Adani Group: A Ride by a Short Seller!

 

It all happened within a week: Gautam Adani, founder of the Adani Group, who until recently was the richest Indian in the world, has now slipped to the 22nd spot in the Forbes billionaire list.

**

On January 24, Hindenburg Research, a US-based investment research firm with a focus on activist short-selling founded by Nathan Anderson in 2017, released a report accusing the Adani Group of “a brazen stock manipulation and accounting fraud scheme.” Citing two years of research, including talks with former Adani senior executives and the analysis of thousands of documents, it stated that the key listed companies in the group had “substantial debt,” and thus the group companies are on “precarious financial footing.” 

The report further stated that “the seven key listed companies of the Adani Group are 85% plus overvalued even if you ignore our investigation and take the companies’ financials at face value.” It is, perhaps, in support of this averment, the report furnished a table indicating a company-wise PE ratio, a price/sales ratio, and an EV/EBITDA ratio, along with the industry average and the implied downside thereof. They are all on the higher side vis-à-vis industry averages. For instance, the PE ratio of Adani Enterprises is shown at 508x as against the industry average of 12x, which would mean a downside of –97.68%, a price/sales ratio of 5.7x as against the industry average of 0.5x, which implies a downside of–91.33%, and an EV/EBITDA ratio of 66x as against the industry average of 8x, which means an implied downside of –88.16%. 

Within a couple of days of the release of the Hindenburg report, Adani Group countered the accusations with a 413-page response calling the document “a malicious combination of selective misinformation and concealed facts relating to baseless and discredited allegations to drive an ulterior motive. This is rife with conflict of interest and intended only to create a false market in securities to enable Hindenburg, an admitted short seller, to book massive financial gains through wrongful means at the cost of countless investors.” This is, however, rebutted by Hindenburg, who states that Adani’s response did not address any of the substantive points that the report raised. 

The outcome of all this is the free fall of the share prices of the Adani Group companies. According to a report in Reuters, the combined market cap of the group fell within a week by 47.44% to $108 bn as against $218 bn before the release of the report. Its spillover is felt by the rest of the market too: the share prices of LIC and SBI declined by 8% and 5%, respectively. This has also moved Gautam Adani out of the top 20 richest people’ list of the world. It even hurt the FPO of Adani Enterprises, which was opened for subscription on January 27, for the participation of retail investors was tepid, leading the group to finally junk it, although subscriptions from qualified institutional investors and anchor investors came in. 

Now, the moot question is: What did Hindenburg get out of all this? As mentioned in its report, having taken a “short position in Adani Group companies” through bonds that trade in US and other investments that trade outside India, it might have made a profit. For, shorting is nothing but borrowing the stock from the market and selling them expecting its prices to fall substantially owing to the report released, hoping to buy them back at a lower price and thus make a killing. However, in view of the prevailing Indian regulations that make upfront disclosure of short positions mandatory, it is not clear how it structured its bet. One possibility is that it might have taken a position in the derivatives market or in the bond market. Nevertheless, going by its past actions, it becomes very clear that it released the report with the intention to make a profit. 

Amidst this crisis, Adani Group has made a smart move: it has called off the FPO of Adani Enterprises. In a regulatory filing, Gautam Adani, Chairman of Adani Group, said, “… the market has been unprecedented, and our stock price has fluctuated over the course of the day. Given these extraordinary circumstances, the company’s board felt that going ahead with the issue would not be morally correct. The interest of the investor is paramount, and hence to insulate them from any potential financial losses, the board has decided not to go ahead with the FPO.” He also said, “… the company shall forthwith refund to the bidders the entire application bid amounts or subscription amount received in the offer in accordance with applicable law.” 

Of course, one has to wait and see how good this move would be in creating confidence in the governance practices of the group. There is a general perception in the market that the stocks of Adani Group have outperformed the market, but its debt instruments are declining in value. This phenomenon, coupled with the regulator’s likely probe of the whole issue, could mean the group would have to wait longer than expected before it regained investors’ confidence. Meanwhile, it may be safe to say that there may not be any existential threat for the group, although its ability to fund its Capex programs will be affected. Also, the fact that no rating agency has yet reappraised its debt too could give some relief to it and also to its various stakeholders. Nevertheless, in light of the canceled FPO, it will have a tough time servicing its debt from internal revenues. And to that extent, the extant lenders to the group stand exposed to default risk. But Mr. Adani, who is known as an able operator, is sure to wriggle out of the crisis.