What is Adani vs Hindenburg Research?
The news is out, and so are the repercussions of the news.
Hindenburg Research’s report on the Adani group has set the Indian stock market on fire, causing 108 billion dollars to be wiped out of Adani’s market share in just over a week’s time. Mr Gautam Adani, until a few weeks ago, was the second richest person and now has fallen to seventeenth richest with a net loss of 2.3 billion dollars. So, how did this happen?
Hindenburg Research is a short-selling company that makes money when a company’s stock price falls. It has shorted Adani’s bonds (equivalent to stocks) and hence, is waiting for the price to fall to make money.
Wait! How does that work? How can you make money when something loses value?
Making money when a company’s stock value falls is known as shorting. Traditionally, one buys a stock in the hope that its price increases in future. Considering purchasing stock as +N (where N is no.of stock being purchased example +1/+20/+100 etc) and selling it stock as -N.
In the traditional case, it is,
Purchase +N (+10)
Sale -N (-10)
Net 0 (+10-10=0)Whereas in shorting, it is the opposite. One sells first in anticipation of stock price falling. So, it is
Sale -N (-10)
Purchase +N (+10)
Net 0 (+10-10=0)The net sum of both trading techniques is 0, but the way the trade is done is the opposite.
Back to the case
Hindenburg says that Adani is using shell companies (companies that exist only on paper – like my ideas) artificially inflate the price of the stock.
How? Vinod Adani (Elder brother of Gautam Adani) kinda owns a lot of companies in tax heavens (basically company’s Goa/Vegas where there are little to no accountability of companies) that invest in Adani group companies and thus create a demand for the stock, thereby increasing the price (Supply and Demand – I need the apple, my friend needs the apple, so the shopkeeper says whoever pays more will get the apple). ,
What’s wrong with this? If Gautam Adani’s brother won’t invest in his brother’s companies, then who will? Well, technically, yes, but no. There’s a rule set by SEBI (Indian market regulator) that every publicly listed company should have at least 25% shares for investors (you, me, mutual funds, anyone literally), but now since Vinod Adani’s companies are investing in Gautam Adani’s companies, it’s like the family holding more ownership in the company thus reducing the public shareholding to less than 25% which is wrong.
Wait. Just this has caused a fall in Adani’s share value. Not entirely. Hindenburg also claims that the Adani company has been involved in money laundering and corruption, among many others, which is why it says the Adani group’s value is all artificial and manipulated. Hindenburg has played the card of short-selling previously on companies such as Nikola (Nikola's valuation fell from 34 billion dollars to 1 billion dollars after Hindenburg's report), which is why people, institutions, governments, you and I are discussing it.
Is it true?
Adani companies did raise a lot of money in recent years. Their business expansion is a result of their debt funds (borrowed money essentially – like startups how they use VC’s money to find new customers), but the Adani group of companies are in-charge of some of India’s biggest infrastructures such as the Mundra Port and eleven other ports(Valued at 12 billion dollars and an income of 580 million dollars/annum), Mumbai Airport and six other airports (Valued at 1+ billion dollars), four thermal power plants, and also a coal mine in Australia.
I could be wrong with the valuations of the companies, but the takeaway point is that they have a high number of well-performing assets that will only make more revenues in the future.
How? India’s aviation sector is the third largest and is poised to stay within the top 3 for the next 20 years (Airbus says so, not me), and Adani has a lot of airports. India is the fifth-largest economy and is poised take enter the top 3 in a decade. In fact, India’s GDP is predicted to grow by 6.9% (World Bank), while most of the world is heading into no growth or negative growth.
There is going to be huge consumption within India, and Adani has a hand in a lot of domestic sectors, from energy (fossil fuels to green energy to transmission) to FMCG (daily consumables such as biscuits and oils) to airports to just ports.
Financially, they should be able to repay their debts. It is more a question of when rather than if. A lot of global companies have purchased debt bonds issued by Adani – France’s Total Energy, America’s BlackRock, Apollo, Multinational Banks such as Barclays, Deutsche Bank, Standard Chartered and Mizuho, and UAE’s International Holding Company, among many others apart from Indian public sector banks (State Bank of India, Union Bank of India), Indian public sector companies (Life Insurance Corporation of India) etc.
All these companies must have done their due diligence, or were they also like – let Adani inflate the stock price artificially, but it’s fine as long as we get our money back in time? A fun fact that I read is 60% of Adani's debt exposure is international, and only 40% is domestic (Indian banks and companies).
I still have two questions remaining (feel free not to answer):
1. To Hindenburg: You as a company could have five employees and come up with such a big breakthrough, but why can’t Adani have a company of eleven employees audit them?
2. To Adani: How did you get hold of some many assets in such a short span of time?
I could be entirely wrong, and Adani as a company could stop existing, but I hope it doesn’t happen, not due to the love for Adani as a company but due to the assets they have – they are going to be important for emerging India, an India to steer a population of 1.4 billion-plus.
PS: This article is a piece of my mind collated from various sources I read, videos I watched, discussions I had, and opinions I have. This is definitely a piece of information but definitely not a stock recommendation.
Cheers,
arc.