Valuation guru Aswath Damodaran believes Hindenburg’s description of Adani as “the biggest con” in history is a “hyperbole”. Damodaran, who teaches corporate finance and valuation at the Stern School of Business at New York University, said a con game has no substance at its core, and its only objective is to fool other people.
Adani, notwithstanding all of its flaws, is a competent player in infra business, Damodaran said. This, he said, is especially true in India, which is filled with frauds and incompetents.
“A more nuanced version of the Adani story is that the family group has exploited the seams and weakest links in the India story, to its advantage, and that there are lessons for the nation as a whole, as it looks towards what it hopes will be its decade of growth,” Damodaran said in his blog ‘Musings on Markets’.
Damodaran said Hindenburg should be complimented for its legwork, but its critique of the Adani Group rests on a mix of serious contentions, circumstantial evidence and questionable claims.
Damodaran touched on the issue of Mauritius-based shell entities that Hindenburg raised and their links to the Adani Group companies. Besides, he tried to decode stock price manipulation charges against Adani.
“To be able to manipulate and move the market capitalisation of a company by a hundred billion, roughly the increase in value in 2022, one would expect to see huge numbers of shares being traded by these entities. I don’t see that,” he added.
Damodaran said there were questionable claims about earnings manipulation because if Adani was manipulating earnings, it was “not doing a very good job, reporting low margins and return”.
Damodaran said he was puzzled that Hindenburg’s short thesis spends as much time as it does trying to convince that the company was over levered.
Damodaran said even if one believed Hindenburg’s contention that a low current ratio equated to higher default risk, being over-levered was not a con game. He said it was a risk but one that equity investors in many investments took to increase their returns.
“In fact, the infrastructure business is full of companies that borrow heavily, with little or no earnings buffer, and I am not sure that many of them will withstand the Hindenburg test for over leverage,” he said.
Damodaran said he was willing to believe that the Adani Group had played fast and loose with exchange listing rules, that it had used intra-party transactions to make itself look more credit-worthy than it truly was and that even if it had not manipulated its stock price directly, it had used the surge in its market capitalisation to its advantage, especially when raising fresh capital.
Damodaran said Indian stock markets were still dominated by momentum traders, and while that was not unusual, there was a bias towards bullish momentum over its bearish counterpart.
“In short, when traders, with no good fundamental rationale, push up stock prices, they are lauded as heroes and winners, but when they, even with good reason, sell stocks, they are considered pariahs. The restrictions on naked short selling, contained in this Sebi addendum, capture that perspective, and it does mean that when companies or traders prop up stock prices, for good or bad reasons, the pushback is inadequate,” he said.
Damodaran said the stock market regulators in India were driven by the best of intentions, but “so much of what they do” seemed to be focused on “protecting retail investors from their own mistakes”.
It is worth remembering that the retail investors in India who are most likely to be caught up in trading scams and squeezes are the ones who seek them out in the first place, and that the best lessons about risk are learnt by letting them lose their money, for over reaching.
“There is another seam or weakness in the global economic setting that Adani Enterprises exploited, and that is ESG, an acronym far more deserving of the “biggest con” label than Adani, since it is threatening to lay waster to trillions of dollars, not billions. If you review the Adani website and sales pitch, it is quite clear that the company learned to play the ESG game well, creating an entire ESG universe to underpin its companies, and exploiting the green bond market, presumably for its green energy business,” he said.
The notion that a family group that build ports, airports and gas transmission lines qualifies for green bond issuance, tells you less about the group making the issuance, and more about the emptiness of the green bond promise.
“In fact, if Adani happens to default on its debt, I hope that it starts with the green bond holders, since I cannot think of a group that deserves default more,” he said.
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