Hindenburg Report on Adani – Here’s What You Need to Know

Hindenburg report led to a sharp decline in Adani shares 

The Hindenburg report – the rippling effects it caused led Adani Enterprises to call off ₹20,000 crores FPO. Adani Enterprises stocks suffered a massive loss of 28.45% on February 1, 2023, closing at ₹2,128.70. Following the event, Adani Group announced to call off their ₹20,000 crores FPO and return investors’ money. They stated that they did it to safeguard investors’ interests. 

We will now analyse the events that unfurled after the Hindenburg report.  

In the report, Hindenburg accused Adani Group of “brazen stock manipulation and accounting fraud scheme over the course of decades.” Although Adani denounced the report as baseless and malicious and even threatened legal proceedings against the reporting agency, the market reaction was immediate and brutal. Adani Group stocks were hit badly. Seeing the volatile market reaction, the Adani Board announced that it is not ‘morally correct’ to continue with the FPO.  

• Citibank Inc’s wealth arm announced to stop accepting Adani Group’s bonds as collateral for margin loans and ramped up scrutiny against the company’s financial conditions. 
• Citibank Inc. is the second agency to stop accepting Adani bonds as collateral. Before them, Credit Suisse yesterday said that following a steep decline in the value of Adani group bonds, it has stopped receiving those as collateral for margin loans. 
• LIC, one of the primary investors in the Adani Group, also said to inquire with the company regarding the allegations made in the Hindenburg report. LIC is quoted as saying that as an investor, it has every right to inquire about the said fraud.   
• Following the series of events, the RBI today directed local banks to update the details of their exposures in the Adani group of companies.

Adani Enterprises’ stocks have fallen further after the FPO got called off. In the last five days, Adani group stocks have crashed. Adani Enterprises stocks lost another 13.47% on February 2, 2023, to trade at ₹1,847.70. The Gautam Adani Group’s flagship company stocks have crashed 30% amid Credit Suisse news. All ten stocks belonging to Gautam Adani are trading in the red zone. 

Know the players

Adani Group

It is one of the largest group of companies in India which specialises in infrastructure projects in coal, ports, cement, green energy and even edible oil. It has made the news in India lately because of its rapid expansion in the cement industry (buying majority stake in Ambuja Cement and ACC Ltd.) as well as news media (buying around 30% shares of NDTV). Its owner, Mr. Gautam Adani has been one of the top 4 richest persons in the world for some time now. The following is a list of a few of the major listed companies that come under the Adani Group –

1. Adani Enterprises
2. Adani Ports and SEZ
3. Adani Green Energy
4. Adani Power 
5. Adani Transmission
6. Adani Total Gas
7. Adani Wilmar
8. Ambuja Cement

Hindenburg Research

Hindenburg Research is a US-based research team that offers services in forensic financial research, with a focus on equity, credit and derivatives analysis. Their fundamental research often includes studying and reporting on companies with accounting irregularities, unethical practices in business/related-party transactions, bad management etc. Its primary method for investment is said to be short-selling.

Note: Short selling basically involves borrowing an asset now in order to sell it, only to buy it back at a lower price and then return the borrowed asset. The view taken basically is a bearish one.

Usually they write reports on western companies such as Nikola, Genius Brands, SC Worx etc. However, on 24th January, 2023 they wrote a report on the Adani Group, claiming that the latter were pulling the “largest con in corporate history”. They also revealed that they were holding a short position on the Adani stocks, signalling their belief that the shares are overpriced and will dip in value soon.

Key points in the Hindenburg Research report on Adani

The following are some of the claims made by Hindenburg Research on Adani Group –  

1. Overvalued shares – The report cites data from FactSet and Hindenburg’s own analysis to claim that the Adani shares are highly overvalued by conventional metrics such as P/E Ratio, Price/Sales ratio and EV/EBITDA. Some of the extreme cases include the P/E Ratio of Adani Enterprises being 42 times the industry average and the Price/Sales ratio of Adani Total Gas being 139.3 times the industry average of 1.0x etc.
2. Debt-fuelled business – 5 out of the 7 key listed companies mentioned have reported a current ratio of less than 1. This means that the total amount of current assets is less than the total amount of current liabilities in those companies. This is not a healthy financial practice as this means that the companies are unlikely to have adequate assets to pay off their liabilities in the short run.
3. Promoters pledging their stocks – This means that the promoters of the company have taken on additional debt on the basis of the shares that they own. As seen above, the share prices are claimed to be already high and so is the debt – therefore, promoters pledging stocks to take on more debt is not a healthy financial practice in such a context.
4. Doubts regarding the management team – The report claims that some members of the management have a questionable past which includes allegations of fraud, duty evasions, scams etc. 
5. Excess promoter control of shares – It has been alleged that in addition to the already high proportion of promoter holding in shares (close to 74% in multiple cases), significant portions of the remaining public shares are also controlled by shell companies that have ties with the Adani group. Many of these companies have a large majority of their shares invested solely in firms under the Adani Group. This may mean that in practical terms, those companies may have worked their way around the SEBI mandate that requires at least 25% of the shares of a listed company to be in public shareholding. This exposes these companies to a high risk of being delisted.
6. Pumped up demand – The preceding point also hints at deliberate pumping of the Adani stock prices through excessive buying pressure from companies that seem to be biased towards (or perhaps connected with) the Adani Group itself. It is claimed that the delivery volume of Adani stocks may have been high because of possible wash trading (ie. buying/selling of a share by the same or related entities to pump up the trading volume numbers). Rumours regarding the involvement of the noted stock manipulator Ketan Parekh have also been raised in the Hindenburg report.
7. Inadequate compliance – The report claims that one of the firms hired to bookrun the Adani Green Energy has had past problems with the SEBI. Moreover,  one of the independent auditors hired to audit Adani Enterprise and Adani Total gas seems to be too small a company and comprising professionals too young to be able to handle the auditing of such a large array of companies. 

Note: All the above claims are those made by Hindenburg Research in its report and are neither confirmed nor denied by Angel One.

Adani Group’s response

Through a twitter post on 25th January, 2023, the Adani Group said that the report is “ a malicious combination of selective misinformation and stale, baseless and discredited allegations that have been tested and rejected by India’s  highest courts”. They questioned the timing of the post (in the context of the Adani Enterprises FPO which came on 27th January 2023 and is the biggest FPO in India ever).

Thereafter, it responded with a point-by-point rebuttal of the allegations made by Hindenburg Research. 

1. It denied any fraud or artificial pumping of prices. 
2. Regarding the issue of over-leverage, it claimed that its companies are highly rated  and are subject to scrutiny and monitoring by the government anyway, so there is not much scope for irregularities here – overall, promoter leverage is less than 4% of promoter holdings.
3. Of its 9 publicly listed entities, 8 are audited by the Big 6, except Adani Total Gas, which is also set to follow the same route in auditing.

There were several other points raised by the rebuttal report from the Adani Group. However, they also mentioned that they will be looking at legal avenues in order to take remedial and punitive measures against those who casted these allegations on the Adani Group. 

Hindenburg Research in turn mentioned that if legal actions do take place, they too will demand the release of several important documents to the public and judicial eye during the trial. In other words, when it comes to its Adani Report Hindenburg has chosen to stand by it so far.

Investors reaction

Seven listed companies in the Adani Group lost over $10.73 billion dollars in market capitalisation on 25th January i.e. after the release of the Hindenburg report. The Adani Enterprises FPO may have suffered too, as in the early hours of its opening day, the price was hovering at around Rs 3130, which is close to the lower end of the price band of Rs 3112-3276 per share.

However, it must be noted that no Adani Group company has ever defaulted on their debt repayments so far. Moreover, the bank debt component in the total debt of the Adani group has only fallen (from 86% in FY16 to less than 40% in FY22) – which means any potential issue in the repayment is less likely to have any impact on the banking system.

The conglomerate is one of the global leaders in infrastructure and also has some famous brands under its wing such as Fortune edible oil and rice. The total revenue of the group is said to be around $ 23 billion dollars yearly. 

Final Words

Retail investors may not need to worry about the entire Adani Group Hindenburg clash as in the larger scheme of things, the Adani Group may be considered by some as a ‘too big to fail’ entity. Allegations, legal suits come and go – but if as an investor you found a stock to be fundamentally strong or weak by your own metrics then you may choose to stick with your decision. The best way forward is to independently analyse any new information on the fundamentals and price action and take an unbiased decision considering returns and timeline.

If the above scenario caught your interest, perhaps you would like to check out more of our blogs and finance content. In case you want to invest in stocks you like, open demat account today with Angel One, India’s trusted broker.