The Unravelling of The AA Economy?

Recent events show that the battle for wealth between the country’s two most powerful business houses – Ambani and Adani – has transcended beyond arrogance and power. Based on what happens to Adani stocks and that of Reliance Industries in the future, the unravelling of the AA Economy will gain clarity

By Alam Srinivas
  • Combined revenues of firms owned by Ambani & Adani, who vie to retain the tag of the richest Asian wealthiest people, accounted for 4% of India’s GDP
  • Both Adani and Ambani had conflicts with the bears, or short sellers, in the past. Both managed to scare them off and shore up the share prices
  • The current global environment has forced Jio to possibly postpone its ambitious move to offer shares to the public
  • Hints about Adani’s political clout have surfaced several times. Although the group denied them vehemently, he has plucked plum projects in the recent past

In the 2021-22 annual report of Adani Enterprises, the group’s flagship, Gautam Adani, the founder, boldly and grandly said that he wished to invest Rs 4 trillion – yes 4 followed by 12 zeroes – over the next 10 years. This would help the country to graduate from Atmanirbhar Bharat (Self-Reliant India) economy to a Bharat Par Nirbhar (Dependent on India) one. Investors would queue up to make the nation the topmost supplier of goods and services to the world. India would replace China as the global manufacturing hub.

Gautam Adani provided a vision for India in 2050: “We’re approximately 10,000 days from 2050. Over this period, I anticipate India will add about $25 trillion to its economy”, or $2.5 billion a day. “Over this period, I also anticipate India will add about $40 trillion to its stock market capitalization”, or $4 billion a day. Ironically, in the three weeks, starting January 24, 2023, the value of Adani stocks capsized by over $120 billion, or $6 billion a day. His personal wealth eroded by $70 billion, or nearly $3.5 billion a day.

Between November 2022 and early February 2023, the stock price of Reliance Industries, India’s most-valued company, fell by more than 14%. Its current owner, Mukesh Ambani saw his net worth fluctuate wildly, but he remained among the top ten richest global billionaires. It seems that there is some form of an unravelling of the AA Economy, a derogatory term used by experts to explain the stranglehold that the empires of Ambani and Adani have over the nation. Not to forget, the manner in which their wealth soared in the post-Covid period.

Mukesh Ambani

In the digital space, Ambani is much ahead of Adani, thanks to the huge strides taken by Reliance Jio, which has inked deals with the world’s tech giants. Still, Adani hopes to create his own digital platform, and a super app, to connect the group’s 120 million users. The number was projected to go up to 400 million by 2030

An article (September 2022) in The Economist pointed out that the ‘AA’ acronym may be an “exaggeration”. But the combined revenues of firms owned by the duo, who vie to retain the tag of the richest Asian and whose rankings are yo-yo in the Forbes’ list of wealthiest people, accounted for 4% of India’s GDP. “They are responsible for 25% of the capital spending of listed non-financial firms,” added the piece. In September, the “two men’s publicly listed companies” were “worth a combined $452 billion, up from a collective valuation of $112 billion four years ago.” Now, most of it has vanished into thin air.

THE HINDENBURG EFFECT

Hindenburg Research, a global firm that specialises in “forensic financial research”, released a damning and incriminatory report (January 24, 2023) on the Adani Group. It decimated the nine stocks within the empire, amidst assertions that their prices were highly over-valued. Hindenburg felt that their real combined worth was 85% lower. The figure in the case of Adani Enterprises was -97.58%. It implied that the price of the stock should be less than Rs 100, rather than Rs 3,436, its closing price on January 23, 2023.

Among the 170-page report was a mix of facts and allegations that Aswath Damodaran, who teaches corporate finance and valuation at New York University, divided into three categories. First, the stocks were manipulated by shell companies in global tax havens. These were controlled by the Adani family. Second, these and other entities were used to cook up the financials of the companies to overstate profits and revenues and understate debt. Finally, the policymakers and regulators aided and abetted the Adani Group.

“We have identified 38 Mauritius shell entities controlled by Vinod Adani (Gautam’s brother) or close associates. We have identified entities that are also surreptitiously controlled by Vinod Adani in Cyprus, the UAE, Singapore, and several Caribbean Islands,” stated the Hindenburg report. It added, “Our analysis found that offshore suspected stock parking entities accounted for up to 30%-47% of yearly ‘delivery volume’ in several Adani listed companies… indicating that Adani stocks have likely been subject to ‘wash trading’ or other forms of manipulative trading via the suspect offshore entities.”

On the impact on the operations of Adani’s listed companies, the report stated, “This offshore shell network also seems to be used for earnings manipulation.” For instance, assets were transferred from a subsidiary of Adani Enterprises to a Vinod Adani-controlled Singapore-based firm to shore up the former’s profit. The Adani Group maintained that Vinod Adani was not legally connected to the Adani companies, and could not be deemed to be a “related party”. The group had no links with the firms based in tax havens, which were free to trade in Adani stocks as they pleased.

Hints about Adani’s political clout have surfaced several times in the media. Although the group denied them vehemently, he has plucked plum projects in the recent past. He has travelled with the Prime Minister, along with other businesspersons, on several foreign tours. “Much can be attributed to the fact that their (Adani-Ambani) vast ambitions fit with those of India’s Prime Minister Narendra Modi, for the country’s economic development,” stated The Economist in September 2022. It added, “Both men have so far been able to navigate the country’s treacherous judicial and political currents.”

Despite the political influence, Ambani’s recent travails, and the drop in the share price of Reliance Industries, can be traced to vastly different factors. Across the globe, technology stocks crashed in recent times, as even the giants like Google, Amazon and Twitter raced to slash costs and shed employees by the thousands amidst fears of a global recession, high inflation and high-interest rates. In India, the stocks of newly-born tech Unicorns, or start-ups with a valuation of over a billion dollars each, witnessed huge selling pressure.

Early this year, another piece in The Economist revealed the crisis among Indian Unicorns. “One reason is the woeful performance of firms that went public in 2021: Zomato (food delivery), Freshworks (enterprise software), Policy Bazaar (insurance) and Nykaa (fashion). The share prices of each have tumbled in excess of 59%,” it stated. It added, “Of the 40 start-ups that have filed results for 2022 only three are profitable… and based on their annual spending, only five have enough cash to survive for over six months.”

Such a rout had an impact on Reliance Jio, one of the largest telecom-tech firms in India, which is owned by Reliance Industries. The current global environment has forced Jio to possibly postpone its ambitious move to offer shares to the public, and list the stock on international stock exchanges. Over the past year or so, Mukesh Ambani concretized plans to hand over the baton to his two sons and daughter. This created uncertainty among investors, especially due to rumours about Mukesh’s health, which were denied by Reliance Industries.

TRYST WITH BEARS

However, both Adani and Ambani had conflicts with the bears, or short sellers, in the past. Both managed to scare them off and shore up the share prices, which touched record towering heights. In June-July 2021, Adani stocks were ripped apart due to news that the stock market regulator, SEBI, had barred four Mauritius-based firms, which had huge exposures to Adani firms, from trading in India. This wasn’t completely true, Adani had to clarify, but questions were raised about possible manipulations in the media and Parliament.

The controversy died down, and Adani shares had a fabulous run in 2022. A cover story in India Today stated that Adani had a “Midas touch” during the year. From below Rs 1,400 in July 2021, the stock price of Adani Enterprises crossed Rs 4,000 in November 2022. It closed at Rs 3,436 on January 23, 2023, a day before Hindenburg made its report public, and caused frenzied selling. At present, the share has managed to salvage some pride. It rose from an intraday low of Rs 1,017 (February 3, 2023) to almost Rs 1,800 (February 16, 2023).

What happens to Adani stocks in the future will depend on actions taken by policymakers, regulators, courts and media. If the heat is turned on, they will face regular and relentless hammering by the bears. If not, the shares can bounce back given their low “free float” in the open market. On March 31, 2022, Adani Enterprises had 226,000 shareholders, of which 595 owned 98.57% of the equity. The latter included the Adani family and dozens of institutional investors, including the controversial entities based in tax havens.

In such cases, it is easy to nudge the share price through minimal trading. This was evident on February 7 and 8 this year. Adani Enterprises zoomed by 15% and 20%, respectively, on the two days. The daily volumes were 1.5 million on the first day, and less than a million on the second. As per its annual report (2021-22), just over 100 million shares were traded in the January-March 2022 period, or an average of over 1.5 million a day, excluding holidays. The price swung between Rs 1,500 and Rs 2,000, or a fluctuation of 33%.

Ambani’s market confrontations with the short sellers have a long history with mixed results. Way back in 1982, less than five years after Reliance Industries went public, its share price zoomed by almost 19 times. The investors were ecstatic but the bears felt enough was enough. The latter felt that the stock was overpriced, and decided to assault it just before one of the public offerings. The price nosedived and was quoted at Rs 121 on March 18, 1982, when the sellers sold 350,000 shares, a massive quantity in those days.

Friends of Ambani rallied behind Dhirubhai, the group’s patriarch and Mukesh’s father. They mopped up 80% of the 1.1 million shares that were sold by the bears. This stemmed the rot, and the price stabilised, even rose. When the time came to settle the accounts within a week or so, i.e. reconcile the positions of the buyers and sellers, the Reliance loyalists demanded the shares they had bought. Sadly, the short sellers did not possess them. They had sold “blindly” and expected the price to go down to make a huge killing on the exchange.

As the bears scampered around to buy the shares, the price scurried northwards. “The result was a giddy spiral in which the already overpriced Reliance stock rose sharply to record highs. From roughly Rs 125 for a Rs 10 share last March, the market price of the bluer-than-blue chip shot up through April to Rs 158, and last fortnight touched the undreamt height of Rs 185, even touching Rs 202 one day in Ahmedabad (exchange),” stated a piece in India Today.

Since then, not many had the nerves to take on Reliance Industries or Ambani. But one can say that there were periods when investors shunned the stock, or stayed away from it. An example: in early-January 2008, the scrip was quoted at almost Rs 750. It wasn’t until July 2017 that it regained the same level. For almost a decade, the share languished. However, from a low of just over Rs 1,000 in early-2020, after the Covid aftermath, it catapulted by more than two-and-a-half times by early-June 2022. Since then, there has been a downturn.

The experience of Anil Ambani, the estranged younger brother of Mukesh, was a nightmare. In early-2008, less than three years after his family separation, Anil’s personal wealth of $43 billion matched his brother’s $45 billion. The younger one was bound to become richer and prove that he is a better businessman. His glittering showpiece was the public offering of Reliance Power, which opened on January 15, 2008. Prior to this, the grey market gave a huge thumbs-up with premiums touching 80% over the issue price.

What happens to Adani stocks in the future will depend on actions taken by policymakers, regulators, courts and media. If the heat is turned on, they will face regular and relentless hammering by the bears

Within the first minute of the opening, the issue was subscribed. It was oversubscribed by more than 72 times. For a mega offering of Rs 115.6 billion, the company received millions of applications worth Rs 7.5 trillion. If the list price was 20% above the issue price, Anil’s worth would be way higher than Mukesh’s. In the early trades on its debut day (February 11, 2008), the stock spurted by a third, but sadly settled 17% lower at the end of the day. To appease investors, Anil issued a 3:5 bonus, or three free shares for every five held.

Never did Reliance Power go above its issue price. In November 2017, it was worth Rs 35, or more than 90% lower than the price paid by the initial shareholders. It was put on the block under the new bankruptcy code, and quoted at Rs 11 on February 16, 2023. Anil accused Mukesh of using Mauritius-based firms to attack the share price in 2008, which was denied by the latter. Never again did Anil, who recently declared he was bankrupt in a London court, have the chance to match the elder brother’s wealth, which is over $80 billion now.

COMPETITORS-AT-ARMS

Based on what happens to the Adani stocks and that of Reliance Industries in the future, the unravelling of the AA Economy will gain clarity. This is because before the current free fall, the two were expected to clash in the business marketplace. The race was on when Adani became richer than Ambani, and was briefly ranked as the Number 2 richest person on Earth. Now, Adani is way behind with a net worth of just over $50 billion. But, as mentioned earlier, this can change soon, if things don’t totter further for Adani.

One can assume the wealth battle will be more about ego and power. More important for them will be the “real” wars on the ground, rather than the “paper” ones in the stock market. From now on, they will clash in several sectors. Green energy is the obvious one, as both have announced grandiose plans in the past. Adani may have to go a bit slow, as one of his foreign partners, Total of France, has said that it will postpone the proposed $4 billion investment in India. At some stage, though, Adani will want to prove a point to Ambani.

In the digital space, Ambani is much ahead of Adani, thanks to the huge strides taken by Reliance Jio, which has inked deals with the world’s tech giants. Still, Adani hopes to create his own digital platform, and a super app, to connect the group’s 120 million users. The number was projected to go up to 400 million by 2030, which can match the high-end data users of Jio. In terms of telecom subscribers, Jio has the largest market share of 37%. Recently, Adani bid for telecom spectrum fueling rumours of a fierce fight.

The fun will begin if, as proposed, Adani enters the refining and petrochemicals businesses. These segments are the mainstay of the Mukesh Ambani Group, for Reliance Industries with its presence across the oil and gas vertical, spews up profits of millions of dollars every day. This allows it to invest huge sums in expansion and new projects. Ambani will never allow Adani to dent this citadel. The latter may deliberately curtail or hide his petro-ambitions, so as not to rattle Ambani. It will be fascinating to watch this business rivalry.

Alam Srinivas

Alam Srinivas is a business journalist with almost four decades of experience and has written for the Times of India, bbc.com, India Today, Outlook, and San Jose Mercury News. He is working on a new book on the benefits and pitfalls of the Indian Bankruptcy Code.

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