Hello. Hindenburg vs Adani Group has reached Round 2. This time, Hindenburg takes on the entirety of India's securities regulators. We'll discuss what is happening, if Adani Group stocks are a buy, and wrap up with Gupshup—a quick round-up of the most important headlines.

BTW: India is especially excited for the 2028 Olympics. Do you know why? (Answer at bottom)

Markets

Read here for an appendix on the above.

Hindenburg vs SEBI

Hindenburg Research revealed in an August 10 report it found the chief of India’s securities regulator (SEBI), Madhabi Puri Buch, had a conflict of interest with Adani Group that prohibited her from conducting a probe into the infrastructure conglomerate.

This comes after Hindenburg released a July 1 report retaliating against SEBI for investigating Hindenburg for market interference in its original Adani Group exposé while not opening a probe into any of Adani Group’s issues raised by Hindenburg.

• SEBI alleged Hindenburg did not properly disclose that it was shorting Adani Group, which Hindenburg disputes by saying “virtually everyone on earth knew we were short Adani because we prominently and repeatedly disclosed it.”

• SEBI also alleged Hindenburg distorted evidence, and Hindenburg responded by pointing out that SEBI did not refute any of the allegations made by Hindenburg but just had a problem with their use of the word “scandal” as an exaggeration.

Now, Hindenburg alleges Buch had a conflict of interest due to an investment in 360 ONE WAM, a Mumbai-based wealth management group, that was co-invested in Adani Group stock. 360 ONE WAM denies that it was invested, directly or indirectly, in any Adani shares.

Hindenburg also alleges Buch and her husband have stakes in some of the offshore Mauritius shell companies with links to Vinod Adani. Hindenburg goes on to show, through leaked emails, that Buch had investments in multi-layered offshore investments meant to defraud the public.

Some caveats to Hindenburg’s claims include the fact that she made all necessary disclosures according to her, SEBI, and the Institutional Investor Advisory Services, a proxy advisory firm in India.

Buch, Adani Group, 360 ONE WAM, and SEBI all deny any wrongdoing. A BJP Spokesperson said the claims made by Hindenburg are baseless.

Adani Group shed $2.4 billion, about 1 percent of its market cap, after Hindenburg released these allegations on August 10th.

Adani Group — Overvalued?

Overview

Adani Group, the combination of all listed companies, has a cumulative ~$200B market cap. It is composed of 8 entities, all centered around infrastructure (except Adani Wilmar which is in the food processing business). 

Adani’s rise has been staggering, being almost unknown just 15 years ago. Growth has come from constant acquisitions (generally done by the flagship incubator, Adani Enterprises, until the acquisition is mature enough to spin off). The most recent has been Ambuja Cement which in turn bought Penna Cements; this is a bet on growing Indian infrastructure demand in rural zones. Adani Group, based in Gujarat, India, can also attribute its rise to Gujarat’s former chief minister and close partner rising to become the nation’s prime minister.

Samosa Capital finds Adani Group to be overvalued but likely to see continued long-term growth in its stock price given India’s unusual market dynamics (read here for our piece on why Indian equities as a whole continue to rise without strong fundamentals to back it) and regulator intervention. Investors should closely monitor BJP's prospects in the 2029 national election when determining how long to hold Adani Group stock.

_{Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.}

Earnings Misinterpretation

After finding each spin-off’s P/E ratio and weighting all 8 entities’ ratios by market cap, Adani can be assigned a P/E of 155.54. This is astoundingly high considering the conglomerate is in the industrial space with low-profit margins (this past quarter was 6% even off of a huge year). Operating margins have also been decreasing with the flagship Adani Enterprises having one of just 3.6% from 2021 to 2023.

Now an argument for the high valuation is recent earnings. So far throughout 2024, Adani Group has had 65% earnings growth YoY. This would imply a P/E ratio of 140 based on a value investing framework. 

Samosa Capital finds this valuation to be unsustainable:

• Airports propelled revenue up by 30% due to reversals from travel lockdowns, a one-time gain

• Revenue and growth have been increasing due to BJP policies that are being rolled back

  • BJP's reliance on coalitions has reduced spending bills benefitting ports, power, and construction

• Earnings growth isn’t taking into account capital expenditures: even if earnings growth, Adani is spending large amounts of available cash on acquisitions and projects which reduces cash flow attributable to investors

  • Gross debt climbed by 13% for Adani Enterprises ($7B) at a time with a higher expected natural rate of interest which will increase the cost of capital

  • On top of bank and bond financing at 7% plus a risk premium, Adani Group is looking for a share sale this month or next which further adds financing costs

  • Even when projects like a new Mumbai airport, a copper mine, and increased cement production manifest themselves, they will remain low-margin ventures

  • As CapEx continues to grow, depreciation and amortization will continue rising further reducing earnings growth

It should be said, however, that even a high debt load is not a huge burden for Adani considering the immense and diversified scale of their holdings. Investors should note that such a scale still does not justify Tesla-esque multiples. 

Squeezed Share Supply

An important factor to look at is the supply/demand driver for Adani shares. A recent SEBI report indicates that around 70-75% of the total conglomerate is family-owned. Another 15% is foreign institutions and the rest is domestic. Now if the price action was driven by foreign funds betting on Indian long-term growth, there could be a bullish argument. 

The more likely explanation is that the bullish bias that SEBI and the Indian government place (see short selling regulation) has resulted in retail traders playing a ‘greater fools’ game with Adani. SEBI protecting retail traders from the downside is what has led to the overall high NIFTY valuations and exodus of foreign dollars which find the Indian market overvalued in the current state. A P/E ratio of 150 would necessitate 70% earnings growth YoY in perpetuity which for an infrastructure business simply makes no sense. 

Family ownership also comes with pitfalls. There will of course be future drama, bad management, and egotistical decisions. Beyond those relationships, the rapid rise of Adani coincides with the rise of another group: PM Modi and the BJP. Receding power reduces the favoritism and protection that Adani has gotten from banks, regulators, and all levels of government. 

Political Risk

At this point, it is cliche to point out Adani Group’s cozy relationship with the Modi administration. Still, specific instances of corporate favoritism must be pointed out to show the company’s reliance on a BJP government to maintain strong values.

For example, Modi’s government removed the condition that a single company could win contracts to build more than two airports domestically, allowing them to hand all six of the airport building contracts in 2019 to Adani Group. In a similar vein, Adani Group has been a beneficiary to food subsidy and coal mining contracts. The Economist reports Adani Group “now runs some of India’s biggest ports, stores a third of its grain, operates a fifth of its power-transmission lines and makes a fifth of its cement.” The closeness of Adani and Modi is so well recognized that upon the election of Modi to Prime Minister, a subsidiary of Adani Group’s stock immediately jumped by 23%. Adani Group’s stock swings violently on news of BJP election prospects: when June exit polls predicted a strong BJP finish in the national Lok Sabha elections, Adani Group gained $20 billion in market cap in a single day. When it was revealed that BJP would not hold on to a single-party majority, the gain was completely wiped overnight.

Closing Thoughts

While Adani’s fundamentals are far better than they were when the Hindenburg Report came out, it is still far too overvalued to consider. The entire company came just a handful of Lok Sabha seats away from seeing a 50% devaluation in June. The Hindenburg findings have tarnished the reputation of the company and resulted in much higher scrutiny from foreign investors. 

While this would normally mean selling short, that recommendation also seems hard to justify, however. First, SEBI’s regulations make this task in itself difficult. Secondly, similar to Tesla, the market can stay irrational far longer than an investor (especially one who is short) can stay solvent. 

Macro

India’s inflation falls to 3.54 percent in July, below RBI’s 4 percent target for first time since 2019 (BBG)

• Food, which is half of CPI by weight, rose 5.42 percent in July y-o-y, compared to 9.36 percent in June

• Fuel and electricity costs fell 5.48 percent

• June year-over-year rise in prices was 5.08 percent

India’s consumer sentiment falters slightly (BBG)

• Burned by inflation and high RBI rates maintained for 18 months, consumer sentiment fell slightly from its March 2024 high of around 97 to 93.90

  • The index was just above 50 in March 2021, during its pandemic recovery

• Nomura’s economists hope for a rate cut by October

Indian bankers have the highest attrition rate globally (BBG)

• Amidst the financial boom, young bankers are jumping from bank to bank to cash-in on hiring incentives

  • Indian bankers’ salaries are expected to grow faster than Hong Kong’s or Singapore’s

• Employment in India’s financial sector has risen 50 percent from 2013 to 1.8 million in 2023

Equities

Ola Electric has a blockbuster IPO, with shares rising 42 percent in the first three trading sessions

• Raised $733 Million, partially going to building a 1 gigawatt-hour factory

• While 5 percent of India’s scooters/motorcycles are electric, analysts forecast 50 percent of the market to be electric by 2028

Starbucks’ India CEO Looks to double the country’s store count through masala chai and local snacks (BBG)

• Starbucks operates in India via a 50-50 partnership with Tata, officially functioning as Tata Starbucks

• India CEO Sushant Dash is aiming for 1,000 stores by 2028, more than double the 441 currently, by diversifying away from coffee

• The parent company recently ousted its CEO and replaced him with former Taco Bell and Chipotle CEO Brian Niccol

Goldman Sachs downgrades Bata India to “sell” (CNBC)

• Bata India is a shoe company that listed publicly in 1973

• Same-store sales growth has been negative if not flat for last few quarters

• Of the 22 analysts covering Bata, now 10 have a “sell” rating

Alts

Bain Capital is the frontrunner to buy stake in India’s HealthCare Global (BBG)

• Bain is looking to buy CVC Partners’ 60.4 percent stake in the healthcare company, currently valued at $356 million

  • CVC invested in 2020, HealthCare Global (HCG) stock is down 3 percent YTD

• HCG operates 21 cancer treatment centers in India, serving 200,000 customers yearly

Bajaj Finance seeks $500 million offshore loan (BBG)

• Bajaj is India’s largest non-banking finance company by market cap, considered a “shadow bank”

• Offshore loans must be raised through RBI’s external commercial borrowing routes, where interest rates are capped at 500 bps above the benchmark rate

• Rise in shadow bankings seeking global credit markets comes after RBI lifted domestic borrowing rates to curb risky behavior

Bharti Group agrees to buy 24.5% stake in BT Group Plc from Altice UK

• Altice UK’s CEO Patrick Drahi has been selling off pieces of the company to pay off debt; the BT Group Plc stake is worth $4.1 billion

• BT Group Plc is valued at $17 billion, and Bharti Group made clear it is not interested in buying more of the company beyond the stake; shares of BT Group rose 8.4 percent on news 

• Bharti Group is owned by Bharti Enterprises, a conglomerate with operations in manufacturing, telecommunications, etc; BT Group Plc is a London-based telecommunications company; Altice UK is a French telecommunications conglomerate

India and China’s weights in MSCI EM Index converge close to 20 percent, the smallest gap ever (BBG)

• In July 2023, India’s weight was under 15 percent, while China’s was near 30 percent

• Reflects China’s debt crisis has left investors pessimistic on the country, looking to India for higher return opportunities

Politics

India’s antitrust regulator retracts accusation Apple abused dominance in domestic market (ET)

• The original probe argued Apple abused the dominance of its app store to unfairly treat digital products and services

• Two things are unusual: 

  • 1. the original probe was predicated on Apple’s domestic market dominance in India, but Apple only has 6.4 percent of the market and is not even a top 5 provider of smartphones in the country

  • 2. It is very rare for the regulatory body to recall such reports, which was done after Apple argued it contained confidential information that shouldn’t be released to the public

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Oh, and cricket will officially be part of the 2028 Summer Olympics, an exciting opportunity for India to take a gold medal home. India won six medals in the 2024 Paris Olympics, though none were gold. The last time cricket was recognized as an Olympic sport was in 1900, when India was not yet a country. Now, India’s supremacy in the sport is recognized through many accolades, including winning the 2024 TC20 Cricket World Cup.

See you next week.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1 USD = 83.96 Indian Rupee