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!

The Vaccine "Free for All"

Independent policy experts have been highlighting that vaccines should be "free for all".  Instead we have ended with a vaccine "free for all" policy where states have to compete with each other and the center for vaccine supply.  It is set to become a "no holds barred", "free for all" battle for vaccines.

Why should vaccines be free? An extreme argument offered by health experts is that unless everyone is vaccinated, no one is safe. It is reasonable to say that a high percentage of the population needs to be vaccinated, to ensure fair protection of the population and early return to normalcy. Maximisation of vaccination is possible only if it is free. People who can afford it should be able to opt for costlier vaccines or vaccination process.

The vaccination policy of the country was riddled with mystery.  Elements of the mystery include:

1. An "atma nirbhar" wait to approve vaccines for use in India, while one vaccine was already being manufactured in India and exported abroad;

2. An "atma nirbhar" refusal to approve import of vaccines that were already approved and being used in other developed countries;

3. A limited order of about 100 million units of vaccine supply - enough for the dual vaccination of about 50 million people out of a population of 1.3billion.  Maximisation of vaccination was clearly not considered;

4. Non-transparent allocation of vaccines to the States.

When the supply constraint blew up with the second wave, the initial attempt was to blame it on wastage of vaccines in the states.  We order 5 per cent of requirement, and the blame falls on the 5 per cent wastage!

Wastage is no doubt a problem.  But some wastage is unavoidable in the process of transportation logistics.  Further, when the same vial has multiple doses, some wastage during vaccination is inevitable.

The opposition built pressure on the Central Government to open vaccination for all adults, instead of limiting it to people who are 45+.  Unbelievably, the center yielded.  With more people joining the vaccination queue, the supply constraint problem aggravated.

One would have expected the center to at least make its vaccination allocation to the states more transparent.  Instead, the supply problem was queered further, by making the states (and private hospitals) buy vaccines directly from the manufacturer, at prices higher than what the center would pay.  50% of the vaccine supply was to go to the center, while the 28 states and 8 union territories would have a "free for all" fight for the balance 50%.  The early states quickly found from vaccine manufacturers that 100 percent of vaccine supply was already tied up with the Center for several weeks.

Belatedly, foreign vaccines are now approved.  In the meanwhile, other countries have already logged their purchases in the international vaccine supply chain.

An unmitigated mess.

The Oxygen Mess

The judiciary of the country appears to be shaken by the pandemic.  The timing of this awakening matches the appointment of the new Chief Justice of India.

One High Court after another (Delhi, Karnataka) is ordering the Central Government to ensure supply of whatever oxygen the respective Chief Minister (CM) asks for. The Supreme Court refuses to stay such judgements. Oxygen supply is constrained. The center finds itself pushed to the corner.

CMs are bound to exaggerate their requirements. A most basic approach would have been to draw a transparent state-wise oxygen allocation plan, based on objective measures such as number of serious cases and deaths. This will have the salutary impact of getting states to report their real numbers, without any cover-ups.  But then, it shows a worse (but real) face of the country to the world, than it already is.   Yes,  this will remove the Central Government's discretionary power.  But that is a better situation than being cornered by multiple high courts and the supreme court.

One gets the feeling that the government is missing on the fundamentals to manage the pandemic.    

Lockdown or MCZ for Covid control

 In March 2020, India had only a few hundred Covid cases. That is when a nation-wide lockdown was announced, giving people hardly 3 hours notice.  The economy crashed and migration pangs shook the world. It is widely believed that Micro-Containment Zones (MCZ) - an approach of localized containment of people - would have served India better.

In April 2021, India is adding about 350,000 new cases every day - with fears of it going upto 500,000 new cases per day. The Central Government is suggesting that states should prefer MCZ strategy - and adopt lockdown as a last resort. With this kind of build up of cases, is MCZ even practical? 

Many Indian states are governed by the same party as the Central Government; a few others are governed by the opposition.  The former states avoided lockdowns - and saw their cases spiral; some of the opposition-ruled states went for lockdown (by whatever name called). At least the ones that adopted a lockdown early are seeing their new cases plateau.

The writing is perhaps on the wall, and the tide seems to be turning.  A southern state which is ruled by the party at the center has finally announced a lockdown.

Wonder if the Central Government is carrying forward its learning from the past, when the ground reality has changed drastically. Time to update the tool kit?

Operation Twist: Is it an Antibiotic with Side Effects?

Perhaps, Operation Twist is a good signal when the economy is doing well, and non-governments do not recognize the wellness.  Unfortunately, the “signal” cannot make up for a poor economic scenario – and can be counter-productive, if the twisted interest rates do not sustain. Experience of the past tells us that once investors get used to short-term securities, it gets difficult to bring about term extension. All in all, short-term gains to be weighed against long-term, deeper side effects.

Hindu Rate of Growth for India?

India found it difficult to breakout of the 3.5% growth rate paradigm for decades since independence.  Thus 3.5% came to be called the Hindu rate of growth.

Liberalisation in the 1990s changed the economic trajectory of the country.  Policy makers started talking of double-digit real GDP growth.  Many economists were, however, not sure about sustainability of such high growth, given the inherent limitations of the Indian economy.

The Q2 numbers of real GDP growth for 2019-20 are in the 4.5% range.  This marks a continuation of the decline seen quarter after quarter.  Are we headed for Hindu rate of growth in a Hindutva world?

Indian Demographics & Governance EconoView

Having seen India rated below Eurozone countries that were near default, one wonders how well equipped rating models are in handling diversified economies like India having low external interfaces.

Will the Tremors of Japan Hit the World Economy

Have been mulling over the economic implications of the developments in Japan. Find the note at www.econoview.info

Technical Analysis of IPO?

Technical Analysis is done based on the price-volume behaviour of listed shares. Before an IPO, the shares are not traded in the market. Therefore, one cannot do technical analysis of shares, pre-IPO.

However, during the Coal India IPO, a different kind of technical analysis seemed to be at work - analysis of allotment possibilites. Accordingly, investors invested a multiple of the shares they wanted. The excess application maximises the number of shares that would be allotted to them, under the partial allotment formula in an over-subscribed issue.

Recently, institutions were permitted to invest through ASBA (Application Supported by Blocked Amount). Under ASBA, the money goes out of the investor's bank account only on allotment. The amount that goes out is limited to the value of the shares allotted. This has made the task of putting in excess applications, simpler.

Old timers in the market may recall that about two decades ago, investors had the facility of investing through StockInvest, which was to be backed by money in the bank account of the investor. The facility fell through, after a few banks started issuing StockInvest without the value being backed by money in the bank account of the investor. Let us hope that banks do not adopt the same mal-practice under ASBA.

A few months ago, SEBI stipulated that Foreign institutional investors need to bring in the entire share application money at the time of investment. This, coupled with the excess application scenario, means that the FII inflows (and potential outflows of excess money post-allotment) increase the challenge for RBI in ensuring stability in the foreign currency market. A good example of the law of unintended consequences!

Coal India IPO is a good example of areas for regulaters to watch out for.

SEBI Chairman's Thought Provoking Points on MFs

Over 200 luminaries were present at SEBI's workshop for Mutual Fund Trustees and Independent Directors of Asset Management Companies yesterday, at Mumbai. SEBI Chairman, Mr. Bhave made a couple of interesting observations:

1. Profits of Asset Management Companies have gone up four-fold since SEBI banned entry loads.

2. People talk of investors withdrawing money from mutual funds - decline of Rs10,000 crore in 1 year. The gross figures are - Addition Rs63K; Reduction Rs73K. If Rs63,000crore of new money came into mutual funds - then taking a saving of 2% (on account of entry load being banned), investors have benefited to the extent of Rs1,260crore. Which other regulatory move has given back Rs1,260 crore to investors in 1 year?

Definitely worth pondering over.

Pink Newspapers need to Learn Finance

A leading pink newspaper in India is talking of Mukesh v/s Anil Phase II, and how Anil Agarwal will get more wealthy than Mukesh Ambani based on his acquisition of Cairn Energy.

Let us understand the basics. Does the transaction of buying a share of Cairn Energy make you wealthier? With the investment, money only changes form - from your bank account to investment in Cairn. If financed by a loan, then both your assets (investment) and liabilities (loan) go up, keeping your net wealth (assets minus liabilities) constant.

Your wealth increases as and when the Cairn share appreciates in the market after your share purchase - or if Cairn pays you a dividend. Elementary, Watson.

This episode only highlights the inherent flaw in the various Lists of the Wealthy that publications churn out. They draw conclusions based on measuring the tip of the ice berg viz. listed shares. The long list of items left out - unlisted shares, non-corporate liabilities, bank balances, physical assets like gold, paintings and yachts ...

The Tata Succession Story

Mr. Ratan Tata has formed a committee of five to decide on his sucessor. He himself is not part of the committee.

Most leaders of family-managed businesses do not go through such a process. They decide on the successor and decision makers around them approve the decision.

On the same vein, Ratan could have had breakfast with Mr. Pallonji Mistry (the other significant shareholder in the group), and decided to appoint Mr. Noel Tata as successor. Noel, for the uninitiated, is cousin of Ratan and son-in-law of Mr. Mistry. He has not had much exposure with any of the major companies in the Tata group.

That Ratan has gone for a committee, speaks well of him. The great JRD did not go for that approach, when he anointed Ratan as his successor. Has Ratan gone far enough along the path of "corporate governance correctness"?

A professional company would appoint a committee of independent directors in such a situation. Who are the five luminaries in Ratan's committee?
1. Mr. NA Soonawalla has been a close associate of Ratan for decades. Can we expect him to do anything that Ratan would not approve of?
2. Mr. RK Krishnakumar too owes his corporate success to Ratan. Another person who is likely to toe the Ratan line.
3. Ms. Shirin Bharucha has been legal adviser to the Tata group for over 5 decades, and involved in many Tata trusts. What's in it for her to go beyond the family to push for an outsider?
4. Mr. Cyrus Mistry is son of the above-mentioned Mr. Mistry. Noel is his brother-in-law.
5. Lord Bhattacharyya, founder of Warwick Manufacturing Group, has been advising Ratan since his early days. He is one person who is likely to express an independent view.

The score is thus 1-4 against any real independent view in the committee. The committee may thus end up becoming Ratan's mouth-piece.

A couple of interesting things have happened in the last few weeks:
1. Talk has started of how Ratan's successor needs to have international expertise. Around the same time, Noel took charge at Tata International.
2. More than a decade ago, R Gopalakrishnan, left Hindustan Lever when he was passed over for the top slot there. It was the rumoured that he may be groomed to take over from Ratan. Gopal has now chosen to step down from the Tata Motors board for "personal reasons". Is he second-time unlucky? Will he step down from more boards when his directorship comes up for re-appointment?

The intention is not to question the credentials of Ratan - or the 5 luminaries in the committee - or Noel. Everyone has built up a name over time. One only wonders whether the committee approach is an eye-wash to give a professional face to a decision that is already taken.

Interestingly, in the 1980s, JRD opted for Ratan after passing over corporate satraps like Mr. Russi Modi (Tata Steel), Mr. Ajit Kerkar (Indian Hotels) and Mr. Darbari Seth (Tata Chemicals). To be fair, Ratan proved his worst critics wrong. (Though, Ratan himself would be wishing he had not become another text book case of leaders making brave, but mistimed, acquisitions towards the end of their reign.)

Will history repeat itself, with Noel following the footsteps of Ratan? The signals will be clearer by March 2011.

Next IPO Scam (Part 2)

In Part 1 of this post, last week, I mentioned about the unusual activity in the newly listed share. Volumes had gone crazy and the share price was jacked up to double the IPO price. I mentioned that the indicaters pointed to circular trading.

The share price has expectedly gone down to below the IPO price. Wonder how many small investors have burnt their fingers. Wonder whether the manipulaters have managed to make their money - or whether greed will make them go for an action replay!

Global Financial Safety Net

Gov. Kim Choong-soo, South Korea's central banker has called for strengthening of the global financial safety net.

Let us be clear where many of these problems and bailouts originate. Markets, by nature, go up and down. Thus, they throw open possibilities of profits as well as losses.

So long as exposures are "reasonably intelligent" (i.e. not taking exposure to absolute duds), valuation losses can get translated into valuation profits, so long as the person has the holding power. This is the principle on which most bail-outs are based - Long Term Capital Management in the US in the 1990s, Unit Trust of India a few years later, and the most recent bailouts in the US and Europe. Over time, valuation gains in the market address the problem; financiers can be repaid. As a luminary mentioned last year, it is privatisation of profits and nationalisation of losses!

Let us look at the trend.

1. First, there were individuals who chose to speculate beyond their limits (or live beyond their means). Banks who funded them had to take losses. The individuals were effectively bailed out. (There was no other option. Unlike organisations, individuals cannot be liquidated through legal means!)

2. Then, banks (and others) chose to speculate beyond their limits. Governments stepped in to bail them out.

3. Then Governments went beyond their limits - other governments stepped in to bail them out.

As we go higher and higher in the hierarchy of defaulting entities, the problem gets more and more challenging. An individual defaulting can only bruise the lender's balance sheet. A country defaulting can spark a global recession - or worse, depression.

Now, a global finacial safety net, is a message to banks and countries - we are there to bail you out in case of trouble. Will this not promote more greed to benefit from the markets by speculating beyond limits?

Enjoy your profits. If you can't bear the losses, some one in this globalised world will step in to bail you out. Greater the losses, more the chances of being bailed out. You will be TBTF i.e. Too Big To Fail.

Telecom Companies to pay Entertainment Tax!

The biggest music company in India is Airtel - thanks to the caller tune downloads.

Maharashtra government seems to be keeping track. They want to charge entertainment tax on the business!

Annual Subscription Model for Newspapers

Subscription is an inexpensive way to access magazines. Most regular readers prefer this option, instead of buying it from the news-stands or other regular newspaper vendor.

I always wondered why newspapers don't offer something similar - until Mint offered such a facility at my residence, over the weekend. Annual subscription to Mint for Rs295.

When it comes to magazines, we are prepared to accept a delay of a few days, that is inherent to delivery by the courier. But we want newspapers the same day; we love to read it along with the morning cofffee. Therefore, Mint has included the newspaper vendor as part of the delivery mechanism.

Same delivery mechanism, but at lower cost, means better value for the reader. On the other hand, Mint has an assurance that the reader will not switch, at a time when more "pink" newspapers are set to hit the market.

Smart tactics. Is the Times Group listening?

Mr. Kapil Sibal's Vision for Education

The Hon. Minister for Human Resources Development floored the audience at the Indo- American Summit on Saturday, with his eloquent vision for education. The highlights of his speech:

1. 21st century stands for Science, Solutions and Sustainability. Education is all about sustainable solutions for mankind. For the first time in human history, resources available with nature are perhaps inadequate for sustenance. Solutions can be found through collaboration.

2. Inclusive education agenda is required for inclusive economic growth. If we do not empower 36% of the population with education - the balance 64% of the population will have to subsidise 400mn population. No economy in the world can sustain that kind of subsidy.

3. 220mn children in India go to school. Only 14mn go to college. So, more than 200mn do not go for higher education. No economy can sustain with such numbers. Today we have about 500 universities and 25,000 colleges. Gross Enrolment Ratio of students is 12.4%. If this is to go to 30% by 2020, India needs another 40mn students in colleges - require another 800-1200 universities and another 35,000 - 40,000 colleges.

4. We need expansion, inclusion and quality. 100,000 students going to the US is a bad economic model. Many more cannot afford to go to the US - they may even be better than the ones who can afford. If we look at output per $ investment, the same investment in India will generate a lot more output. This is not a new economic model - it has already been done in manufacturing and services, where the the US have invested in China and India to enhance their competitiveness. In education, it is better to invest the dollar where the human resource is, rather than have the human resource go to where the investment is. Better to set up colleges in India and send faculty to India, rather than expect that 5-10mn people will travel to the US - because they will never be able to afford going to the US.

5. In the US, there are a total of 75,000 engineers. In India, Bangalore alone has 65,000 engineers. This is the rationale for the economic model. Need to view the business opportunity in a new way. Like the couple who came to Mumbai and decided to offer IB program in municipal schools for children of tea vendors. Children of that school are going to Yale and other parts of the world.

6. I cannot give a $100 computer to children. It is not a sustainable solution for India. What is sustainable in west may not work here. A nano car is sustainable here. Empowerment with sustainable solutions calls for such cost-effectiveness in education.

7. Unions in education institutions under colonial rule were part of the freedom struggle. But today, in education institutions, we need unions for empowerment of the minds. Need to change from being obstructive to being constructive.

8. Universities need the freedom and creativity. Need to challenge the past. If some one had not challenged the laws of gravity, we will never have flown.

9. We also need a society that tolerates dissent; a mind that is sensitive.

My comments:
After the minister left, many of the speakers were back to minutae based on blinkered thinking. One young member of the audience rightly asked one of the speakers - if we are the big segment that you are worried about, why don't you get more of us in the education-related committees?

The Art of Choosing

I really liked this video of about 20 minutes. It discusses the issues of choice in different cultures. The content, as well as the presenter are interesting.

Make sure you watch it till the end. If the hyperlink does not work, copy and paste the web address in your brower.

http://www.ted.com/talks/sheena_iyengar_on_the_art_of_choosing.html