Adani Hindenburg Row : Indian Conglomerate vs US Corporation

Untill now, most of us would have heard about this tussle. Here, I will try to summarise the events happened till date.

The Incident

Beginning with, Hindenburg Research, a US based corporation came up will a report claiming of financial fraud by Adani Group. It came up with a series of tweets dating back to year 2000 of various related party's involved in scams and shady practices under the Adani family. Transactions like creating shell companies, money laundering, accounting loopholes allegedly used by Adani group to jack up the prices of the listed entities were mentioned by Hindenburg.

The timing of report couldn't be more wrong for the Adani group as it came with a FPO (follow on public offering) of Rs. 20,000cr ($2.5 billion) at Rs. 3,112-3,276 for its flagship company Adani Enterprises (NSE: ADANIENT). As soon as the report gained traction, the shares of all listed companies went haywire. The stocks started cracking in range of 10 to 20% in a single day. And have this, such a deep fall for a NIFTY 100 companies is not a common case. Last this happened during covid crash of 2020.

Fund Raising Went South

Now Businesses in which Adani conglomerate operates which range from airports to transmission, are quite capital intensive. Hence to fund these projects huge loans were taken from various institutions like banks, and other global companies in US. With interest rates rising, it was a sensible move to go for a FPO to reduce debts of the company.

Now, the most critical point was the valuations of Adani group companies. Most entities are trading at crazy high valuations. PE (Price to earning) ratio of companies in are quite high compared to peers.

There are also allegations that Adani Groups projects are highly related to govt contracts. Various rules and regulations were tweaked in order for a new player entry to be entertained be it largest green energy contract in the world worth $6.5 billion or airport privatization or data center for localization of India's data. Due to these relations, retail investors bet big and hence price of adani stocks kept on rising post covid crash. Returns range from 400% to 10,000% in last 3 to 5 years. Hence the group saw an exponential rise in the valuation to more than $200 billion.

Now, as we all know, price is decided by a simple rule of demand and supply. Almost all Adani cos have high promotor holding of around 75%. FII (Foreign Institutional Investors) and DII combined hold approx 20%. Hence leaving hardly 5% to retail public. With demand being driven via media and various contract wins and the RELATIONS, prices sky rocketed.

Hindenburg case is based on the fact that the FIIs holding Adani shares are present in tax havens countries and are supposedly shell companies of Adani family created to reduce the free float shares. With all these news inflow, all stocks crashed more than 50%. FPO was barely subscribed and price of FPO was almost 33% higher than current stock price. Hence, Gautam Adani came forward and withdrew the FPO which was quite an ethical move in all regards.

Since Hindenburg is a US based entity, so it had built significant short position in US dollar bonds of Adani group. Bonds also started crashing as serious concerns were raised on the group's ability to repay the debt as levels of debt the company held are also quite high compare to peers similar to PE ratio. Similarly, Indian banks also followed same path. SBI, HDFC bank, and all others saw price erosions.

The Clean Up

To protect investors interest and addressing the stocks price crash, adani group came up with a series of responses. They pre-paid U.S dollar coupons (bond payments), announced hiring of BIG4 companies for a full on forensic reports on the fundamentals of the companies. LIC which was the largest domestic institution investor came up with a report on the holding in the group to assure investors. SBI, the largest Indian lender said the total exposure in about 0.8% of the total loan book to the group. RBI had to announce a circular assuring confidence in the Indian banking system.

My Strategy

Amongst all the listed companies in the group, I was an investor in Adani ports and sez ltd (NSE: ADANIPORTS)and ambuja cements (NSE: AMBUJACEM) . With Make in India, PLI schemes and other govt initiatives, exports from India are going to rise signifantly. Hence, Adani ports which manage 90% of private ports available at a PE of 18 is really cheap. And I am a shareholder in ambuja cement long before it was acquired by Adani due to its growth and fundamentals.

One should also see that although valuations are steap of companies, but growth is also happening in high double digits year on year. Based on your risk appetite, one can take position in the stocks.

In case you cannot handle such volatlity and track markets, do check out my blog for passive investing