INVESTMENT PERSPECTIVE

By J Mulraj

Jan 30 – Feb 3, 2023

Until the Adani Stocks Tanked!

The Union Budget presented last week was, as budgets should be, devoid of surprises. Budgets are the announcements of the fiscal paths taken by Governments, based on their priorities. There aren’t, and should not be, any surprises in the rates of taxes, to be met by oohs and aahs. In earlier years they were basically a TV event which perhaps earned more ad revenue for media houses than additional income for Governments; hopefully that has ended.

The Budget contained an increased emphasis on physical infrastructure, with an increased outlay of Rs 10 lac crores, or Rs 10 trillion. Better infrastructure will help reduce logistics costs and lower manufacturing costs, making exports competitive. It’s essential in attracting FDI, which brings in new foreign investment, with new technologies and new jobs. Simultaneously, the MSME (micro, small and medium enterprises) were provided relief measures, since they create most jobs. A focus was given on use of technology, like setting up of three AI (Artificial Intelligence) centers of excellence , and to promote India as a research and innovation hub for the healthcare industry. State Government loans will have a 50 year tenure but linked to some performance parameters. Fiscal deficit for Mar 23 has been estimated at 6.4% of GDP, lower than the earlier estimate of 6.9%, with a target to bring it down to 4.5% of GDP by 2025-26.

Criticism of the budget are in the form of quibbles, with different commentators lamenting that the outlays for abc or xyz were not increased. But there are limited resources, so increasing the outlay in one area would reduce it in another (or create a higher deficit) so the allocation depends on what the Government views as its priorities. My quibble is the evidence of bureaucratize in slicing up the income tax pie into 6 slabs when, perhaps, 3 would have been enough. Reminds me of the blonde who, when asked by the waitress if she wanted her pizza cut in six or in eight slices, replied she wanted six because she wasn’t too hungry!

The Budget states that the Government would borrow ₹15.4 trillion to meet its fiscal deficit. This results in the biggest item of expense in the Indian budget, viz. interest cost, which is 20% of all expenditure. Can the Government not do some financial engineering towards this?

Suppose the Government offers a scheme under which any investor can buy a part of an existing series of its bonds (eg the 10.18% bonds due 2026, outstanding debt ₹ 15,000 crores) and surrender it to RBI before March 31, reneging his interest and repayment benefits, for a weighted tax write off (say 4X the face value of the bonds foregone). The 4X write off would give him a net benefit for the investment in bonds which he forgoes. The Government benefits because it’s debt is written off to the extent of ₹ 15,000 crores, and doesn’t need to be serviced. The banks holding the bonds till maturity would get money released earlier, available for lending. Such activity, if repeated, can result in development of a yield curve, necessary for a vibrant bond market.

It would be worth bureaucratic time and effort to conceive such financial engineering, to tackle the biggest expenditure item, 20%, rather than in slicing income tax slams into six slices with the skills of a cordon blue chef!

While the FM was going through her budget proposals, the market was coasting along, rising slowly. Then came the news that Credit Suisse wealth management was not accepting Adani bonds as collateral. That led Adani stocks to tank further. (Since then, Citibank has also stopped accepting Adani bonds, whose yields have shot up to 30% in some cases, far worse than junk bond status). Ever since the Hindenburg report came out, Adani stocks have lost over $ 100 b. in value.

The extent of the fall is surprising, given that the group is reported to own 60-70% in its operating companies. With a float of 30-40%, of which a part would be held by institutions, including LIC, the float available for borrowing in order to short sell, would, perforce, be small. Which is why the $ 100 b. drop in market cap of the Adani group is startling.

Think of it this way. In Jan 21, a bunch of disparate and unconnected individual investors ganged up on a chat site against a large hedge fund which had shorted a stock of a company called GameStop, a failing business supplying video games. Collectively this motley group drove up the price of the stock from $ 19 to a peak of 483, crushing the short seller.

Now, the question arises is why, if unconnected, small, individual investors can, using a Reddit chat site, join hands to bring down a short seller, shorting the stock of a failing, small, business why is a multi billionaire, the #3 richest, before this episode, having several large, profitable businesses, unable to? Especially when he would need to buy perhaps 15% of the floating stock, which ought not to be arduous for a multi billionaire. Hugely perplexing.

For the group has built some pretty impressive assets. It has 13 ports in India, especially a world class one at Mundra (which has a draft of 22 m, capable of taking large ships) and also one in Israel. It has some 14000 MW of thermal power capacity across 7 plants in India. Adani Green has. 650 MW of solar power. It operates 6 airports. It has some 70 m tap of cement capacity. It owns a large coal mine in Australia.

Given all these performing and cash flow generating assets, the fall of $ 100 b in m cap is truly astonishing. As is the slowness in response to the attack by soaking up a chunk of the floating stock.

At some point the short has to buy back the stock and restore it to the lender. He will do it when he feels that the risk of awaiting a further fall outweighs the reward. That should not be far off.

But in the meantime Adani group is being battered, like a bout between Woody Allen and Mike Tyson! After it’s bonds we’re unaccepted as collateral by Credit Suisse and Citi, it suffered another blow when Dow Jones decided to remove Adani Enterprises fro its Sustainability Index. So, it’s all the more perplexing that the group is not fighting back.

It has, however, stated that it is in talks to prepay loans for which it has pledged its shares. If the lender had lent the pledged shares, which would be illegal if the loan was properly serviced, the demand to return the shares would compel Hindenburg to scurry to procure them. Next week should see some volatility in the Adani stocks.

In other news, after a meeting between their national security advisers, USA and India have agreed to deepen technology and defense ties.This will include joint production and development of jet engines , munition related technologies,  a new innovation bridge to connect defense start ups, collaboration on High Performance Computing, AI and other areas. This would be beneficial.

US Fed raised interest rates 0.25% and Bank of England 0.5%. A few more rate hikes can be expected before the cycle stabilizes and turns.

The BSE Sensex ended the week at 60841, up 511 over te week.

The next week should see volatility in Adani stocks. If Adani manages to prepay loans and release his pledged shares, there can be a sharp rally. The Ukraine conflict would continue to weigh down rallies, and the possibility of another conflict between Israel and Palestine may drag markets down. A bull inebriated by the optimism of hope isn’t a match for a bear driven by vituperative hate. Sigh.

Picture Source: https://www.hindustantimes.com/business/nirmala-sitharaman-dons-bright-red-saree-for-budget-2023-101675222807715.html

Comments may be sent to jmulraj@asiaconverge.com