Why investors might be ready to bet on Adani stocks again

Group companies of Indian tycoon Gautam Adani have lost up to $150bn in market value following US short-seller Hindenburg Research's scathing report

Shares in Adani's flagship companies rebounded strongly last week, although they still remain a long way off their levels before Hindenburg's report was released. Bloomberg

A wave of positive developments for India's embattled Adani Group, including a fresh injection of foreign investment and roadshows, have given some reprieve and helped boost investor sentiment in the past week.

But billionaire Gautam Adani's conglomerate — which has lost up to $150 billion in market value following US short-seller Hindenburg Research's scathing report — is far from out of the woods, analysts say.

“We believe that bargain hunters are back after a series of positive developments,” says Manish Chowdhury, head of research at Stoxbox, a stockbroking platform in India.

But “it would be premature to conclude a reversal of fortunes for the group”, he says.

“The path to recovery for Adani group stocks looks a long journey as it would have to take concentrated efforts to regain trust from the investor community.”

Shares in Adani's flagship companies rebounded strongly last week — although they still remain a long way off their levels before the Hindenburg report was released on January 24.

The report accused the group of stock manipulation, financial irregularities and improper use of offshore tax havens.

Mr Adani has denied the allegations.

Adani Enterprises' share price ended the week at 1,879.35 Indian rupees ($23) on the BSE, up 43 per cent from 1,308.05 rupees at the start of the week.

Adani Ports gained 20 per cent to close up at 684.35 rupees a share.

A major fillip for the group — which has interests ranging from ports to power — came on Thursday when the US investment group GQG Partners announced that it had bought shares worth $1.87 billion in four Adani companies.

“This may assuage concerns about the group’s ability to raise funding for the repayment of loans against its listed company shares, its stated target,” according to a research note by Kotak Institutional Equities.

There are also potential wider positive implications, analysts point out.

The investment “might influence the market positively”, says VK Vijayakumar, chief investment strategist at Geojit Financial Services.

“This money is mainly to be used for retiring debt, which means that the banks that had funded Adani companies will not face any stress.”

Mitul Shah, head of research at Reliance Securities, agrees that the investment appears to be a vote of confidence that has “improved the overall sentiment in the market and especially in the public sector banks”.

Media reports earlier in the week that claimed that the group had reportedly raised $3 billion from a sovereign wealth fund also boosted optimism, but were later dismissed by the Adani Group as a “market rumour”.

Investors have been rattled since the emergence of Hindenburg's allegations against the conglomerate, which “has raised questions regarding the corporate governance, sustainability of high levels of debt and sky-touching valuations of the group, thereby leaving a bitter taste for both domestic as well as foreign investors”, says Mr Chowdhury.

More broadly, the matter has triggered questions about India's business practices in general, as well as expanding into a political row, with Mr Adani widely perceived as being close to India's Prime Minister Narendra Modi.

“The saga has brought the role of regulators, lenders, credit agencies and other stakeholders under the lens and tarnished the brand image of India at the global level,” Mr Chowdhury says.

The continuing crisis has prompted the Adani Group to launch a charm offensive. The group held meetings with fixed-income investors in Singapore and Hong Kong last week.

It is also planning to meet investors in Dubai, London and the US between March 7 to 15, to try to reassure them of its financial position, Bloomberg reported, citing unnamed sources.

These efforts could prove to be critical when it comes to restoring trust, analysts say.

“Conducting roadshows is the step in the right direction to alleviate investor concerns towards the group,” says Mr Chowdhury, adding that this helps the company to “present its side of the story to the investing community”.

“The major reassurances that investors would be looking at would revolve around promoter-level deleveraging, refinancing plans, especially, for the $750 million Adani Green bond due 2024, creditworthiness of the group, business viability, planned capital expenditure, accounting practices, debt structure and other measures,” he says.

But while the roadshow is “a good move”, Devi Yesodharan, co-founder of stock market analysis platform Trendlyne, says it could be more of a branding exercise.

“If the reassurances are focused on the cash flow and assets of the group, which it reportedly is, then it doesn't address the questions raised on governance, related party disclosures, and Mauritius funds,” says Ms Yesodharan.

Meanwhile, Indian authorities are also taking steps in response to the situation.

India's Supreme Court on Thursday said that it has set up a panel to investigate the allegations against Adani Group made by Hindenburg Research.

The court also directed India's markets regulator, the Securities Exchange Board of India (Sebi) to probe the claims of stock manipulation, and to report back with its findings within two months.

Mr Adani said he welcomed the Supreme Court's move.

“It will bring finality in a time bound manner,” he said on Twitter.

“Truth will prevail.”

Supreme Court panels have had mixed results in the past.

But experts say that they are confident that the Sebi report could provide some much-needed answers.

“This will ensure that transparency prevails,” says Niranjan Shastri, associate professor of finance, at NMIMS University in Indore.

The saga has brought the role of regulators, lenders, credit agencies and other stakeholders under the lens and tarnished the brand image of India at the global level

Manish Chowdhury,
head of research at Stoxbox

“In my opinion Sebi’s report will matter [a] lot more than any private short seller's report.”

Mr Shastri does not expect the Adani crisis to be a contagion threat.

“The Indian economy is robust on all fundamentals,” he says.

“The exposure of Indian banks and non-banking financial companies is limited.”

Ms Yesodharan also does not think that India's markets will experience any prolonged spillover effects from the crisis.

“The contagion in my view has been limited,” she says.

“While the Adani stocks saw steep falls in share prices, foreign inflows into Indian stock markets have turned positive in the last week and month. This wouldn't have happened if there had been a perception of the Adani issue being an 'India' issue.”

The steps that are now being taken are encouraging, according to experts.

Adani is “on the path to rebuild investor trust”, says Mr Chowdhury.

“The foremost task at hand for the group is to provide a clear picture to investors about the cash flow generating capabilities of the various group companies which are reeling under high debt."

Adani companies have reportedly cut their capital expenditure for this year and questions remain about raising finance for their projects going forward.

The group may have “to extend the timeline for key project completion”, says Ms Yesodharan.

But as long as Adani Group can demonstrate that the “business performance of the group companies is on track, we do not foresee any challenges for the group to raise further capital to finance its operations or ambitious expansion plans”, Mr Chowdhury says.