Adani finds an investor with great cred

Or how disagreeing with everyone else is an investor's main job

A real-life contrarian investor disagreeing with everyone else

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An investor’s main job is to disagree with everyone else. You buy a stock if you think the price is low, and sell it if you think it’s high. When you’re buying, you think the stock price is low and will go up, but you’re buying it from someone who thinks the opposite. Similarly, you sell a stock when you think the price is high, but the investor on the other side thinks otherwise. There’s quite a bit of disagreement!

Yes, I’m oversimplifying. There are lots of folks in the markets. Some might be gambling. Others might buy a stock even if they think it’s expensive, because they think there’ll be a greater fool who they can sell it to later at an even higher price. That said, it’s useful to think of an investor as someone seeking to be contrarian. They want to disagree with other investors because that’s how they really make money.

GQG Partners is an American investment firm known to make contrarian investments in companies. Earlier this month, it invested ₹15,446 crore ($1.9 billion) in Adani Group companies. Definitely a contrarian bet after the Group was accused of fraud and their stocks fell by more than 50%. (In case you somehow missed the whole saga, I wrote about it here.)

One reaction to this is of skepticism. Adani Group has anyway used Mauritius-based funds to inflate its own stock prices (so the accusation goes), maybe it’s now using GQG? Well… GQG isn’t a strange Mauritius fund. It’s a company that manages $90 billion that everyone knows about and generally has a good reputation.

Okay, let’s chuck their reputation. Large banks have great reputations yet do shady deals all the time. If you’re an investment firm that manages funds with your clients’ money, and you’re in the mood to “help” a company that’s just been accused of fraud, you might do it with maybe one or two of the many funds that you manage. Why risk more?

GQG bought shares of 4 Adani companies, and it did so across more than 20 distinct funds. Some of those 20 funds include retirement funds for

1. Government employees of two US states, New York and Texas

2. Australian workers

3. Saudi Arabian citizens

I mean… GQG isn’t going to be intentionally messing around with retirement funds across three continents, less so government ones. Adani is really just a contrarian investment.

Adani (finally) sells some stock

Back in late January, Hindenburg Research accused the Adani Group of fraud. At the time, the conglomerate was in the process of selling some stock to investors. There were broadly three reasons for this stock sale:

1. Fund new projects

2. Repay some company loans

3. Reduce Adani’s (the individual’s) stake in Adani Enterprises, which is super high and close to the upper limit of 75%. This would also help in shutting up people (like me) who claimed Adani share prices were high only because he owned all the shares

Eventually, though, Adani Group cancelled the stock offering and returned whatever money it did raise. In a way, Adani finally did this month what he couldn’t in January. He sold some stock to investors!

There’s a difference. In January, it was Adani Enterprises selling stock. This time around, it was Adani the person that sold the stock.¹ The difference between Adani and his companies is often blurry, because he owns more than 60-70% of all his companies, but there is still a difference.

Because it was Adani the person that sold the stock and not Adani the company, the money fulfils different goals. He can’t really fund new projects² and he can't repay company loans. In fact, Adani's already putting some projects on hold.

What Adani can do with this money is repay his own loans! When Adani stock prices fell, banks that had lent money to Adani against his companies’ stock asked for some of the money back. So Adani decided to repay his loans in full. Here’s him two weeks ago repaying $2.65 billion that he borrowed to buy Ambuja Cements. I had earlier written about him repaying a similar loan of $1.1 billion.

Adani didn’t want to fund new projects, or repay the high debt that his companies have frequently been criticised for. But he clearly really needed money to repay his own loans. It was a happy coincidence that he succeeded in fulfilling goal (3) that I mentioned above—he reduced his own stake in his companies, a bit at least.

GQG likes the leniency

I wrote earlier that a company being accused of fraud, by itself, wasn’t reason enough for investors to think less of it. If you’re a company that’s accused of a number of frauds, and one of those frauds is being on the receiving end of government “leniency”, it could actually be good for your investors.

When Adani stocks started to fall, the problem wasn’t that Adani Group was accused of defrauding the government or people at large. The problem was that the Group was accused of fraud against its own investors by inflating its companies’ share prices.

For an investor whose job it is to be contrarian, the question then becomes—do the benefits of the first kind of fraud outweigh the pitfalls of the second kind of fraud? Rajiv Jain, the chairman of GQG Partners, spoke to ET Now on a Sunday morning after the $1.9 billion investment in Adani companies. Here’s what he said:³

Something not well appreciated is that the barriers to entry in infrastructure anywhere in the world are very high, particularly in India, execution extremely difficult.

You might remember that POSCO Iron and Steel tried to acquire land for seven, eight years, couldn't even acquire land, and then they left. So greenfield projects are very, very difficult. And that's what actually we quite like about this group is they have shown remarkable ability to execute on greenfield projects. And I feel that they don't get full credit for that in terms of ability to pull that off.

Rajiv Jain likes that Adani could build infrastructure projects in a country where other multinationals couldn’t even acquire land in eight years. Yeah, I think what he’s saying is that he likes the “leniency” that Adani’s been getting from the government. And he’s willing to pay a higher price for the company because the benefits outweigh the costs.⁴

1. “Adani the person” could be Adani’s family members, the trusts that hold his stock, etc., not necessarily the man himself.

2. Technically he can, it’s still his money. But he’d have to lend to his companies, in which case he would rather just have raised money via a stock offering directly.

3. If you watch the interview you’ll see that the swooning journalist doesn’t ask Rajiv Jain the tough questions. The journalist asks him about what he thought of Hindenburg’s accusations, and Jain waives them off saying it’s stuff everyone has already known for a while. But what does he think about the specific accusation of Adani owning Mauritius-based funds to inflate his stock prices and defraud his investors? No idea, the question wasn’t asked.

4. Another way to look at this is that the accusations against Adani are of defrauding on price, not on assets. The assets that Adani companies own are real and tangible, there is no argument about it. The accusation of defrauding investors is about overpricing the assets, something that GQG seems to think is fine after the massive fall in share prices.