Adani Port replacing Deloitte with another reputed auditor to comfort investors, says Jefferies

• Auditor resignations are typically seen as a red flag by investors but Jefferies says that replacement with a reputed auditor (top 6) gives some comfort.
• New auditor is also the audit firm for other leading Nifty50 companies and is not a small family-run entity.
• Growth guidance for ports business in FY24 continues to be robust, say analysts.

The dirty linen being washed in public by Deloitte Haskins and Sells along with Adani Ports has not ruffled analysts at Jefferies, a foreign investment bank. The research firm which tracks Adani Ports has found a silver lining even in this development as it feels that the auditor has been replaced with another “reputed auditor,” which is among the top 6. Auditor resignations are typically seen as a red flag by investors but Jefferies says that replacement with a reputed auditor (top 6) gives some comfort.

Operationally, Adani Ports looks set to grow port volumes at a steady clip. The company’s guidance has been maintained. In the June quarter of FY24, Adani Ports gained 200 basis points in market share in India to settle at 26%. The company’s management continues to remain positive on the outlook and maintained volume growth guidance of 9-15% year-on-year at 370-390 mnt. The guidance for operating income has been maintained at 13-17% YoY for FY24. Analysts expect core port EBITDA growth should remain upward of double digits.

The company’s board on Friday accepted the resignation of its statutory auditors and new auditors have been appointed from 12 August 2023 till the date of the next AGM in 2024.

M/S Deloitte Haskins & Sells and approved the appointment of M/s M S K A & Associates (independent member firm of BDO International). The reason that Adani Ports cited for Deloitte walking out was lack of wider audit role across other group companies. In its resignation letter, as submitted with the company’s exchange release, Deloitte highlighted they are not statutory auditors of a number of other Adani group companies. They were appointed for five years in May 2017 and then reappointed in July 2022 for a term till 2027.

The dispute between the company’s management and Deloitte seems tp have arisen after the two did not agree on an external firm looking into allegations made by Hindenburg Research. For the financial year 2023, the accounts carried a qualification by Deloitte in Adani Ports’ annual report that as per a short seller report the company entered an EPC contract, some financing transactions and sale of its Myanmar container terminal to related parties.

The qualification mentioned that Adani Ports’ represented that they are not related parties and did not consider it necessary to have an external independent examination given the ongoing SEBI investigation as directed by the Supreme Court. The auditor’s qualification mentioned that the company’s own evaluation did not constitute sufficient appropriate evidence.

Typically auditor resignations are seen to be negative for companies as witnessed in the case of UPL when KPMG walked out as auditor in 2020 but Batliboi stayed on. While the stock corrected by 18% in the near term, the stock gradually recovered after 6-12 months, says Jefferies. Replacement with a big audit firm should give comfort to investors in Adani Ports too.