Hindenburg Research’s Report on Adani Group

What’s in today’s article?

• Why in News? 
• About Adani Group
• About Hindenburg Research
• Hindenburg’s Report on Adani Group
• Key points in the Hindenburg Research report on Adani Group
• What is the Impact of Hindenburg Research’s Report?

 

Why in News?  

• On 24^th January 2023, a US-based investment research firm, Hindenburg Research, published a research report on the Adani Group. 
• The report claims that the Adani Group is holding a short position on the Adani stocks, signalling that the shares of Adani Group are overpriced and will dip in value soon.

 

About 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.

 

About 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.
  • 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 bearish one.

 

Hindenburg’s Report on Adani Group

• Usually they write reports on western companies such as Nikola, Genius Brands, 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 Group

• 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. 
  • 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.
• 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.
• 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.
• 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. 
• 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.
• 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.
    • Wash trading is the practice of buying/selling of a share by the same or related entities to pump up the trading volume numbers.
• 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. 
    • It comprises of professionals too young to be able to handle the auditing of such a large array of companies.

 

What is the Impact of Hindenburg Research’s Report?

• Impact on the Adani Group
  • 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.
  • It also wiped off over $25 billion of the personal net worth of Mr Gautam Adani to below $100 billion and relegated him to 7^th richest in the world, from 3^rd earlier this week.
• Systemic risk
  • 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).
    • This means any potential issue in the repayment is less likely to have any impact on the banking system.
  • But the experts believe that liberal investments were made by state entities like LIC, SBI and other public sector banks in the Adani Group.
  •  Since, share prices have fallen, these entities may have exposed the county’s financial system to heavy risks.
• Reinforces distrust around corporate governance practices in India
  • The current report may reinforce distrust around corporate governance practices in India Inc.
• If one of India’s largest companies is facing this crisis of governance, people may become suspicious and raise questions.

 

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Q1) What is Short Selling?

Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money. Short sellers bet on, and profit from, a drop in a security's price. This can be contrasted with long investors who want the price to go up.

 

Q2) What is a Wash Trade?

A wash trade is a form of market manipulation in which an investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity in the marketplace. First, an investor will place a sell order, then place a buy order to buy from themselves, or vice versa.

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Source: Hindenburg Research stands by its report on Adani, will seek disclosures in US court proceedings   | Livemint