oiled process out there. And I think there is a settlement mechanism out there. There's an appeal process out there.
All these, obviously, Adanis will legally pursue it to its logical end. And the US, definitely, the courts act swiftly. So, to that extent, the resolution could be much faster than what it would have happened if it were Indian courts.
Govindraj Ethiraj: Right. Shriram, thank you so much for joining me.
Shriram Subramanian: Thank you.
Rupee Low
The Indian rupee drifted once again to an all-time low on Thursday, thanks to foreign outflows from local stocks and renewed strength in the dollar..
The rupee declined to a low of 84.4275 in early trading, eclipsing its previous all-time low of 84.42. It was quoted at 84.4175 as of 10:30 a.m. IST, nearly flat on the day, Reuters reported.
British Airways 90-year Old Flight
British Airways Plc has dropped plans to axe its longstanding route to Bahrain amid a public backlash even as it scrambles to change its network to accommodate engine issues on its Boeing Co. 787 Dreamliner aircraft, Bloomberg is reporting.
Similar engine-linked issues have also likely caused some cutbacks in flights to India, according to reports (CHECK)
The other India angle is of course this - the first flights to Bahrain were actually enroute to India.
British Airways has been forced to pare back its network and schedule because of a shortage of spare parts for the Rolls-Royce Holdings Plc Trent 1000 engines fitted on its Dreamliners.
This month, the carrier owned by IAG SA said it would suspend long-haul services to Kuwait, Bahrain and Dallas and reduce frequencies to Miami next summer as it didn’t expect to have sufficient aircraft to operate the flights.
British Airways has said it will now run flights between London Heathrow and Bahrain International Airport three times a week next summer, increasing to a daily service in winter next year.
The route to Bahrain has been operational for more than 90 years, and the decision to end service on the route sparked a backlash from passengers as well as politicians in both countries.
Interestingly, the first commercial flight of the now-retired Concorde jet was from Heathrow to Bahrain in 1976 while the UK’s Royal Navy also has a support facility there.
Imperial Airways, which was a predecessor to BA, began services that stopped in Bahrain en route to India in 1932 at the time when the kingdom was a British protectorate.
Bahrain later became an important stop on services to Hong Kong and Australia
