Adani stock plunge: Will it trigger an emerging market crisis?

After reading Hidenburg’s reports and Adani’s inadequate reply, my confidence with the Indian market is shaken.

Here are my quick insights on the Adani collapse:

• Collapse of Indian Equities
• Adani Leverage
• Emerging Market Contagion

Collapse of Indian Equities

So far, Guatam Adani has lost more than $58 billion within a span of six trading days. This is the most severe in terms of scale and speed since Bloomberg began tracking billionaires in 2012.

For the entire Adani group, the drop in share price has resulted in a $108 billion plunge in a week, marking one of the biggest corporate plunges in India’s history. Bonds issued by the Adani group has also fallen to record lows. For example, Adani Green Energy 2024 USD bonds are now trading at about 60 cents on the dollar.

I will not be surprised if the Indian equities drop further in the coming weeks. At the end of 2022, MSCI India was trading at 24.9x P/E, more than double that of MSCI China’s 12.1x P/E.

Now, MSCI India has dropped about 15% to 23.7x P/E. This is close to its 3-year mean P/E.

If MSCI India trades to 20.4x P/E (which represent one standard deviation from its 3-year mean P/E), the Indian equities could still drop another 14%.

Adani Leverage

The companies within the Adani Group are highly leveraged.

If I weigh the Adani companies according to their market cap, the entire Adani Group has a net leverage of 446% and 6.0x Net Debt to EBITDA. This is high!

Within the Adani Group, Adani Green has the highest leverage of 1941% net gearing and high 14.5x Net Debt to EBITDA. So if there is any collapse, this will be the first to go.

Although the high leverage could be partly explained by the infrastructure assets, this will not bring much comfort if they have any short-term liquidity risk as their assets are mostly long-term in nature. Their cashflow is also not great as the group has a low proportion of EBITDA to its Net Debt.

The Adani Group has $34.7 million of coupon payments due this week on its dollar bonds. This should be easily financed.

The bigger issue could be if banks pull their credit lines from the Adani Group in the coming months. While this is unlikely, one cannot rule out such possiblity if there is serious corporate governance issue with the company.

Emerging Market Contagion

There have been near-record inflows into the emerging markets this year. This is fueled by falling bond yields and China re-opening.

However, if the Adani debacle continue to worsen, this could lead to severe outflows from the emerging markets as India is the second largest market with a 14.4% weight. Then, the loss of confidence in the India market could lead to a contagion effect in the emerging markets.

The article is contributed by EdxCapital. You can read more of his investment insights on substack.