Hindenburg-Adani Row: More Than Meets The Eye

The Hindenburg episode has left mixed outcomes, both for the nation as well as for Adani Group.

It left behind some serious lessons for India on the potential risks in a globalised financial world.

At the same time, there are more questions than answers on the motives behind the bear operation and its potential gainers.

Adani Group deserves applause for a full subscription to the now-cancelled Rs 20,000 crore ($2.43 billion at current exchange) follow-on public offer (FPO) of Adani Enterprises. It reassured foreign institutional investors about the strength of the Indian market.

Failure of the issue could have triggered a pull-out by FIIs, leading to bloodshed in the market and serious hurdles to the Indian growth story. That explains why some quarters were unhappy to see that the issue sailed through.

Having said that, Adani Group deserves criticism for its poor, if not arrogant, public messaging for nearly a week from the publication of the Hindenburg report on 24 January to the cancellation of the FPO on 1 February.

It was not the content of the argument, but the tone of it, which made all the difference. The company forgot that they were dealing with investor sentiment. Chest-thumping and raking up national interest issues didn’t suit the occasion.

The communication disaster was finally corrected by group chairman Gautam Adani’s sober messaging. Unfortunately, by that time the damage was done.

More To It

In 1957, Indian diplomat V K Krishna Menon spoke for a record eight hours at the United Nations defending India’s territorial rights over Kashmir. 

He tried to impress upon the audience that the Indian position was beyond doubt. Former Union minister Natwar Singh remarked in his book that many in the audience wondered why, if the issue was so simple, did it take so long to explain.

It is a matter of debate whether Adani’s 413-page counter to Hindenburg Research LLC helped soothe nerves in the stock market. Having said that, there is little doubt that the importance of the debate raked up by Hindenburg lies in its timing rather than the content.

The valuation debate is not new to Adani stocks. Compared with Gujarat Gas, the price-earning multiple of Adani Total will make heads spin. Screener, the stock analysis and screening tool, flags that despite the correction, the stock is traded 66 times its book value.

Adani Enterprises serves multiple purposes apart from trading. It is the holding company of the group and incubator for new businesses, which are yet to establish steady revenue streams. A mismatch between the trading volume and delivery has been a known issue with this stock.

In the market, higher delivery is indicative of investor buying. Low delivery normally stems from low float, and signifies the play of traders who square off deals during the day for opportunistic gains.

Such trade gives buoyancy to the stock. On the flipside, quick profit-booking by traders let Adani Enterprises' share bleed over the last 10-odd days. Investors are backing the stock. 

According to a media report quoting Ace Equity, as on 2 February, the six-day average deliverable volume declined to 17.79 per cent from 25.21 per cent during 17-24 January.

Notably, Adani wanted to correct this mismatch by taking more shares to long-term investors, who don’t participate in day-trade, through the FPO.

The big question is: Who gained from its cancellation?

The group has a huge array of hard assets. With the Indian economy fully recovered from the pandemic impacts and is the fastest-growing among its peers, the cash boxes of Adani’s ports, airports, power generation and distribution business, coal mines, cement, and so on, will keep ringing.

Who Gains?

Here is a group that operates in scale and controls the entire value chain in the businesses they are present.

Take coal, for example. From mines in India and abroad, export-import trade, shipping to user industry — they are everywhere. 

Adani focused on infrastructure and built a huge empire during the United Progressive Alliance (UPA) era. The infrastructure focus of the Narendra Modi government helped them scale greater heights.

They are just too big to fail, and the decline in share value has nothing to do with business prospects.

Having said that, the Hindenburg episode may leave some peripheral impacts. The cancellation of the FPO and anticipated shelving of the $500 million overseas bond issue plan will delay the declared goals to repay part of the loans.

The decline in market capitalisation, coupled with the downgrading of the collateral value of Adani’s bonds, might hold the group from throwing its hats into new capital-intensive areas. 

This is, however, a temporary impact. Analysts expect the spell to be over in six months to one year. During this period, Adani might prioritise its spending to earn a breather.

The question is, which are those areas and whether they have any implications for the future plans of the group?

The market is abuzz that Adani might slow down on its promised $50 billion foray in green hydrogen, which was potent to create a storm in India’s highly competitive energy sector.

The future will tell us which way Adani takes, but it’s hard to believe that one short seller in some faraway land can launch such a precision attack and have ramifications on the national economy and business space.

A short seller offers to sell shares without owning them. They expect to buy the shares at a lower value to complete the deal at a later date. Such ‘naked short selling’ is not allowed in India, but is legal in the United States (US).

Hindenburg took short positions in Adani Group companies through US-traded bonds and global receipt, and they declared it. Was it enough to cause such damage?

Normally, any bull or bear operation happens in a networked fashion and no one in the Indian market is ready to believe that it’s a simple case of an activist-investor taking on Adani, or India, all alone.

It is up to the country to find answers. It is not known whether the answers will ever reach the public domain. But, for now, the Hindenburg story seems too good to be true. There is surely more than meets the eye.

From that perspective, the bloodshed in Adani stocks is a minor incident. The design might be far more vicious than it seems, as an ace lawyer and ex-Solicitor General of India, Harish Salve, has claimed.