Adani Short Sale Story Not A Problem For India's Stock Market

Stock brokers react as they watch the days trading of the Bombay Stock Exchange in Mumbai. (AP ... [+] Photo/Rafiq Maqbool)

Adani Group, an Indian holding company that is heavily invested in the energy markets back home, is the latest target of emerging market short sellers. It’s problems, though, are not India’s problems. Investors should not consider this the Indian version of the “Evergrande” real estate default in China.

In BlackRock’s BLK iShares MSCI India (INDA INDA ) exchange-traded fund, Adani’s companies, namely Adani Total Gas (1.1%), Adani Enterprises (1.08%), Adani Transmission (0.77%), Adani Green Energy (0.65%), Adani Ports (0.43%) and Adani Power (0.26%), all make up less than 4% of the fund. It is not a top holding in the Wisdom Tree India Earnings Fund (EPI). EPI and INDA have moved pretty much in lockstep over the last 12 months. Adani Enterprises, for example, is a runaway train. It’s up 79% over the last year while both the India ETFs are down by 8.8%. Over the last two years, Adani Enterprises is like the Indian bitcoin, up 470.9% — which is, in fact, much better than bitcoin (-32.4% over two years).

China’s Evergrande shares were halted from trading last March. China stocks did fall on that news, but Zero Covid policy had as much to do with that sadsack market than Evergrande. The MSCI China and the CSI-300 Index, which measures Shanghai and Shenzhen listed stocks, have been rising since October.

At this point, everyone knows what all the Adani fuss is all about.

Adani’s meteoritic rise over the last couple of years was a red flag to some. Namely, Hindenburg Research, a small, investment research firm in New York City. They told clients to dump the company’s stocks on Monday, saying Adani is running a “corporate con”. Their report was published on Jan. 24.

In their long report (complete with 68 footnotes), Hindenburg analysts said that Forbes-listed billionaire Gautam Adani, the founder and Chairman of the Adani Group, has amassed a net worth of roughly $120 billion, adding over $100 billion in the past three years “largely through stock price appreciation in the group’s seven listed companies.”

“Even if you ignore the findings of our investigation and take the financials of Adani Group at face value, its seven key listed companies have 85% downside purely on a fundamental basis owing to sky-high valuations,” report authors wrote.

On Sunday, Adani responded with an even longer response to Hindenburg’s report — calling them the “Madoffs of Manhattan” and that the report was “nothing but a lie.”

It’s 413 pages if you are a speed reader and have a three martini lunch break.

Gautam Adani, chairman and managing director of the Adani Group. A 400+ page rebuttal to the ... [+] short-selling investment researech firm Adani calls the "Madoffs of Manhattan." (Photo by Kalpit Bhachech/Dipam Bhachech/Getty Images)

Hindenburg has a point. When it comes to valuation, Adani properties are off the chain.

We all know that green energy is all the rage, but is Adani Green Energy really worth 353 times trailing 12 month earnings? The stock fell 20% in India on Monday.

But, owning to Adani’s connections in Delhi, and the fact that it is a player in the all-important energy and power markets, this company might be “too unique to fail,” says Shumita Deveshwar, chief India economist for TS Lombard in Delhi.

Adani is due for a major correction, but India’s equity market, which has benefited as a play off China’s Zero Covid closure as investors just put money into an economy that was going to work everyday as opposed to China’s ongoing pandemic woes, is not going to crash because of this.

“Investor scrutiny of Indian stocks is bound to increase, but on corporate governance metrics, India ranks better than most emerging markets,” Deveshwar says. An Indian corporate governance scorecard developed in conjunction with the International Finance Corporation and the Bombay Stock Exchange found that standards of larger Indian companies have been improving. Adani is not the norm.

On the too-big-to-fail front, Adani has support from the Narendra Modi government. Modi remains very popular in India.

Modi’s popularity rankings are amongst the world’s highest for political leaders, and Hindu nationalist fervor runs high — a bandwagon that Adani has jumped on, according to Hindenburg’s take.

Adani’s problem is not an India problem, though India might take it on the chin in the short-term. For Deveshwar, “markets will stabilize in coming months.”