All you need to know about the Hindenburg-Adani ping pong match.
By now, you might have heard about the tanking shares of the Adani firms. And how Gautam Adani, who was recently the second richest man in the world, has now dropped to the 15th position in the Forbes’ list of the world’s wealthiest. All over a week.
It began with a list of allegations by Hindenburg Research – a US-based short selling activist firm – on January 24, and a lot of subsequent back and forth between Adani and the organisation.
The Adani Group has likened the stock bloodbath to the Jallianwala Bagh massacre. In its response spanning over 400 odd pages, the group said the report was “a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India”. Adani also questioned the timing of the report – it came just before the Rs 20,000 crore-FPO for Adani Enterprises, the flagship company of the group. The initial response to the follow-on public offer was lukewarm, but on the last day, qualified institutional investors and high networth individuals rallied behind Adani. And Viola! The FPO was fully subscribed even though retail investors stayed away. But on February 1, Adani Enterprises called off the FPO and decided to return the money to investors, amid pressure over the Hindenburg report.
But what were the key allegations in the report and Adani’s response? Let’s look at five core themes.
Hindenburg is a short seller. Short sellers look to make gains if stock or bonds prices of a company fall in future. In Adani’s case, Hindenburg believes that the stock prices of the listed companies are overvalued by 85 percent. It has taken a short position on US-traded bonds and derivatives of Adani. If their prices drop as predicted by the research firm, Hindenburg will make money. It’s not illegal.
There are various metrics to understand if a stock is overvalued or undervalued. One of them is the share price to earnings per share ratio. This table shows the P to E ratio of seven Adani-listed companies.
For example, Adani Green Energy’s ratio is 815 times while the industry average is 24 times. This means that the share is highly overvalued. Only Adani Power’s P to E ratio is close to the industry average.
Debt and public shareholding
The Hindenburg report shares this table.
The only thing to be noted is the current ratio, which is current assets divided by current liabilities. A ratio of less than 1 is a cause for concern. This means that a company has to rely on debt to meet its working capital. Current ratio of four of the listed firms is below 1. The lowest is for Adani Total Gas at 0.2. Another column shows the net debt to earnings before interest, taxes and depreciation ratio. Four companies’ debt to Ebitda ratio is more than industry standards.
In response, the Adani Group says, “The leverage ratios are healthy and in line with the industry benchmarks of the respective sectors.”
The bar chart above in the Adani response shows that earnings are growing at a faster pace than the growth of debt. It also says that it has diversified its long-term borrowings. The shares of private banks and PSUs have come down.
One of the PSUs is LIC, which is the single largest non-promoter shareholder in five Adani companies. The life insurer has increased its share in Adani Group of companies over the years. Its total investment stands at $4.47 billion. Since the report, its early gains have been eroding with the rout of Adani group shares.
Now, back to diversification of debt. This is a normal course when a big company grows. For example, Reliance Industries undertook a similar exercise in 2020.
This allegation primarily covers offshore entities in tax havens and tainted stockbroker Ketan Parekh.
The SEBI rules say that promoter groups can not hold more than 75 percent of shares while the remaining 25 percent should be for the public. The idea behind this rule is that if shares are held only by promoters or insiders, the chances of stock manipulation increase. For example, they will be the first one to make money when stocks rise and pull out when prices drop.
Hindenburg has listed four companies and their shareholding pattern. Promoter groups hold 74.19 percent in Adani Transmission, 72.63 percent in Adani Enterprise, and so on and so forth – all slightly below the 75 percent threshold.
So far so good.
But it gets murkier when Hindenburg points out that “a large portion” of the public shareholding is held by funds based in “the opaque jurisdiction of Mauritius”. Nothing wrong, anybody can buy shares. But Hindenburg claims that these Mauritius funds are related to Gautam Adani’s elder brother Vinod. And why are these funds investing only in the Adani group of companies? This table throws more light on Hindenburg allegations.
So effectively, these companies breach the 75 percent threshold in violation of the SEBI guidelines.
Adani’s response was that they are under no obligation to check who buys or sells company shares. “A listed company does not have nor is it required to have information on its public shareholders and investors.”
The report also features Ketan Parekh. Hinderburg alleges that Adani promoters aided Parekh in manipulating stock prices of Adani group. It quotes a 2007 SEBI order: “The charges leveled against promoters of Adani that they aided and abetted Ketan Parekh entities in manipulating the script of Adani stand proved.” Adani Group told SEBI that it dealt with Parekh to finance its Mundra airport. The report alleges that Adani’s explanation “suggests that share sales via stock manipulation somehow constitutes a legitimate form of financing”.
Adani said the matter was settled after payment of penalties by 14 Adani group entities in 2008. SEBI had earlier debarred the 14 companies from accessing the securities market.
And finally, auditors
For a conglomerate as big as Adani Group, one would expect the Big Four or Six companies to audit their books. But Hindenburg has found that one little-known audit firm, called Shah Dhandharia, was also an auditing partner. It says Adani Enterprises and Adani Total Gas’ annual audits were signed off by youths “fresh out of school”. “They were 23 and 24 years old when they started approving financials,” it alleges.
The now defunct website of Shah Dhandharia and Co shows four partners. And three of them are in their late 20s. One of the CAs, Shubham Rastogi was just 23 when he first signed the Adani Gas financials. Another CA, Ankit Ajmera, was just 24 when he first approved the books of Adani Enterprises. Hindenburg claims that the auditor’s office is located in Ahmedabad and pays Rs 32,000 monthly rent. It claims that the only other listed company Dhandharia audits is a penny stock firm with market cap of Rs 64 crore.
In its rebuttal, Adani claims that all auditors are duly certified and qualified, and Hindenburg’s findings are not new. The group says it has 35 auditing firms, including Big Six, for Adani Enterprises. But it is silent on Adani Gas. On parterning with Dhandaria, Group CFO Singh asked, “Do you think we have no responsibility to develop Indian vendors.”
There are other allegations too, including past cases of over-voicing of imports and signing contracts with related companies. One example is PMC Projects. The firm has generated Rs 63 billion since 2010. The report claimed that most of its revenue came from Adani Group and the two were linked. “We found no disclosure of PMC Projects being a related party to Adani,” Hindenburg alleges. “A 2014 DRI investigation called PMC Projects a ‘dummy firm’ for Adani Group. Given that constructing major projects is Adani’s business, is PMC Projects in fact just a dummy firm?” reads one of the 88 questions in the report.
PMC Projects has no website and its staff claimed to be associated with the Adani Group, the report alleges.
Adani, in its response, said the Directorate of Revenue Intelligence termed the allegations false in 2017. “It can be clearly concluded that the allegation that PMC was managed and controlled by Adani portfolio through its entity MEGPTCL is unsustainable for the reason that the price was arrived at arm's length,” Adani said.
But why were all seven listed Adani companies in red on Wednesday, even as the FPO was subscribed cent percent?
A financial analyst, who has been tracking the market for three decades, said that there is still fear among investors. “Though the FPO has been fully subscribed, there is fear among investors that the issue may not have genuine subscription. It may have been through friends and associates. But the fear could be baseless also. Financial markets basically run on perception, greed and fear both, rather than fundamentals,” he said, just before Adani Enterprises called off the FPO.
But, he believed, Adani Group has enough in its tanks to weather the storm. “I think the group has enough assets in the form of ports, airports etc. Short-term valuations may seem stretched. True, these assets may not generate immediate revenues but infrastructure businesses take time.”
On the reason for calling off the FPO, group chairman Gautam Adani said that “going ahead with the issue would be morally incorrect”. The FPO price band was set at Rs 3,112 to Rs 3,276. On January 31, the last day of the FPO, Adani Enterprises shares closed at Rs 2,948 apiece, meaning it was cheaper to buy them in the secondary market than through FPO.
On budget day, while the media kept a close watch on market trade, Adani Group firm shares continued to decline. Between January 25 and 31, the group’s market cap eroded by 29 percent, and Adani Total Gas, Green Energy and Transmission were the worst hit.
About the possibility of corrections to those share prices, picture abhi baaki hai.
Update at 12.35 pm, Feb 2: This article and its headline have been updated with details about the Adani Group’s decision to scrap its FPO.