India Business and Finance August 15th

What happened in the India business during the past week

Hindenburg pokes India

Businesses operating in India whether based locally or abroad are usually terrified to even mumble criticism of government agencies, fearing regulatory retribution. That has made Hindenburg Research, a New York-based short-selling firm, a huge presence in India’s securities markets almost overnight. In January 2023, it issued a report calling the Adani Group, a major Indian conglomerate, “the largest con in corporate history” and late Saturday night it slammed the investigation that followed which has, so far, led to no action.

The new report takes aim at the head of the Securities Board of India (SEBI), India’s market regulator, Madhabi Puri Buch, asserting the agency’s “unwillingness to take meaningful action” is because she herself had investments in a fund that participated in the odd trading of Adani Group securities. As an added shot, it suggests Ms Buch has additional conflicts because her husband has a business relationship with Blackstone, a company that benefited from changes in rules involving REITs supported by Ms Buch.

The charges were taken beyond seriously by SEBI. Indian bureaucracies can take forever to respond to anything; within hours of Hindenburg issuing of its report, both SEBI and Ms Buch (jointly with her husband) issued its own response denying any pejorative implications. Their involvement in the fund, the statement asserted, was before it held any Adani securities. SEBI said proper disclosure of holdings had been made and Ms Buch had recused herself appropriately in the case of conflicts. The Buch response accused Hindenburg of “character assassination”. The Adani Group went further, saying “the allegations…are malicious, mischievous and manipulative…with wanton disregard for fact and the law.

On Monday morning, the value of Adani Group publicly listed companies had dropped 8% - a large number but the shares are thinly traded and often volatile. By the end of the day, eight of the 11 publicly listed Adani entities lost value but not much. As of this post, after the close of the market on Thursday, they are off a bit less than 3% - which is meaningful, but not very. The key thing to note was that there was no wipeout.

Key issues

It is worth looking at the two core issues raised by Hindenburg initial attack and how they are playing out now:

1)         Odd trading through offshore funds.

This is where Hindenburg was probably right, at least sort of:

At the time of the report, several of the Adani companies had stratospheric valuations. This, Hindenburg alleged, was a product of share manipulations stemming from off-shore funds in which the Adani family was involved. The use of off-shore funds for Indian investment is common and awful. The India government sees them as vehicles for tax evasion and opacity. That is doubtless part of their appeal but they also exist because the constantly shifting rules and taxes imposed by the Indian government makes even the most honest investor search for circuitous ways into India that offer clarity and stability. Ms Buch invested while living overseas, doing what overseas investors into India typically do. Since she has joined SEBI, the government has imposed increasingly onerous rules on off-shore investment but would do better to improve the rules for investing directly into India. Ms Buch now has abundant incentive to make this a priority.

A twist her investment was that the fund was run by a childhood friend and college classmate of her husband, Anil Ahuja, who has a glittering resume including having worked at western banks as well as – and this is where it gets tricky – having been a director of Adani Group companies. He too had left the fund during the controversial period but this, at the very least, seems awkward. The best framing is that it reflects how India, at the top of its commercial pyramid, is a small place.

2)         Where Hindenburg may have been less right: the largest con.

Hindenburg’s charges boil down to the Adani Group being an over-leveraged house of cards. This simply does not seem to be true. It is seen as a strong operator of important assets, notably air and sea ports, and its financial position has improved since the report was issued with profits of its 11 listed entities increasing from $2.7bn in the 2022 calendar year to $4,331bn over the past four months. Certainly some entities were overvalued, but others appear sound. A consequence of the report was that Adani Group has been more transparent and a bit less aggressive, all of which may have made it better.

A takeaway is that beyond the acrimony, Hindenburg’s impact has likely been good both for the immediate target of its attack and India’s broader capital market. This sort of praise, however, is unlikely to be forthcoming from elsewhere.

Macro matters

Inflation.

The top line number continues to fall, with the year-on-year July number at 3.54%, under the target average (which is too high) of 4%. The report comes just after the RBI declined tot cut its 6.5% headline repo rate. This is most likely because it was rattled by the election and the possibility that a contributing cause to the ruling BJP’s rather poor result was food inflation. It suddenly began focusing on this facet of the Indian economy. The RBI is run by people who have the usual incentives to survive which means it is not in the interest of its leadership to blow up support for the politicians that appointed them. Tightening earlier would have been smarter – there was no question that prices were rising, but it preferred to risk inflation more than lost growth. That has changed.

Growth seems to be slowing a bit.

The survey of manufacturers remains distinctly positive but not as distinctly positive as several months ago. And questions have been circulating about how much growth, really, India has been experiencing. One indication that it has been at least good, if not stratospheric, is freight traffic. Yes, this sounds old fashioned, given India’s avowed strengths in software and related services,  but freight reflects consumption and manufacturing, both areas India wants to expand. According to data released in the last week, rail freight traffic volume during the 2024 fiscal year (concluding at the end of March) grew 5.3%  and air freight grew 18%.

Micro matters

What sectors are doing well?

Calculations drawn from 1,440 company results in the quarter concluding at the end of June by BusinessLine, a newspaper, conclude that revenues grew 7% and profits 10% year-on-year, excluding power generation (revenues up, profits down) and financials (up and up). Bank revenues grew 22% year-on-year, profits 18%; pharma revenues grew 10%, profits 21%. One reason for the improvement is perhaps explained by data showing that of the Rs9.9trn ($12bn) of bad loans written off between the end of the 2020 fiscal year and the 2024 fiscal year (concluding at the end of March), only 19% has been recovered. The write-off, almost exclusively for banks run by the state, reflects a huge bailout.

Coal endures despite endless opposition

Indian companies love to talk about investment in renewables. The best investment would have been to look the other way. Coal India’s share price is up 140% in the past year in the face of small but steady increases in revenues and profits and hints from many energy producers that they may build more coal-fired generation capacity.

Beautiful numbers

The market for apparel, beauty products and footwear should grow from $130bn now to $210bn in 2028, according to a report by Bain Consulting that, if taken seriously by foreign companies in these areas, will likely have a similar growth impact on Bain’s consulting prospects.

The fate of foreign companies in a key Indian sector

Market share statistics compiled by Jato Dynamics, a consultancy, show that the market share of European car makers in India has dropped from 4.8% in 2019 to 2.8%. Japan’s leading market share has dropped as well, from 62% to 50%, doubtless because of the fading dominance of the single biggest Indian producer, Maruti Suzuki, which remains huge (more than 40% market share) but not as huge (well over 50%) as it was before. The biggest share gain has been Indian producers, presumably Mahindra and Tata, which have dramatically improved the quality and appeal of their cars. Ford left India in 2021 but is apparently thought to be on the verge of a return, reflecting how India, notwithstanding its hurdles, is too big a market to ignore.

What foreign companies operating in India make Indians happy

Two of the most attractive companies to work for in India are foreign, according to new survey. Microsoft is the most appealing foreign company (second overall), and Amazon is the third most appealing. The other three rounding out the top five are all controlled by Tata: TCS first, Tata Power fourth, and Tata Motors fifth.

India’s (and the world’s) enduring affection for communists who try unsuccessfully to become capitalists.

Many nice obituaries ran in the India press for Buddhadeb Bhattacharjee, the last explicitly communist chief minister of West Bengal. To visit West Bengal, and Kolkata, is to see a section of India that long ago lost its economic dynamism. Businesses shun it. And surely Mr Bhattacharjee played a role. And yet the obits were quite sympathetic. He was literary. He developed cultural life. He died in a modest home. The Economist praised him in 2004 as evidence of a reformist wind, “the cherry on the top” of the effusive compliments he received, according to The Business Standard. Maybe The Economist should run a retraction. An obituary might have lots to say about failed Indian efforts since its reopening in 1991 (as opposed to other states that are at least showing signs of possibly working).

What products do foreigners buy in India?

Organ transplants, according to The Times of India. Of 18,336 done in India, 1,851 of the recipients, about 10%, were overseas patients.

Is India becoming more American?

The Indian ammunition market is expected to expand from $844m this year to $1.4bn by 2032 according to KPMG, a consultancy.

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