Why are Adani stocks going down now?

NEGI RK Wednesday, February 08, 2023

Why are Adani stocks going down now?

Hindenburg Report on Adani – Here’s What You Need to Know

Scathing allegations, quick rebuttals, legal storms approaching - the Adani Hindenburg Research tussle seems yet to be over. Read on to know more about how things have unfolded

Adani Group

It is one of the largest group of companies in India which specialises in infrastructure projects in coal, ports, cement, green energy and even edible oil. It has made the news in India lately because of its rapid expansion in the cement industry (buying majority stake in Ambuja Cement and ACC Ltd.) as well as news media (buying around 30% shares of NDTV). Its owner, Mr. Gautam Adani has been one of the top 4 richest persons in the world for some time now. The following is a list of a few of the major listed companies that come under the Adani Group –

Hindenburg Research

Hindenburg Research is a US-based research team that offers services in forensic financial research, with a focus on equity, credit and derivatives analysis. Their fundamental research often includes studying and reporting on companies with accounting irregularities, unethical practices in business/related-party transactions, bad management etc. Its primary method for investment is said to be short-selling.

Note: Short selling basically involves borrowing an asset now in order to sell it, only to buy it back at a lower price and then return the borrowed asset. The view taken basically is a bearish one.

Usually they write reports on western companies such as Nikola, Genius Brands, SC Worx etc. However, on 24th January, 2023 they wrote a report on the Adani Group, claiming that the latter were pulling the “largest con in corporate history”. They also revealed that they were holding a short position on the Adani stocks, signalling their belief that the shares are overpriced and will dip in value soon.

Key points in the Hindenburg Research report on Adani

The following are some of the claims made by Hindenburg Research on Adani Group –

Overvalued shares – The report cites data from FactSet and Hindenburg’s own analysis to claim that the Adani shares are highly overvalued by conventional metrics such as P/E Ratio, Price/Sales ratio and EV/EBITDA. Some of the extreme cases include the P/E Ratio of Adani Enterprises being 42 times the industry average and the Price/Sales ratio of Adani Total Gas being 139.3 times the industry average of 1.0x etc.
Debt-fuelled business – 5 out of the 7 key listed companies mentioned have reported a current ratio of less than 1. This means that the total amount of current assets is less than the total amount of current liabilities in those companies. This is not a healthy financial practice as this means that the companies are unlikely to have adequate assets to pay off their liabilities in the short run.
Promoters pledging their stocks – This means that the promoters of the company have taken on additional debt on the basis of the shares that they own. As seen above, the share prices are claimed to be already high and so is the debt – therefore, promoters pledging stocks to take on more debt is not a healthy financial practice in such a context.
Doubts regarding the management team – The report claims that some members of the management have a questionable past which includes allegations of fraud, duty evasions, scams etc.

1.3K views

View 9 upvotes

View 6 shares

Answer requested by

PRIYATOSH MONDAL

Pankaj Dubey

and 1 more