Adani Rout Eases, Some Relief After Companies' Market Value Almost Halves

The pressure on Gautam Adani’s indebted conglomerate eased a little on Friday after two global rating firms stuck with their calls on its credit profile, capping a tumultuous seven days that saw the market value of his companies plunge by almost half since short-seller Hindenburg Research’s scathing report.

Friday was a relatively less damaging day in the stock rout that’s wiped out about $112 billion from 10 Adani Group firms since US-based Hindenburg claimed last week that offshore shell entities were used to inflate revenues and manipulate stock prices. Shares of flagship Adani Enterprises Ltd. erased an intraday loss of 35% to end 1.4% higher amid a series of big trades. Six of the other nine stocks finished lower.

The slump looked unstoppable this week as worries grew over Adani’s access to funding after the billionaire scrapped a key stock offering, and long-held concerns about the group’s debt were propelled onto the global stage by Hindenburg. Some reprieve came as both Fitch Ratings and Moody’s Investors Service highlighted the stable cash flow from long-term sales contracts for some of Adani’s key companies, which span from ports to power and green energy.

At one point on Friday, losses for some Adani stocks including the flagship reached more than 50% since Hindenburg published its explosive report. The short seller said at that time that seven listed firms of the group are 85% overvalued even by taking the their financial metrics at face value. That unleashed a wave of selling, with record volumes also seen in options contracts.

“Till the time the points raised by Hindenburg are clarified by the company, it will be challenging to trade in the shares,” said Suniil Pachisia, a strategist with Mumbai-based Pratibhuti Vinihit Ltd. The rebound in Adani Enterprises “looks like covering of shorts positions” as trading now requires higher margins, he added.

India’s biggest stock exchanges placed six Adani companies, including the flagship, on a watchlist for additional trading scrutiny — a measure that’s typically applied to highly volatile stocks.

Fitch Ratings said Friday that there’s no immediate impact on the credit profile of the Adani companies it rates following the Hindenburg report. It also doesn’t expect material changes to the forecast cash flow. Moody’s said that while “these adverse developments are likely to reduce the group’s ability to raise capital to fund committed capex or refinance maturing debt over the next 1-2 years,” it’s aware that a portion of the capital expenditures is deferrable.

“Today’s gains could be technical bounce but selloff is clearing slowing,” said Avinash Gorakshakar, head of research at Profitmart Securities Pvt.

National Issue

Meanwhile, Bloomberg reported that the embattled tycoon is in talks with creditors to prepay some loans backed by pledged shares as he seeks to restore confidence in his conglomerate’s financial health. Adani Green Energy Ltd. and Adani Transmission Ltd. were the group’s worst performers Friday, losing 10% each.

“Investors are not just interested in clearing pledges, they want concrete plans and actions,” said Sameer Kalra, founder of Target Investing in Mumbai. “The use of every rupee on balance sheet is critical now. There are a lot of stakeholders.”

The crisis of confidence in Adani has become a national issue with lawmakers disrupting parliament for two days to demand answers from Prime Minister Narendra Modi’s government, given how closely his interests are intertwined with the nation’s growth plans. Government officials have sought to downplay the impact, even as the opposition Congress Party plans nationwide protests to highlight the risks to small investors.

Hindenburg Research last week accused the group of “brazen” market manipulation and accounting fraud, claiming that a web of Adani-family controlled offshore shell entities in tax havens were used to facilitate corruption, money laundering and taxpayer theft.

The conglomerate has repeatedly denied the allegations, called the report “bogus,” and threatened legal action. Adani gave a video speech on Thursday stating that the group’s balance sheet is healthy.

In a reprieve for Adani, the group’s bonds also rallied early on Friday after Goldman Sachs Group Inc. and JPMorgan Chase & Co. told some clients that the debt can offer value due to the strength of certain assets. All 15 dollar debt securities, some of which had fallen into distressed pricing, advanced.

At least 200 financial institutions have had exposure to Adani Group’s $8 billion in dollar bonds, according to data compiled by Bloomberg based on the company’s most recent filings. BlackRock Inc, New Jersey-based Lord Abbett & Co. and New York-based Teachers Insurance & Annuity Association of America were among the big holders.

“The Adani stocks and bonds have different investor bases with limited institutional involvement in the stocks. Equity valuations in the group were hard to justify on fundamentals even before the shortselling report was issued,” said Willem Glorie, portfolio manager at LGT Capital Partners. “Bond investors may still see value at low prices as the conglomerate controls large parts of strategic infrastructure with an underlying business that has potential.”

Banks have been tightening scrutiny on Adani companies’ securities. Units of Credit Suisse Group AG and Citigroup Inc. earlier this week stopped accepting some securities issued by Adani’s companies as collateral for margin loans to wealthy clients.

The conglomerate is said to have pledged 5.5% of its listed units’ shares overall in loans.

The fallout has already led to the removal of Adani Enterprises from the Dow Jones Sustainability Indices. Jo Johnson, a former Conservative minister and brother of former prime minister Boris Johnson, has stepped down as director of a UK firm named by Hindenburg in its report on Adani.

Adani’s proposed loan prepayment would see lenders release some of the stock in the group’s companies that was pledged as collateral, Bloomberg News reported, citing a person with knowledge of the matter. The Indian group hasn’t faced margin calls on these pledges and is seeking the prepayment proactively, the person added.

“Contagion concerns are widening, but are still limited to the banking sector,” said Charu Chanana, a strategist at Saxo Capital Markets. “The focus remains on further risks of index exclusions, while a coherent response on the fraud allegations from the Adani Group is still awaited.”

--With assistance from Harry Suhartono, Lorretta Chen, Ishika Mookerjee and Akshay Chinchalkar.