What happened?

US-based short-seller Hindenburg Research released a report on the Adani Group on January 24, alleging that the company has engaged in “brazen stock manipulation and accounting fraud” over decades. The report, which Hindenburg state was the product of 2 years of research, claimed that key listed Adani companies have taken on substantial debt including pledging shares of their inflated stocks for loans and putting the entire group on a precarious financial footing. Another key allegation was that the group’s very top ranks and 8 of the 22 key leaders are Adani family members, a dynamic that places control of the Adani’s financials and key decisions firmly in the hands of the family with little independent oversight. In response, the Adani Group published a lengthy rebuttal to the allegations and described the Hindenburg report as “a calculated attack on India.” That did little to ease investor concerns as Adani shares took a steep tumble, shaving more than ~US$70 billion off the conglomerate’s combined market cap.

Our views

The allegations of stock manipulation, the low free float and Adani’s supposed use of offshore entities are not new to us. We were aware of the SEBI investigations, which are public information and as investors with a long-term quality focus, we have always had serious reservations over the transparency, related party transactions and accounting practices of such an opaque, complex, highly-leveraged and politically-connected group. For these reasons we never held any of the Adani entities in our portfolios, even as their shares enjoyed a meteoric rise last year and contributed significantly to our relative underperformance. We believe the Hindenburg report is a well-researched piece of work that has done a thorough job of collating the various disparate strands of evidence that led us to also conclude that this was a poor quality group that was best avoided. The share price reaction is vindication of that view and is now materially contributing to our relative performance this year.

It is hard to say what might happen to the group. Despite the allegations of fraud and a subsequent sharp sell-off in the market, Adani Enterprise – the holding company – still pulled off a US$2.5 billion share sale this week with particular support from Middle Eastern investors. We have seen in the past when public news of 3 FPI accounts owning Adani group shares were frozen in 2021, it did not stop the share prices from flying in the subsequent year. The group has the ability to manage share prices and we are aware that Gautam Adani has strong political ties to Prime Minister Modi. Nonetheless, we will monitor how the situation develops from here and how the regulators might respond with India’s market transparency, quality of regulation and protection of minority shareholders now very much in the spotlight. 

Is there systemic risk? Not at this point...

Having met with the Adani Group, analysing their financials and looking at their loan and bond exposures as well as speaking to Indian banks and one of Adani’s offshore financiers, our findings suggest:

1. Most of Adani’s funding has come from offshore financing.  
2. Adani Enterprises’ CFO told us he has fixed his offshore borrowings at very low rates and long tenures, which reduces some of the refinancing risks. 
3. In India, the State Bank of India and the PSU banks are the primary lenders but it is being said within the industry that even they have been more judicious about selecting the projects they underwrite. That said, it still reiterates why we find it hard to justify investing in even the best of the PSU banks (e.g. SBI) since they are unlikely to get away with funding the Adani group given PM Modi’s ambitions in building out infrastructure for the country. 
4. Our private sector banks in the portfolio also lend to the group (ICICI, Axis) though they focus on operating assets that generate cashflows, such as gas transmission, roads and power. They have been selective and have contained their risk exposures to Adani. 
In general, the Indian banking community is well aware of the Adani risk but there is no view yet that this could translate into a systemic risk. We learned that Adani has apparently fully hedged its dollar risk and only a small percentage (low double digit) of the total debt is up for refinancing in the next 3 years. This may turn into more of a political risk ahead of the 2024 parliamentary elections given Gautam Adani’s close ties to Modi. 

Impact on our portfolio companies 

ICICI Bank: The bank told us that their credit and bond exposures to Adani are not significant. 

Axis Bank: Though Axis has more exposure, it is still relatively contained. Most of it is in the operating assets (transmission, ports, airports, power, Adani Wilmar), many of which are considered national interests and therefore with little credit risk. The power assets are mainly legacy NPLs that was taken over by the Adani Group as distressed purchases. These have been upgraded as performing assets. Investment exposure is only in the form of commercial paper and bonds of Adani’s transmission business. The bank’s relationship with Adani is a long-standing one since Axis was a corporate lender in the past. Axis confirmed to us that it has not participated in the financing of new businesses and acquisitions. 

Kotak Mahindra Bank: They have minimal exposure primarily to ports and gas and loans pledged to assets in these entities. They have taken a wait-and-see approach for financing other Adani projects.  

HDFC Bank: Like Kotak, they have minimal exposure and we are not worried about any potential impact. At this point, the bank remains focused on its pending merger with HDFC which is expected to complete later this year. 

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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