Bloodbath in Adani stocks: The Hindenburg saga leaves the darlings of Dalal Street on tenterhooks

The Adani Group stocks made headlines in 2022 for delivering massive returns and establishing the group's chairman, Gautam Adani, as the world's second-richest person—the first Asian to break into the top three. Additionally, the new entrant in the group, Adani Wilmar, emerged as the best-performing IPO last year and also topped the FMCG chair, dethroning HUL.

Adani stocks have also dominated the headlines this year, but not for good reasons. The seven listed Adani Group stocks led to a bloodbath on Dalal Street last week following the Hindenburg Research report claiming that the Indian giant had participated in a clear stock manipulation and accounting fraud scheme over decades.

The report was released on January 24. Within a day, the market cap of seven listed stocks fell by Rs 88,000 crore. The following trading session on Friday saw the stocks losing about Rs 3 lakh crore in market value, and the sell-off in stocks extended to Monday's trade and shaved off another Rs 1.37 lakh crore in market cap.

In 2022, the market cap of Adani Group companies jumped Rs 7.82 lakh crore or 75 percent to Rs 18.23 lakh crore from Rs 10.41 lakh crore at the end of December 31, 2021. However, the group lost Rs 5.27 lakh crore in market valuation in just three trading sessions or 67.39 percent of the value created in 2022.

During the course of the last three trading days, Adani Total Gas was the worst hit with a loss of Rs 1,68,922 in market cap, followed by Adani Transmission, Adani Green Energy, and Adani Enterprises with a drop of Rs. 1,15,849 crore, Rs. 1,13,287 crore, and Rs. 59,846 crore, respectively.

Notably, the loss of Rs 3 lakh crore in the market cap of group companies occurred on the same day as the group's flagship firm, Adani Enterprises, launched India's biggest-ever FPO (follow-on public offering). The sell-off in the stocks also dented investors' sentiment towards FPO.

According to exchange data, the FPO saw a muted response from investors. On Day 1, only 1 percent of the issue got subscribed –  4.7 lakh shares of the 4.55 crore shares on offer. Adani Enterprises is selling shares in a price range of Rs. 3,112 to Rs. 3,276. On Monday its share price closed at Rs 2,892, much below the price band of the FPO.

As stocks tumbled, India's and Asia's richest billionaire, Gautam Adani, slid to the eighth spot in the global rich list.

Despite a sharp drop in Adani's net worth, he is still two positions ahead of his business rival, Mukesh Ambani, the chairman of RIL, who is ranked 10th on the rich list with a fortune of $84.1 billion.

What are the allegations against Adani Group?

US-based Hindenburg Research came out with a 32,000-word report and asked the Adani Group 88 questions. The 100-page long research report contains seven parts, with allegations from violation of SEBI exchange rules to skyrocketing valuations.

According to the report's opening statement, "We present what we believe to be one of, if not the, most severe cases of corporate fraud in history."

Firstly, the report claimed that Gautam Adani, the founder and chairman of the Adani Group, has increased his wealth enormously to $120 billion by adding $100 billion in just three years. 

The report claims the reason behind the wealth surge was mostly due to a rapid increase in the stock prices of the group's seven most prominent publicly traded companies, which climbed by an average of 819 percent during the last three years.

Who owns the most?

According to SEBI regulations, 75 percent of shares in a company can be owned by promoters. And just around the threshold is roughly how much ownership the Adani promoters have in the group. As a result, the promoters profit greatly from a rapid surge in share prices.

While most of the rest 25 percent of the shares are held by the Foreign Institutional Investors, DII's stake in the group companies was 6 percent.

Mauritius-based entities like APMS Investment Fund, Cresta Fund, LTS Investment Fund, Elara India Opportunities Fund, and Opal Investments collectively and almost exclusively hold shares in Adani-listed companies, totalling almost U.S. $8 billion.

Interestingly, the report stated that London-based Elara Capital Plc, which operates the Mauritius-based India Opportunities Fund, had a total market value of about Rs. 246.36 billion (U.S. $3.04 billion), out of which Rs. 243.35 billion (U.S. $3.01 billion), or 98.78 percent, was invested in 3 Adani stocks.

Elara Funds held 3.62 percent of the equity of Adani Transmission, 1.62 percent of Adani Total Gas, and 1.6 percent of Adani Enterprises, the report said citing the most recent data.

Why does Elara Capital have such faith in the equities of the Adani Group?

It was reportedly revealed to Hindenburg by a former Elara dealer that Adani controls the shares. Intentionally designed to hide their beneficial ownership is how the funds are structured, he said, as per the report.

Further, the report stated that four Adani listed companies are on the verge of delisting due to highly disclosed promoter (insider) ownership. Stocks including Adani Enterprises, Adani Transmission, Adani Power, and Adani Total Gas all report having 72 percent or more of their shares held by insiders.

Furthermore, Adani Wilmar, a new company with current insider ownership of 87.94 percent, must reduce its insider holdings to 75 percent by early 2025 to meet these requirements—a significant feat requiring the offloading of 12.94 percent of its current insider equity, said Hindenburg.

'Fundamentals are missing'

Any product that needs to be purchased has an MRP, and nobody wants to pay more than that. Similarly, to this, stocks are assessed using metrics like the price-to-earnings ratio and the PE ratio to determine how expensive or undervalued they are compared to their peers. In the Adani Group case, all seven listed firms are overvalued by more than 85 percent, it said.

Infrastructure firms are generally relatively sleepy, with low growth and low multiple enterprises, yet the valuation metrics of the Adani listed companies are comparable to the frothiest of high-growth tech companies, the report highlighted.

‘The debt mountain’

The report claimed that 4 out of 7 Adani entities have negative free cash flow, indicating that the situation is worsening.

A company’s ‘current ratio’ is a measure of liquid assets less near-term liabilities. Five companies in the group (all but Adani Ports and Adani Wilmar) have current ratios below 1.0, suggesting a heightened short-term liquidity risk, it added.

In addition to the debt bubble, the promoters used inflated stock prices and pledged portions of their equity as collateral for loans, placing the group's overall financial situation at risk, it added.

Beyond explicit leverage, "we strongly suspect there may be additional, hidden leverage within the Adani empire in the form of pledges on the undisclosed shareholdings," said Hindenburg.

‘A large business empire controlled by a few’

The Adani Group has been managed by the family since its formation. Beyond Gautam Adani, the Adani Group’s 22-person leadership team features at least eight members of the Adani family.

Hindenburg alleged that the family members of the Adani Group have been involved in export and import scams involving diamonds, iron ore, coal, and power equipment, and these were some of the early building blocks of the Adani business empire, according to multiple investigations by the finance ministry´s anti-smuggling unit and other national and state-level investigative authorities.

'Accounting fraud'

Hindenburg discovers a pattern in which capital is transferred from offshore entities to private Indian companies within the Adani empire, frequently through undisclosed related party transactions in apparent violation of the law, and then to publicly traded companies.

At that point, the report claimed that the capital was being used to engineer Adani’s accounting by bolstering its reported profit or cash flows or cushioning its capital balances to make listed entities appear more solvent or creditworthy.

Adani's seven key listed companies have a total of 578 subsidiaries, some of which are incorporated in notoriously opaque jurisdictions including Mauritius, Panama, and the UAE, according to the annual reports of the conglomerate, it said.

These seven listed entities collectively engaged in a staggering total of 6,025 separate related-party transactions in the fiscal year 2022 alone, per BSE disclosures.

Away from Adani Stocks

At the end of December 2022, domestic mutual funds had over U.S. $180 billion of equity & growth-related assets under management. Yet despite Adani listed companies featuring in domestic and overseas indices, no active local fund owns Adani Green, Adani Enterprises, Adani Total Gas or Adani Transmission above 1 percent of equity, according to shareholding disclosures, the report underscored.

CreditSights raised concerns about Adani's group debt in 2022

Similar to the Hindenburg allegations, rating agency firm CreditSights, a Fitch Group subsidiary, said the group was "deeply overleveraged" in August last year.

The agency, in the report, pointed out that the group is investing aggressively across existing as well as new businesses, predominantly funded with debt. Over the past few years, the Adani Group has pursued an aggressive expansion plan that has pressured its credit metrics and cash flows, the report said.

However, the rating agency admitted a month later that it had discovered a calculation error in the debt report, softening the tone of Adani Group's debt.

War of Words

The Adani Group dismissed the report and said, "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."

On Sunday, in response to Hindenburg research allegations, the Adani Group released a 413-page response, in which the group said of the 88 questions raised by Hindenburg, 65 of them relate to matters that have been duly disclosed by Adani portfolio companies.

“Of the balance 23 questions, 18 relate to public shareholders and third parties (and not the Adani portfolio companies), while the balance 5 are baseless allegations based on imaginary fact patterns,” the group added.

Hindenburg Research on Monday said “Adani failed to specifically answer 62 of our 88 questions. Of the questions it did answer, the group largely confirmed or attempted to sidestep our findings.”

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