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Adani Group vs Hindenburg Research Report

Madoff's of Manhattan-Adani Group

 

Table of Content

Introduction

Who is Nathan Anderson?

The Hindenburg Research Report on the Adani Group of Companies

The causal effect

Digging Deeper: Understanding the areas of concerns

The Adani Groups response :“Madoffs of Manhattan”

The Hindenburg Response: "Fraud Cannot Be Obfuscated By Nationalism "

Conclusion



 

Adani Group vs Hindenburg Research Report

January 24 2023: The Adani Group, one of India's largest conglomerates, has been embroiled in a controversy surrounding a report released by the US-based investment research firm Hindenburg Research. The report, alleges that the Adani Group's businesses are overvalued and that the group has engaged in fraudulent activities, including money laundering and tax evasion. This lead to rise of Adani Group vs Hindenburg Research Report war. The Adani Group has vehemently denied the allegations made by Hindenburg Research. The company has released a statement saying that the report is "blatantly erroneous" and that it contains "inaccuracies, half-truths, and misrepresentations." The company has also filed a case in India's National Stock Exchange, claiming defamation by Hindenburg Research.



Who is Nathan Anderson ?

Hindenburg Research is a US-based investment research firm that specializes in uncovering fraud and malpractice by companies. The firm was founded in 2017 by Nathan Anderson, a former securities lawyer and hedge fund analyst. He is a seasoned short-seller who has gained a reputation for exposing fraud and unethical business practices in the market.

Prior to founding Hindenburg Research, Anderson worked as an analyst at investment firms, including Silver Creek Capital Management and Gilder Gagnon Howe & Co. His experience in finance and research laid the groundwork for his future. Anderson gained international attention in 2017 when he exposed Chinese bike-sharing company Bluegogo for fabricating user numbers and financial data. His report led to the company's bankruptcy and further investigations into fraudulent practices within the Chinese bike-sharing industry.



Hindenburg The Short-Sellers

Hindenburg Research has gained attention for its short-selling strategy. Short-selling is a type of investment strategy that involves borrowing shares of a company and selling them in the hope that their value will decrease. If the value of the shares does indeed decrease, the short-seller can buy them back at a lower price and return them to the lender, profiting from the difference. Hindenburg Research's reports often trigger a sharp decline in the share price of the companies it targets, allowing the firm to profit from its short positions. Critics of the firm have accused it of being motivated purely by profit, rather than a desire to promote corporate accountability and transparency.

Proponents of Hindenburg Research's short-selling strategy argue that it is a valuable tool for identifying potential risks and opportunities in the market. They point to the firm's track record of uncovering fraud and malpractice by companies, and argue that its reports have led to increased scrutiny of companies by regulators and other stakeholders. In any case, Hindenburg Research's short-selling strategy has proven controversial, with some arguing that it can be used to manipulate the market and harm companies unfairly. The debate over the ethics of short-selling is likely to continue for some time to come.


Hit-And-Miss

Hindenburg Research has gained a reputation for its controversial reports on companies, which often lead to significant drops in their stock prices. While the firm has had some notable successes in uncovering fraud and malpractice by companies, its track record is not perfect.

  1. Nikola report: One of Hindenburg Research's most high-profile reports was its Sept 2020 report on the electric vehicle company Nikola. The report alleged that Nikola had engaged in fraud by overstating its technological capabilities and misrepresenting its business relationships. The report led to a significant drop in Nikola's stock price and the resignation of its founder, Trevor Milton.

  2. Clover Health: Their report on the fintech firm Clover Health in 2021 was challenged by the company and its supporters, who argued that the report contained inaccuracies and misleading statements. Hence, Investors should approach Hindenburg Research's reports with a healthy dose of skepticism and perform their own due diligence before making any investment decisions.



The Hindenburg Research Report on the Adani Group of Companies

The report by Hindenburg Research raises several serious allegations against the Adani Group. It alleges that the group has inflated the value of its assets and that it has engaged in complex financial arrangements to evade taxes. The report also suggests that the group has been involved in illegal activities, such as money laundering and environmental violations. One of the main allegations made by Hindenburg Research is that the Adani Group has inflated the value of its ports and power plants. The report claims that the group's ports are worth far less than the company claims, and that its power plants are not as profitable as the company suggests. The report suggests that the group's businesses are overvalued by as much as $10 billion.

The report also alleges that the Adani Group has engaged in complex financial arrangements to evade taxes. According to the report, the group has set up a network of shell companies in tax havens such as Mauritius and the Cayman Islands. The report claims that these companies are used to transfer money between Adani Group companies, allowing the group to avoid paying taxes in India. The report also raises concerns about the Adani Group's environmental record. The report alleges that the group has violated environmental regulations and has failed to obtain the necessary permits for its projects. The report claims that the group's activities have caused significant damage to the environment, including the destruction of forests and the displacement of local communities. The Adani Group is one of India's largest conglomerates, with interests in ports, power plants, airports, and other sectors. The group has been a major player in India's economic growth story over the past few years, and it is seen as a key player in the country's efforts to become a global economic power. The controversy has also raised questions about the role of investment research firms in uncovering potential fraud and malpractice by companies. Hindenburg Research is known for its critical reports on companies.



The causal effect


The Adani Group & the Capital Market of India

The Hindenburg Research report on the Adani Group, released in January 2023, had an effect on the company's subsequent ADANI FPO (Follow-on Public Offer). The report alleged that the Adani Group had engaged in fraudulent and unethical practices, leading to a sharp decline in the company's stock price in the subsequent days. The Adani group's companies have seen $108bn wiped off their market value after the incident.


Google sheet of Stock Ticker
The sharp fall in the stock prices of the Adani Group of companies from 23rd Jan 2023 to 3rd Feb 2023

Mr. Adani himself has lost $48bn of his personal wealth, and is now 16th on the Forbes real-time billionaires list. Reuters Report 02/02/23(Bengaluru ): Indian shares struggled for direction on Thursday as the week-long rout in Adani Group stocks persisted, erasing $100 billion in market value and hurting sentiment. The Nifty 50 index (.NSEI) closed 0.03% lower at 17,610.40, while the S&P BSE Sensex (.BSESN) rose 0.38% at 59,932.24. Thirty of the Nifty 50 constituents fell in a volatile session in which the index swung between 0.2% gains and 1% losses.


Cancellation of the FPO


1st Feb 23: Mr. Gautam Adani, the founder and chairman of the Adani Group, announced that the company would be canceling its planned FPO (Follow-on Public Offer) even when it was fully subscribed. In a statement, Mr. Adani cited "volatile market conditions" and "global uncertainty" as the reasons for the cancellation of the FPO. He said “The Board takes this opportunity to thank all the investors for support and commitment to our FPO”. “The board felt that going ahead with the issue will not be morally correct,” he said, amid a rout sparked by allegations of fraud in a report by US short-seller Hindenburg Research. Following the news of cancellation of the FPO the shares of the firm nosedived 28.45% to close at ₹2,128.70 on the BSE.


Politics: War of Words

The Hindenburg Research report on the Adani Group caused a political storm in India, with opposition parties seizing on the allegations of financial impropriety and corruption to attack the ruling Bharatiya Janata Party (BJP) government. The report quickly became a hot topic of discussion in the Indian media, with opposition parties calling for a full investigation into the allegations and demanding that the government take action against the Adani Group. The Congress party, in particular, was vocal in its criticism of the government's handling of the issue, and accused the BJP of being complicit in the alleged wrongdoing by the Adani Group. Congress leader Jairam Ramesh has hit out at Gautam Adani. "Adani speaking of being morally correct is like his Prime Mentor preaching virtues of humility, sobriety and large-heartedness. This is ENTIRE political science," he tweeted. (Source: twitter; #gautamadani #jairamramesh #adanistockcrash).

The BJP government, for its part, dismissed the allegations as baseless and politically motivated, and defended its relationship with the Adani Group as being based on purely business considerations. The government also accused the Congress party of using the issue for political gain, and of trying to derail the country's economic growth Prime Minster Modi said, "It is unfortunate that some people's behavior and language not only disappoints the house but also the whole country." He ignored continuous heckling from the benches, which included slogans like "Modi-Adani bhai." ."Keep mudslinging, the lotus will bloom even more," boomed the prime minister



Digging Deeper: Understanding the areas of concerns


Valuations:

“Upbeat assumptions on revenue growth and operating margins”, yields a value of just about Rs 947 per share.

Valuation guru, Aswath Damodaran feels the share price of Adani Enterprises was over stretched when it was valued at $53 billion. According to him, the stock even with “upbeat assumptions on revenue growth and operating margins”, yields a value of just about Rs 947 per share. (Source: Financial Express)

There have been concerns in the market about the overvaluation of the Adani Group of companies, following a significant increase in the company's stock prices in recent years. Some analysts have suggested that the stock prices may not be supported by underlying fundamentals, and may be the result of market speculation and hype.


Bar Charts of Adani Grp against its Top Nifty50 companies

(Source: Screener.in)


Cluster column charts of stocks current ratio
Current Ratio of Adani Grp Visa Vis Industry Peers

(Source: Screener.in)


One factor contributing to the overvaluation concerns is the rapid expansion of the Adani Group's business interests in recent years. The company has diversified into a wide range of sectors, including ports, logistics, renewable energy, and mining, which has led to questions about the company's ability to manage and sustain such a broad portfolio.


Risk to lenders from exposure to Adani Group


The Adani Group has been the recipient of significant loans from both public and private banks in India and outside the country, as well as non-banking financial companies (NBFCs). The company has a diverse portfolio of businesses that includes infrastructure, power, mining, and ports, among others, and has leveraged its size and reputation to secure substantial financing from a variety of sources.

In fact, Adani conglomerate may be among the most leveraged groups in India, with promoters and investors pledging shares worth Rs 36,027 crore, according to data from National Stock Exchange.


In India, the Adani Group has secured loans from major public sector banks, including the State Bank of India, Punjab National Bank, and Bank of Baroda. The company has also borrowed from private banks such as ICICI Bank and HDFC Bank, as well as NBFCs. These loans have been used to fund the company's various expansion and acquisition plans, including the purchase of airports and renewable energy assets.

Bloomberg report citing sources stated that SBI has given loans of as much as Rs 21,000 crore ($2.6 billion) to Adani Group firms.

Financial Express reports: Public sector lender Bank of Baroda has also said that its total exposure to Adani group stands at Rs 7,000 crore, which is fully secured. Another PSU bank Punjab National Bank has a Rs 7,000 crore exposure to Adani conglomerate.


CLSA said in a recent report that Indian banking exposure is less than 40% of total Adani group debt. Within this, private banks’ exposure is below 10% of total group debt, and most banks, including ICICI Bank and Axis Bank, have indicated that they have largely financed assets with strong cashflows, such as airports/ports. PSU banks do have material exposure at 30% of group debt, but this debt has not increased in the past three years. Most of the incremental funding to the group for new businesses and acquisitions has come via overseas sources. “To conclude, the ballpark exposure of private banks is 0.3% of FY24 loans and 1.5% of FY24 networth. For PSU banks, the exposure is 0.7% of FY24 loans and 6% of FY24 networth,” CLSA said.


India’s banking sector has been one of the hardest hits by the collateral damage from the sharp correction in the Adani group stock.

SocGen (Société Générale) estimated that Indian banks’ loan exposure to Adani was close to $10 billion, just 0.6% of total banking sector loans at nearly $1.5 trillion.

The effect was seen on the subsequent days in the market with correction in India's Nifty Bank index (.NSEBANK) lost as much as 7.7% to hit its lowest in three months.

Outside India, the Adani Group has secured loans from major global banks such as Standard Chartered, Barclays, and JP Morgan, among others. These loans have been used to fund the company's overseas acquisitions, including the purchase of coal mines in Australia and the development of a port and logistics hub in Myanmar.

While the Adani Group's ability to secure significant financing has been seen as a testament to its size and reputation, it has also raised concerns about the level of risk associated with the company's borrowing.




The Adani Groups response: “Madoffs of Manhattan”


The Adani Group responded strongly to the Hindenburg Research report, called it "calculated attack on India", and call the company “Madoffs of Manhattan”. In the response report they alleged the company had engaged in fraudulent and unethical practices. In a statement, the Adani Group called the report "blatantly erroneous" and accused Hindenburg Research of engaging in a "malicious" campaign to damage the company's reputation. The Adani Group refuted the specific allegations made in the report, which included claims of inflated power prices, insider trading, and tax evasion. The company stated that it was in full compliance with all app liable laws and regulations, and suggested that the allegations were based on "selective and incomplete" information. In addition to its public response, the Adani Group also launched a legal challenge against Hindenburg Research, alleging defamation and seeking damages. The company claimed that the report had caused significant harm to its reputation and business prospects, and that Hindenburg Research had engaged in a deliberate campaign to spread false information. Overall, the Adani Group's response to the Hindenburg Research report was forceful and assertive, reflecting the company's determination to defend its reputation and push back against what it saw as baseless and malicious allegations.




The Hindenburg Response: Fraud Cannot Be Obfuscated By Nationalism


Hindenburg Research said, "Fraud Cannot Be Obfuscated By Nationalism" in a issued statement defending its findings and accusing the company of attempting to deflect attention from the allegations of fraud and misconduct. In its statement, Hindenburg Research rejected the Adani Group's claims that its report was based on misinformation and anonymous sources. The firm reiterated that it had conducted extensive research and due diligence, and that its findings were supported by publicly available data and interviews with insiders. Hindenburg Research also accused the Adani Group of engaging in a campaign of harassment and intimidation against the firm, including attempts to uncover the identities of its anonymous sources. The firm suggested that the Adani Group's response was part of a broader pattern of attempts to silence critics and stifle dissent. Overall, Hindenburg Research's response to the Adani Group's statement was defiant and unapologetic. The firm appeared to stand by its allegations and its methodology, and suggested that it was prepared to continue its investigation into the Adani Group and other companies that it believed were engaged in fraudulent or unethical practices.



Conclusion


The field of investment is always going to be a matter of debate. Hence, it is upon the judgement of the individual investors to studies every company financial report and forensic reports with an unbiased attitude. The full effect of the Hindenburg Research report on Adani Group and subsequently on the Indian Economy is yet to be seen. With the present geo-political tensions, inflations and horrible situation of the job market. This research report couldn’t have chosen a bad time then now. Our market is already under pressure from FIIs. The FIIs have been a net seller in this fiscal year till date. Thanks to the contribution of the DII’s and retail investors, the market is putting up a brave face.


Line Chart of FII investment/sales in India for last 5 Fiscal Years
Data source: Moneycontrol

The regulatory bodies (SEBI etc.), have been trying best with new updated frameworks, educational info’s. to reduce the any loss made by the investors. But, at the end of the day, it’s us the investors have to be smart and educated to take the right decisions. We do have to understand that Financial forensic agencies like Hindenburg Research is also a business house. And for any business to run it has to be profitable. But, this doesn’t mean that we should rule out and discard their findings. They have a healthy hit rate of around 60%. So, we do have to respect their findings with a pinch of salt. Till things aren’t proved as alleged no one can declare Adani Group of any wrong doing. We also have to respect that fact that Adani Group of companies have been the driving force behind the sharp rise of our market during the last few years. So, whatever is your personal outlook, I am asking you to consider both sides of the narratives before coming to a final conclusion.

 

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8 Comments

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Guest
Mar 26, 2023
Rated 5 out of 5 stars.

Its right, Adani grp is over-valued. But, we cannot rule out the true intentions of a short-seller. They do track companies to square off their positions. Its their business model.

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Saugata Dastider
Saugata Dastider
Mar 26, 2023
Replying to

Very true. I do agree. It's the business of any short selling fund house. But, this doesn't mean we can rule out the financial red flags of Adani group too. It's high time for retail investors to be educated before investing. So, any information must be evaluated with a pinch of salt.

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Guest
Mar 08, 2023
Rated 5 out of 5 stars.

I can tell you put a lot of work into this

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Saugata Dastider
Saugata Dastider
Mar 26, 2023
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Sure did. Thanks for the recognition

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Guest
Mar 08, 2023
Rated 5 out of 5 stars.

Quite an extensive research!

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Saugata Dastider
Saugata Dastider
Mar 26, 2023
Replying to

I tried my best. Tanks again for those words of encouragement.

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Guest
Mar 08, 2023
Rated 5 out of 5 stars.

Well done on the research 👍

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Saugata Dastider
Saugata Dastider
Mar 26, 2023
Replying to

Thank you for your kind words.

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