Share trade resembles a local market auction -the anxious traders,their tricks and hacks and the adrenaline raising rounds of bid. Two decades back it was literally so with share traders jumping around most of the day. Now they do the jumping on-line. Every minute, truck loads of money is at stake with a chance of your investment multiplying many folds a few hours or days ahead.
The investor who had spent just ten lakh rupees in Adani enterprises shares three years before would have been counting his money up to 1.54 crore this January. Those shares grew at an astonishing 1450 percent; from ₹ 226 rupees to ₹ 3500. All other shares of Adani group also grew similarly. It was a gravity-defying hike. Prerequisites for such a spike are a track record of churning out huge profit and or growth potential for similar results. But Adani growth had neither of it.
In the three quarters of this year which ended in December Adani group’s total declared profit after taxes is 3616 crore. Reliance Industries made five times more than that in the same period – 15,792 crore. For the top 6 six companies of Tata group combined, it is 13,622. This is not a short term phenomenon but was evident for some time.
The operating margin which is profit after raw material cost, labour and administrative expenses is one such statistics. Adani enterprises, which is the flagship company of the conglomerate, has its operating margin going down for some time. From 7.16 percent till 2015 to 4.27 in the next six years and then 3.60 percent in the last 12 months.
Another is Return on capital which is earnings before interest and taxes divided by capital employed. We are taking the same period. It is declining too. From 14.69% to 4.45% and then in the last 12 months it is 3.18 percent.
Now let us look from where Adani Enterprises is getting money. It has been taking huge loans compared to equity. Till 2015 91.26% of funds came from debt. In the next 6 six years it is even worse. 106 percent. Which means even to give dividends some sort of loans were taken. And in the last 12 months 82% of funds are from debt.
Given the track record the share prices shouldn’t have gone up this far. But even after the Hindenburg report, the prices seem to be more than normal. Its price to earning ratio- derived by dividing current share price by earning per share- is still very high. For Adani Total Gas it is 301.8 . 237.5 for Adani Green. 198.6 for Adani enterprises. other global corporations. Far more successful global corporations’ value are minuscule in comparison. Apple- 25.5. Amazon- 98.6. Reliance 24.1
Hindenburg Research alleges it as a game of shell companies jacking up the share price using funds moved out illegally from the country. Facts which will be revealed only by a thorough investigation. But a more important question is about the emergence of companies in not so profitable businesses and their metamorphosis into conglomerates with monopoly in many sectors. It began in 1990’s when India made a tryst with Neoliberalism.
Dubbed as liberalisation, the floodgates were opened for private investment and there was a rush of private entrepreneurs. But some sectors , like infrastructure, remained taboo for fear of losses. It required large investments and needed more time to become operational and make profit. Moreover, public enterprises in those sectors were already operating on small profit margins. Still fledgling entrepreneurs like Adani could come into infrastructure. One way finding capital was loans.
After the turn of the century GDP growth was around 8% every year. Foreign financial capital was flowing into our bond and equity market. Banks swelled with deposits setting off a credit boom. They waded into more areas including infrastructure which was earlier considered too risky. The nationalized banks lead the way beginning with the State Bank of India.
But that was not enough. Lot of concessions were offered. Subsidies and tax rebates were the most visible ones. Offering land at unbelievably cheap rates and easy environmental clearances overlooking blatant violations were the next lot. Doing away with a lot of prerequisites was another. And for favoured ones things were even better. Suddenly land price will hit rock bottom or experience in running a project becomes unnecessary. Even for build,operate and transfer models government started offering money to the contractors in the name of viability gap funding. For the Vizhinjam Port project based in Kerala, the government will pay 1635 out of the 4089 crore needed. This is a project where the ownership and hence the majority of the profit made will remain with the private company, Adani ports in this case, for up to 60 years.
All while the public limited companies already operating in those sectors were left in the cold. Many had a natural death due to stiff competition for the new entrants. But in some cases it was premeditated murder. When mobile communications was launched the BSNL was kept away for some time alleging that given the customer base and infrastructure capacity there won’t be a level playing ground. And when BSNL came in, it revolutionized the sector by making incoming calls free for the first time. (Yes, there was a time when you had to pay for incoming calls too!) But soon it was trapped in some obscure government policy which denied BSNL to go for global tender in purchasing equipments. It denied the company cheap and quality equipment which others easily procured. For there started the downfall of BSNL.
Nevertheless the government continues to offer rebates and pump in money for roads and rails to boost private investments. Ten lakh crore is the latest budget figure for building infrastructure. Meanwhile data reveal that the private players have slowed down in capital investment long back. Whatever job creation and other benefits that society was expected to get via trickle down effect is not happening. We saw the finance minister lamenting about this last year.
But the same government is cutting down expenses in social welfare programs. NREGA lost one third of its earlier allotment in the latest budget. Free food distribution too was drastically cut down. Less expense for education and health – considering the inflation impact. Government proudly brags that they won’t do debt financing and swears on fiscal conservatism. A curious situation where hundreds of crores of rupees offered as subsidy to the business class and money spent to attract private capital is considered nation building and any aid for the poor is charity and only to be spent as a last resort. Neoliberalism is in action with its full pomp and arrogance.
As the crash in Adani shares continues, the hue and cry is not about investigating Adani but about rebuilding investor confidence which means preventing the investors loss in Adani stocks. Why should the government spend a dime or move a finger? Those who invested in those shares had conveniently overlooked the track record of those companies. It’s the old trick of turning to the government when everything comes crashing. Rebuilding investors’ confidence really means resurrecting Adani.
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