‘On thin ice’: Former CEA Subramanian raises doubt on Hindenburg’s ‘biggest con in history’ claim against Adani
Top economist and former Chief Economic Adviser (CEA) Krishnamurthy Subramanian on Thursday said the rise in Adani Group stocks can’t be termed as a “the biggest con in history” as alleged by US short seller Hindenburg Research in its January 24 report.
“Overlaying irrational exuberance on the part of investors in their interpretation of the potential prospects from India’s economic shift towards significant capital expenditure, the Adani Enterprises’ stock price appreciation to Rs 3,800 is not inconceivable,” wrote Subramanian a column in The Times of India.
The Hindenburg report has plunged Adani, led by billionaire Gautam Adani, into crisis, wiping some $120 billion off the value of the group’s companies.
He said that a plausible explanation for the high market valuation of Adani stocks was a combination of public capital spending and irrational exuberance.
“Such irrational exuberance often manifests when investors observe regime shifts either in technology – as in the dot-com bubble – or in government policy – as in the encouragement of subprime credit before the Global Financial Crisis,” said Subramanian.
The regime changes in India’s economic policy focussing on capital expenditure, therefore, can explain irrational exuberance about AE’s future prospects, said Subramanian.
A careful analysis of Adani Enterprises’ financials reveals that the label of “the biggest con in history” rests more on innuendo than on solid evidence, said the professor at the Indian School of Business adding the evidence backing the claim is “on thin ice”.
While high levels of debt have been highlighted as a significant problem by the Hindenburg report, peer comparison reveals that book leverage of 57. 2% is similar to the average of 51% for global peers. Though leverage measured using the market value of equity equals 6. 9%, it is an incorrect measure here because of the high market value of equity.
“Hindenburg report, peer comparison reveals that book leverage of 57. 2% is similar to the average of 51% for global peers. Though leverage measured using the market value of equity equals 6. 9%, it is an incorrect measure here because of the high market value of equity. Similarly, the lower operating margin and return on capital reflect AE’s relatively younger infrastructure business. As returns on capital improve as assets age, these metrics should catch up with those of peers,” wrote Subramanian.
