After the Bell: The Adani Group and the ancient art of pooping and scooping

30 Jan 2023

The Indian stock market has seen the golden rules of ‘poop and scoop’ and ‘pump and dump’ applied at such a scale that it’s mind-boggling.

Every investor knows the two golden rules for making quick money on the stock market. The usual way, or should we call it the slow way, to make money on the stock market is to search for alpha, invest sensibly over the long term, diversify, find a good money manager, start investing early, etc.

But for some people, this process takes ages, and they often don’t have the time, so they look for more, shall we say, adventurous options. This is where the two golden rules come in. Actually, they are not so much “golden” as polished brass which can give the impression of gold if you don’t examine them too closely. I’m talking about, of course, the hallowed “poop and scoop” rule, and its equally hallowed sibling, “pump and dump”. Quite.

The Indian stock market has seen these two golden rules applied at such a scale that it’s mind-boggling. What happened most recently, if you are not an aficionado of the Indian stock market, is that seemingly out of the blue a new Indian billionaire started to appear on the Bloomberg Billionaires Index: Gautam Adani. At one point he was second on the list, with a net worth of about $147-billion. The family trust owns about half of the listed holding company Adani Enterprises, as well as a host of other companies.

Adani Enterprises, a diversified industrial powerhouse, chugged along happily for years and years trading at around 150 rupees on the BSE (formerly the Bombay Stock Exchange) until 2020, when it blasted off. The company reached a peak last December, hitting 4,161 rupees. Part of the reason has to do with coal, since the group is not only a big coal miner but a huge coal trader as well (and we all know what has happened to the coal price over the past few years). Coal is estimated to constitute about 60% of its total earnings.

For whatever reason, the group’s valuation, on its way out of Earth’s orbit, lost sight of reality. Adani Enterprises is currently trading — and this after a huge implosion — at a 121 price:earnings ratio. How much “pumping” was there in this process? That question has engendered a big argument.

If you are a manager of a company and the stock market goes bonkers, what do you do? Well, the first thing you do is have a big rights issue to build a humongous war chest because if the market is going to value you at an extraordinary multiple, you might as well turn some of that goodwill into nice, cold, hard cash.

In some ways, this is a forced move, because if the market is expecting you to grow at an exponential rate, you’d better start showing some of that growth, even if you have to buy it. In some ways, doing so constitutes the “dump” part of “pump and dump” because existing shareholders do get diluted somewhat in this process (of course, that is balanced by the new cash flooding through the company’s doors).

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So, in November, the company announced it would be raising about $2.45-billion in a public offering of new shares, the largest capital-raising exercise in the history of the Indian exchange after previously announcing it might try to raise $5-billion. That didn’t seem out of the question, since Adani Enterprises alone was valued at $55-billion at this point when technically debt was only about $4.5-billion.

Adani Enterprises is only one of 15 or so companies that bear the Adani name and there are another five listed companies in the stable, too. The total value of all the companies was about $235-billion in December, the Wall Street Journal reports.

This was all going swimmingly until last week when a company called Hindenburg Research released a 200-page report which included allegations of fraud and misconduct. Enter the “poop and scoop” effort. Now, I don’t know whether the name “Hindenburg Research” is a joke or not, but what was clearly intended was something very large floating back down to Earth in flames. And down in flames the company came. The group has now lost some R50-billion in value in four trading days and Adani has slipped down the list of billionaires to seventh. Shame.

I have to admit that I am heavily incentivised to support Hindenburg because, a) the name, and b) respect. Anyone who can knock $50-billion off a company’s value using the old-fashioned technique of writing about it deserves support from other writers! But the real point is that the allegations made by the report are eye-popping.

Hindenburg’s report claimed that the Adani empire was the “biggest con in corporate history” and that it has engaged in a “brazen stock manipulation”. They also point to an “accounting fraud scheme” and loading companies with so much debt as to put the entire group on a “precarious financial footing”.

Adani, in its response, went all out, issuing a reply twice as long, weighing in at 430 pages. The Hindenburg report was “simply a lie”. Adani rebutted many of the allegations point by point and also wrapped the company in the Indian flag. The allegations were “not merely an unwarranted attack on any specific company but a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India”, it said.

Now, we in SA know this all too well, because of similar Steinhoff and Capitec sagas. And these reports, we know, take no prisoners. If you intend to malign, then you might as well go the whole hog. But the Adani Group does have a much simpler problem, which Hindenburg pointed out right at the start of its report: all of the companies in the group are trading on multiples that are nuts. And if one constituent of the group was trading very high, that would be one thing. But all of them?

The share prices of companies in the consortium started to find a level on Monday, but the question remains: Is the company a Steinhoff or a Capitec? Overall, the greater warning is around frothy markets which are losing their steam, and that would be a time like now. It is an occasion to sleep with your pants on. DM/BM

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