It started on January 24, 2023, when the investment research firm Hindenburg Research released a report alleging stock price manipulation and other malpractices by the Adani Group over decades. The information has polarised people, with some calling it a direct attack on the Indian Economy and some calling Adani a fraud. Since the report’s release, Adani has lost about $100 billion in wealth, and the stocks of the Adani group have plummeted. The stock prices of Adani Ports have fallen by 23%, Adani Enterprises have fallen by 46%, Adani Green has fallen by 61%, Adani Total Gas has fallen by 67%, Adani Transmission has fallen by 57%, Adani Power has fallen by 40% and, Adani Wilmar has fallen by 24%.
Who is Hindenburg Research?
Hindenburg Research is an investment research firm that uses short-selling to generate profits. First, let’s understand what short-selling is. Short selling is a trading strategy investors use to profit from a decline in the price of a security.
It entails borrowing a security from a broker and selling it in the hopes of later repurchasing it at a lower price, returning the borrowed security, and pocketing the difference as profit.
Put another way; short selling allows investors to bet against a stock by selling shares they don’t own in the hope that the price will fall.
If the price falls, the investor can repurchase the shares at a lower price and return the borrowed shares to the broker, profiting. In this case, Hindenburg would have borrowed stocks of Adani group companies when the prices were high and sold them at a bit lower price. After that, they would have released their report, and these two reasons would lead to a fall in price. When the price fell, Hindenburg would have repurchased the shares at a lower cost and turned a profit.
What is the Adani Group?
Adani Group is the 2nd largest conglomerate in India, run by its Chairman and Founder, Gautam Adani. The group has seven key publicly listed equities (nine in total) with a collective market value of approximately INR 17.8 trillion (U.S. $218 billion). It also includes a maze of Adani private companies and family trusts. Gautam Adani and his family have amassed a paper fortune of over U.S. $120 billion, with over $100 billion coming in the past three years.
The conglomerate is involved in many businesses, primarily focused on critical infrastructure projects such as developing ports, mines, airports, data centres, power generation and transmission.
The seven key Adani listed companies have seen their stock prices surge over the past three years, with most increasing multifold. Adani Enterprises and Adani Ports feature in India’s Nifty 50 index, and six companies are included in the MSCI India Index.
Gautam Adani's Stock Market Strategy the Adani Group's debt strategy is a complex framework that uses the strength of its various subsidiary companies to raise capital for growth. The Adani Enterprise, initially the only listed company in the stock market, is at the centre of this framework. Adani Group began recording more companies, including Adani Wilmer, Adani Ports and Special Economic Zone, Adani Power, Adani Transmission, and others. This resulted in forming of a network of businesses that could be used to raise capital and assist one another in times of need.
The strategy consists of two major moves: first, leveraging one group company’s loan eligibility to pass it on to another company, and second, directing cash flow to a troubled group company. This creates a virtuous circle in which an Adani company can quickly raise funds to bid on a tender. For example, when Adani Infra needed to raise 10,000 crores, it began by projecting its profits and raised 2,000 crores. The company then pledged 10% of the shares in its high-performing subsidiary, Adani Green, to obtain a 7,000 crore loan from the bank. Finally, it issued a 1000 crore bond to raise funds directly from the public.
Adani Group’s Current Ratio
The current ratio is a financial metric that assesses a company’s ability to repay short-term debts with existing assets. It is calculated by dividing a company’s assets by its liabilities. The resulting figure represents the company’s liquidity and ability to meet short-term obligations. A current ratio of 1:1 is considered a healthy balance because it indicates that a company’s existing assets exceed its current liabilities. On the other hand, a ratio greater than 1:1 is preferable because it suggests that a company has a comfortable cushion to cover its short-term debts in the event of unexpected events. On the other hand, a ratio less than 1:1 may indicate that a company is struggling to cover its short-term obligations, which is cause for concern.
Five companies in the group, Adani Green Energy, Adani Power, Adani Total Gas, Adani Transmission, and Adani Enterprises, have a current ratio of less than one, suggesting a high risk.
(Source: FactSet)
In response, Adani Group pointed out that net EBITDA growth has grown twice as fast as debt over the last five years. The net debt to run rate EBITDA ratio has come down significantly. It is almost in the “moderate risk” category now.
(Source: Adani response to Hindenburg)
