The Adani – Hindenburg Saga: Explained!

The Adani - Hindenburg report analyis
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The Adani-Hindenburg Saga is the recent talk of the town. But what is the current situation of the story? Let’s find out.

People were busy talking about two things last week: Paathan and Adani breaking records! But in the opposite direction. Paathan was hitting blockbuster records, and Adani stocks were plunging like no tomorrow, taking losses to over $100 billion!

So, what is the reason behind Adani’s fall? Let’s find out. 

What’s Happening?

On January 24th 2023, the research firm Hindenburg Research issued a report after a two-year investigation on the Adani Group. In the research report, they have levied allegations against the Adani group stating that they have manipulated their stock prices, created shell entities and whatnot. As a counterpart, the Adani group also came up with a 413 pages report to clear their side of the story. 

Don’t worry; we will get into the nitty-gritty of the reports in a bit. Before that, let’s take an overview of who is Hindenburg Research and what their motive is behind defaming the Adani group.

Well, Hindenburg is a research firm as well as a short seller. 

To help you understand better, short selling or a short position is selling a stock at a high price and buying at a low price. So, Hindenburg created a short position in the Adani Group through US-traded bonds at a high price and issued a report about the said company, which acted as a whistleblowing activity. The company will cover its position and book profits when the stock plunges. 

So, before the report got published, Adani Enterprise was trading at Rs 3,388, and on 3rd February 2023, the stock was trading at Rs 1,603 per share, which is a dip of over 50%. This is the profits Hindenburg is earning. 

According to Bloomberg, since 2020, the company has short-sold 30 stocks and earned a good amount of money. 

For example, there is a company named Nicola on which Hindenburg published a report and shorted it. Today the company has a market capitalisation of $1.3 billion, which was once $34 billion.

Now let’s move ahead to see the allegations and how Adani responded. 

Adani vs Hindenburg Report

1. Stock Manipulation and Wealth Creation

Hindenburg has stated in his report that, ‘Through their holdings in the group, Gautam Adani and his family have amassed a paper fortune of over US $120 billion, with over $100 billion of that coming in the past three years, largely through the meteoric appreciation of its stock prices.’

To simplify it, the report states that, out of the massive wealth the company has made, a major chunk of wealth was created in the last three years. 

How have they created wealth?

Through the crazy appreciation of the stock price as they have a majority promoter stake in the company. For example, if the share price goes from x to 2x, as Adani has the majority stake in his own company, his wealth also becomes 2x. 

2. Shell Companies

The Hindenburg Report states that Adani family members allegedly cooperated to create offshore shell entities tied to the Adani Group, comprising many of the largest ‘public’ (i.e., non-promoter) holders of Adani stock companies onto the listed companies’ balance sheets to maintain the appearance of financial health and solvency.

In simple terms, the SEBI rule states that a company cannot hold more than 75% of holding in a publicly listed company. This rule is made so that there is enough float (liquidity) available in the market and the stocks cannot be manipulated. But, according to the Hindenburg report, the Adani group has made some shell companies which hold stakes in the Adani Group of companies in the ‘public section’. By doing so, there is less float (liquidity), and the stock price can be easily manipulated. 

They have mentioned the shell company’s name, Monterosa Investment Holdings, under which three companies have 90% of the holdings in Adani companies. 

In response to stock manipulation and shell companies, Adani Group’s report stated, ‘The listed entity does not have control over who buys or sells or owns the publicly traded shares in the company.’

3. Debt Fueled Growth

The Hindenburg Research report states, ‘A portion of promoter equity in Adani group-listed entities is pledged for loans, effectively leveraging the group to the hilt’.

The Hindenburg report also states, ‘Five companies in the group (all but Adani Ports and Adani Wilmar) have current ratios below 1, suggesting a heightened short-term liquidity risk’. 

In simple terms, the Adani Group of companies has pledged their holdings as collateral for loans. The downside is that if the share prices fall, the lender can sell their collateral to recover their money. Moreover, the five companies from the Adani Group have a current ratio below one, indicating the risk of not meeting their obligations in the short term.

In response, Adani Group’s report stated, ‘The leverage ratios of Adani Portfolio companies continue to be healthy and are in line with the industry benchmarks of the respective sectors.’ They have mentioned that their EBITDA growth is 2X the debt growth over the last five years.

Moreover, Adani Group’s report stated that their pledge has significantly reduced with time. 

4. Young Group of Auditors

The Hindenburg report states, ‘The firm comprised only four audit partners and seven support staff’. ‘We found that three were in their 20s – hardly the level of experience or seniority needed to scrutinise one of the world’s wealthiest and most powerful businessmen.

In response, Adani Group’s report stated, ‘All these auditors who we have engaged have been duly certified and qualified and have been appointed in compliance with applicable laws’.

Both reports are long enough, with numerous allegations. Hence, we have highlighted the integral parts of the report. 

What Happened to Adani Group After the Report Got Published?

Firstly, the report was published before Adani’s Follow on Public Offer (FPO), which indeed spoiled the market sentiments. But it seems the Adani group has a magic wand. The FPO got oversubscribed 1.12 times, and the major contributors were the Non-Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs). 

The Chairperson of Adani Group, Mr Gautam Adani, decided to take a U-turn and announced that they would withdraw the FPO and the money would be returned to the investors. This move was taken because of market volatility, said the company’s Chairman. 

Later, as the share prices kept falling, Standard Charted, Citigroup and Credit Suisse took the Hindenburg report seriously and they stopped accepting Adani Group bonds as collateral on margin loans. 

An announcement was also made in the US market stating that Adani Enterprises will be removed from the Dow Jones Sustainability Indices effective from 7th February 2023. Moreover, NSE has put 3 Adani Group firms (Adani Enterprises, Adani Ports, and Ambuja Cements) under its Additional Surveillance Measure (ASM) framework, which means that trading in their shares will require a 100% margin. 

Finally, after all of this chaos, according to Economic Times, Adani promoters are looking to prepay up to Rs 8,000 crore loans against shares in 45 days to soothe investors’ nerves. 

What’s Next?

Adani Group is still in the middle of a storm, and the stocks have experienced a massive wealth reduction. But, as investors, we should not derive a conclusion if something really went wrong with the Adani group or not. Let’s wait for the regulatory body or the judicial system to decide, as the case has already reached the supreme court. 

That’s it for today.

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