Gautam Adani retreats after short seller attack -Dlight News

Gautam Adani retreats after short seller attack

More than three months after short-seller Hindenburg Research accused Indian tycoon Gautam Adani’s conglomerate of stock price manipulation and accounting fraud, the company argued that its profits were proof of the strength of its business.

“It’s unfortunate that we had to go through this politicized, tainted report,” Adani Group Chief Financial Officer Jugshinder “Robbie” Singh said last week on an earnings call for flagship company Adani Enterprises. “But you look at the numbers.”

Adani Enterprises more than doubled its after-tax profit to Rs7.8bn ($95mn) in the three months ended March, with coal trading and mining profits nearly doubling before interest and tax.

But the conglomerate, which has grown thanks to government contracts and acquisitions over the years, has had to adapt in many ways since the onslaught of short-sellers. Adani has been forced to scale back to save cash after the report wiped about $100bn off the group companies’ market capitalization and Adani Enterprises scrapped a $2.4bn follow-on equity offer.

Adani Enterprises said in a stock exchange filing on Wednesday that it is considering a fresh share sale to raise funds but did not specify the amount. Its board meeting will take a decision on Saturday.

The group, which denies Hindenburg’s allegations, has slowed acquisitions and is buying back bonds to boost confidence.

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The company has told investors and market analysts that its continued growth in new areas, including media and data centers, is on hold. “We understand from management that they are trying to slow down capitalization across the board,” said Rachna Jain, director, infrastructure and projects team at Fitch Ratings. “And even on key sectors they are trying to trim growth.”

In 2022, Singh said Adani Enterprises would spend $5.3 billion on capital expenditure in the 2024 fiscal year. This month, it revised the estimate to $3.8bn.

Adani Ports and Special Economic Zones, the conglomerate’s logistics arm, halved its capital for this year from last year and launched a $650mn bond buyback that it said was part of “reflecting the company’s comfortable liquidity position”. Adani’s Ambuja Cement said this month that it had invested Rs. 18 billion engineering contract has been cancelled.

The group also appears to have backed away from seeking some government tenders. Adani Green Energy, the group’s renewable power arm, did not win any of the 30 new renewable power tender offers issued in India in April, according to JMK Research, a Gurgaon-based consultancy.

Asked about the company’s absence of new bids in an earnings call this month, Adani Green Energy’s head of business development said: “We have a large pipeline of projects under construction. . . We already have significant capabilities attached. So, we are focusing on value addition opportunities and timing them as they come. We are not necessarily aggressive in the market right now.”

An Adani spokesperson said the group has not changed its overall strategy for participating in tenders or investment schemes for its core infrastructure business. “Capex is being reassessed in the short term in new areas of investment outside of core as we continue our work with relevant parties to address the economic downturn,” added a spokesperson of the short seller’s report.

Dealmaking has also taken a back seat. Adani held off on buying an $847mn coal power plant in India in February and has since avoided new deals, which has weighed on the broader market as it suffers a slowdown in M&A activity.

Adani built its empire on a “blitzkrieg” of acquisitions, said a Mumbai banker. The tycoon’s quiet period will “definitely impact investment banking revenue as it is critical to the business”, the banker added. “It’s like if Chennai Super Kings quit the Indian Premier League,” he said, referring to the second-placed team in the top cricket league.

Following the short-seller attack, analysts expect Adani to struggle to secure new financing. Adani Green Energy, which is developing a 25GW renewables portfolio, had a quarterly profit of Rs 5bn and is due to repay $1.25bn on two bonds in 2024.

“A report like Hindenburg raises additional questions in the minds of investors,” said one analyst who spoke on condition of anonymity for fear of fallout from Adani, “making it more difficult to raise capital in already challenging markets.”

“They will be careful about things like corporate governance because now people are watching them really closely,” said Anish Teli, managing partner at Mumbai-based fund manager QED Capital.

On Friday, index provider MSCI said it was downgrading Adani’s two stocks. It revalued the size of the free float – the proportion of shares available for trading – from 25 to 14 per cent and 25 to 10 per cent of the power unit of Adani Total Gas, Adani and TotalEnergies’ city gas business and Adani Transmission. St., respectively. MSCI calculates a stock’s weight based on its free float.

Adani said it is working on “increasing the depth of [the] Share Register and Off [the] Free float in our portfolio of companies”.

Despite rejecting Hindenburg’s findings, Adani has responded to one of the criticisms by changing auditors at the company. The Hindenburg report criticized Shah Dhandaria, the auditor of Adani Enterprises and Adani Total Gas – as a “small firm” that “seems hardly capable of complex audit work”.

Last week, Adani Total Gas replaced its Ahmedabad-based auditor four years before his term expired and announced Walker Chandiok, the Indian affiliate of London-headquartered auditor Grant Thornton, as its new auditor.

“If you want to have some sort of comfort in the audit process, you have to rely on big auditors,” said Sharmila Gopinath, India Specialist Advisor at the Asian Corporate Governance Association. She added that this assurance is particularly important for foreign investors.

An Adani spokesman said Adani Total Gas had intended to change its auditors ahead of the Hindenburg report.

At home in India, the Supreme Court in March directed Indian markets regulator Sebi to investigate the conglomerate.

The short seller’s report has also had an impact on Indian politics. Opposition parties have seized on the issue to defeat Prime Minister Narendra Modi a year before the national elections.

Modi and Adani, both from Gujarat state, are widely believed to have a close relationship that analysts say is now a political liability for the prime minister.

“Modi can’t be too happy about the Adani issue,” said Shruti Kapila, professor of history and politics at Cambridge University.

The way Modi deals with the Hindenburg report “will really matter, especially the way he is punishing opposition leaders”, Kapila said. “It could backfire.”

Additional reporting by John Reid in Bengaluru

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