Why Adani's big shock to India's $3.1tn stock market is fading fast

Fund managers see India’s main equity indices both ending the year higher than current levels, as strong domestic demand boosts corporate earnings

The slump in 10 Adani companies that has now wiped off more than $130 billion from their combined market value may end up being a stumble in India’s growth journey. Bloomberg

Signs are quickly emerging that investors in Indian stocks are moving beyond Adani Group’s woes. Local money managers are bullish on the outlook for the year ahead, and overseas funds are starting to trickle back into the $3.1 trillion equity market.

A key share benchmark is climbing back towards an all-time high after retreating for a second month in January, when a scathing report on billionaire Gautam Adani’s empire by US short seller Hindenburg Research shook sentiment across the broader market.

Fund managers think India’s main equity indices will both end the year higher than current levels, according to a Bloomberg News survey, as strong domestic demand increases corporate earnings.

“There is an Adani issue, and there is the Indian market: they are separate,” said Rakhi Prasad, an investment manager at Alder Capital in Mumbai.

The Adani sell-off is not an India matter because the governance standards of many Indian companies are on par with others around the world, while similar problems can be found in many countries, she said.

The slump in 10 Adani companies that has now wiped off more than $130 billion from their combined market value may end up being a stumble in India’s growth story, as the government targets the fastest expansion among the world’s major economies.

Indeed, the scrutiny the nation’s corporate governance scene has faced since the Hindenburg report may end up being a long-term positive rather than its own “Lehman moment”, some say.

“I have become more bullish,” said veteran emerging-markets investor Mark Mobius, the co-founder of Mobius Capital Partners. “India now has attracted international attention and investors will realise that the Adani case is an aberration.”

Mr Mobius said he is looking to buy technology, infrastructure and healthcare stocks. He told Bloomberg late last month that he plans to put more money into India as the “long-term future of the market is great”, and the investor retreat as a result of the Hindenburg report “is an Adani problem”.

Hindenburg published a report on January 24 accusing the Adani group of share manipulation and fraud — charges the conglomerate has denied.

Sixteen of 22 local fund managers Bloomberg News asked in an informal survey this month said they were still bullish on Indian stocks despite the Adani saga. Only two were bearish, while four others were neutral.

Seventeen predicted the S&P BSE Sensex Index and NSE Nifty 50 would end the year higher than current levels, while the majority also said the Adani fallout would not hurt Prime Minister Narendra Modi’s pro-growth political agenda.

Overseas investors, too, now seem less concerned than in the early days of the Adani rout. Foreign funds boosted holdings of Indian stocks for six straight sessions through to Thursday, the longest streak since November, according to the latest exchange data compiled by Bloomberg.

While the Adani group has dominated news headlines in recent weeks, the conglomerate’s many businesses that span areas from ports-to-power only comprise a sliver of the Indian economy.

The group’s combined capital expenditure over the next two years will be at best about $12 billion even assuming it manages to maintain last fiscal year’s levels despite its wide-ranging troubles, according to calculations from Bloomberg Intelligence. This represents only about 0.3 per cent of the potential gross domestic product of India’s $3.47 trillion economy.

An analysis of governance, liquidity and leverage conditions at India’s biggest business groups including Tata, Reliance and Infosys also indicates that Adani is an outlier, and is not representative of India Inc. as a whole, according to a report by Bloomberg.

Not everyone is optimistic. Some investors fear the corporate governance concerns surrounding Adani’s firms may continue to act as a drag on Indian equities, and add to other negatives including expensive valuations and the switch of global funds towards China following its reopening.

In the near term, Indian equities have more of a valuation risk as rates rise, rather than Adani risk

Nitin Chanduka,
strategist at Bloomberg Intelligence

The Sensex, which does not have Adani stocks among its 30 constituents, is less than 4 per cent away from a record high reached in December and is trading at an 89 per cent premium to the MSCI Emerging Markets Index on earnings-based valuations. The Nifty 50 gauge, which houses two Adani group companies, is less than 5 per cent away from its peak.

“In the near term, Indian equities have more of a valuation risk as rates rise, rather than Adani risks,” said Nitin Chanduka, a strategist at Bloomberg Intelligence in Singapore. Adani’s issues will not lead to a “widespread capitulation”, he said.

Meanwhile, growth in corporate earnings is expected to support India’s long-term valuations.

Analysts estimate earnings per share for companies in the MSCI India Index to increase 14.1 per cent this year, better than most major markets, data compiled by Bloomberg Intelligence show.

The bullishness of institutional money managers mirrors that of the growing army of retail investors, who have become a force to reckon with after an investing boom triggered by the pandemic. Over the past two years, the number of retail investor accounts in India has increased to about 110 million from 30 million.

Adani’s issues are not system-wide concerns as “India’s markets have matured significantly over time,” said Rushabh Sheth, co-chief investment officer at Karma Capital. “In a few months, it’ll just remain as a wrinkle.”