Adani Story 3: My earlier comments on leverage and an update from Forbes

In Adani Story 2, posted on February 15, I wrote "What if the security is created in a round about way that does not fall within the mischief of pledge reporting? What if accommodation entries help in reducing the year-end loan figure? Thus, it is not inconceivable that the total system leverage (company + promoter) is more than the numbers floating around."  

These thoughts were earlier shared with participants from SBI Mutual Fund at the National Institute of Securities Market (NISM) on February 10.

Forbes has now disclosed that Pinnacle Trade and Investment Pte. Lte., a Singapore company indirectly controlled by Vinod Adani (Gautam Adani's brother), had in 2020 entered into a loan agreement with Russia’s state-owned VTB Bank (which was sanctioned by US last year due to Ukraine war). By April 2021, Pinnacle had borrowed $263 million and lent out $258 million to an unnamed related party. Later that year, Pinnacle offered two investment funds — Afro Asia Trade and Investments Limited and Worldwide Emerging Market Holding Limited — as guarantors for the loan... Both Afro Asia Trade and Worldwide are large Adani Group shareholders. Together, the two funds hold $4 billion (as of February 16 market prices) of stock in Adani Enterprises, Adani Transmission, Adani Ports, and Adani Power, all of which acknowledge the funds as 'promoter' entities. Neither fund has disclosed share pledges in Indian financial filings for the four Adani companies they’re invested in.

It is clear that there is layer after layer of leverage.  Like in an onion, peel off one layer and the next layer is visible.  Peeling onions makes you cry.  Investors in Adani group stocks are already crying.  Wonder who will be next.

Adani Story 2: Leverage & Listings of the Uber Rich

 The exact numbers on Adani's leverage are all over the press.  Thinking further ....

1. The leverage numbers quoted in the press are based on published information.  Borrowing companies need to show the loans in their balance sheet at the end of the year.  Promoter pledging of shares in listed companies too needs to be disclosed by the company.  But what if the borrower is not a corporate entity? What if the security is created in a round about way that does not fall within the mischief of pledge reporting? What if accommodation entries help in reducing the year-end loan figure? Thus, it is not inconceivable that the total system leverage (company + promoter) is more than the numbers floating around.

2. We have so many listings of the Uber Rich.  The easy part is to obtain information about shareholding and multiply it by share price to arrive at a figure for "public" wealth of the individual.  The difficult part is unravelling leverage of the type mentioned above. If I were to own 1million shares of a company that appreciates later by Rs10 per share, against which I secure a private loan of Rs6million and blow it all away.  My "public" wealth would go up by 1million shares X Rs10 per share i.e. Rs10million; but my "real" wealth, net of the loan, would go up by only Rs4million. How reliable are such listings of the uber rich based on "public" wealth?

3. A separate point on the uber rich listings.  Godrej group owns so much of land in Mumbai through various entities.  The publishers who report the wealth of the uber rich will not even be aware of the extent of such real estate holding, forget its value. So many such Godrejs may be ultra wealthy, but below the radar of such listings.

Adani Story 1: Did Aswath Damodaran miss out on Real Estate Terminal Value in the Adani Valuation?

I view Prof. Aswath Damadoran of NYU Stern as the God of Valuation.  His masterpiece, "Control, Complexity and Politics: Deconstructing the Adani Affair!" is an essential read for any student or professional of finance.

  https://aswathdamodaran.blogspot.com/2023/02/control-and-complexity-deconstructing.html

The one aspect that I did not see in the masterpiece is the potential terminal value upside from real estate.  Many of Adani's businesses (airport, seaport etc.) "sit" on large tracts of land.  True the land is given for a special purpose, and the contracts from the Government impose limitations on exploitation of real estate.  But, one stroke of the pen - and lo and behold - everything changes.

For instance, in Mumbai, Adani got the contract for the 2nd airport (Navi Mumbai) through competitive bidding - and many believe through Government prodding, the 1st airport too was transferred to Adani.  This 1st airport is bang in the middle of the costliest city in India.  Once the 2nd airport (located about 35 kms from the 1st) becomes operational, any number of reasons can be offered to shut down the 1st airport.  Imagine what happens to the land and Adani then!