The Hindenburg Report and Its Impact on Adani – One of The Biggest Research Unfolded On Adani Group
Adani Group –
One of India’s major business groups, it specializes in infrastructure projects involving coal, ports, cement, renewable energy, and even edible oil. It has recently gained attention in India due to its quick expansion into the news media (purchasing about 30% of NDTV) and the cement sector (buying the majority stake in Ambuja Cement and ACC Ltd.). Its owner, Mr. Gautam Adani, has long been one of the world’s four richest people.
Hindenburg Report –
A US-based research team called Hindenburg Research provides forensic financial research services with an emphasis on equities, credit, and derivatives analysis. Their primary investigation frequently involves examining and documenting businesses with questionable accounting procedures, unethical dealings with linked parties, poor management, etc. Short selling is reportedly its primary investment strategy.
Following are some of the claims made on the Adani Group :
1. Overvalued Shares
According to traditional criteria like the P/E ratio, price/sales ratio, and EV/EBITDA, Adani shares are significantly expensive. Adani Enterprises’ P/E Ratio is 42 times the industry average, while Adani Total Gas’ Price/Sales Ratio is 139.3 times the industry average of 1.0x, among other extreme occurrences.
2. Debt Fueled Business
Out of the seven significant publicly traded corporations mentioned, five have reported current ratios under one. This indicates that for such businesses, total current assets are less than total current liabilities.
3. Promoters Pledging Their Stocks
The company’s promoters have added to their debt based on their ownership of shares. Promoters guaranteeing stocks to take on more debt is not a sound financial practice in such a situation because it is argued that the share prices and debt are already high.
4. Doubts Regarding Management Team
According to the investigation, certain management members have a murky past that includes claims of fraud, duty evasion, scams, etc.
5. Pumped-Up Demand
The aforementioned argument also raises the possibility that the Adani Group itself has been purposefully driving up the price of its stock through undue buying pressure from other businesses.
6. Inadequate Compliance
According to the report, one of the companies chosen to manage Adani Green Energy has a history of conflicts with SEBI. Additionally, it appears that one of the independent auditors recruited to examine Adani Enterprise and Adani Total gas is a small business with staff members who are too young to be able to perform the audits of such a broad range of businesses.
7. Shell Companies
According to Hindenburg, several organizations associated with Gautam Adani’s brother, Vinod Adani, transacted with Adani enterprises (and shares) without fully revealing their nature. For those who are unaware, listed corporations are required by law to disclose “related-party transactions.”
These are serious accusations that include:
a) To artificially raise the price of these equities, Vinod Adani dabbled in them.
b) To temporarily improve the financial health of Adani’s publicly listed firms, he used offshore corporations to transfer money from private companies (whose financials might not always be transparent) to those companies.
Additionally, they point out that a lot of Vinod Adani-related organizations lack any telltale evidence of activity, such as reported personnel, separate addresses, phone numbers, and a substantial web presence.
They conclude that these must be fictitious firms (dummy companies) that were exclusively created to commit corporate fraud.
Adani Group’s Reaction
Adani Enterprises announced that it has decided not to move through with its fully subscribed Follow-on Public Offer (FPO), hours after the company’s shares plunged 28.45% to close at 2,128.70 on the BSE.
What is a Follow-on Public Offer (FPO)?
When a firm, which has already been listed on an exchange, offers new shares to investors, it is referred to as FPO. An FPO can be used by businesses to lower debt or obtain additional funds for growth. The billionaire Gautam Adani’s empire has lost more than $100 billion as a result of explosive accusations of accounting fraud as claimed by the US short-seller Hindenburg Research.
The Group then rebutted Hindenburg Research’s accusations point-by-point in its response. Summarised below are a few :
- It rejected any allegations of pricing manipulation or fraud.
- Regarding the issue of over-leverage, it was asserted that because its enterprises have good ratings and are already under government surveillance and oversight, there is little room for fraud at this point. Altogether, promoter leverage is less than 4% of promoter holdings.
- Eight of its nine publicly traded companies are audited by the Big 6; the ninth, Adani Total Gas, is also scheduled to follow the same auditing path.
The rebuttal report from the Adani Group brought up several additional issues. However, they also stated that they will investigate legal options to take corrective and retaliatory actions against anyone who leveled these accusations against the Adani Group.
In response, Hindenburg Research stated that if legal action is taken, they will also demand that several significant papers are made available to the general public and the court system throughout the trial. In other words, Hindenburg has decided to stick by its Adani Report for the time being.
Conclusion
The market value of seven listed Adani Group firms fell by roughly $10.73 billion on January 25, the day following the publication of the Hindenburg report. It should be noted, meanwhile, that no Adani Group entity has ever so far missed a debt payment.
Additionally, the bank debt portion of the Adani Group’s total debt has only decreased (from 86% in FY16 to less than 40% in FY22), which means any possible problems with repayment are less likely to affect the banking system.
The corporation is a leader in infrastructure around the world and is home to well-known products like Fortune edible oil and rice. It is estimated that the group makes about $ 23 billion in total income each year.
