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Adani attack puts focus on valuation concerns – and activists’ motives

An explosive report by activist short seller Hindenburg Research led Adani Group to shelve a planned US$2.5 billion equity sale and wiped $120 billion from the multinational conglomerate's market value. While activist short reports should be taken with a grain of salt, market observers said, some of Hindenburg's key claims are likely valid - including that Adani was vastly overpriced.
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Hindenburg Research’s blistering short report on Indian multinational Adani Group is a pertinent reminder of the contentious role short sellers play in policing public companies and of the dangers of market exuberance.

The US-based short seller said Adani, which has seven listed companies bearing its name, “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades”. Hindenburg disclosed that it is short Adani Group companies via bonds and derivatives, meaning it will profit as the assets fall in value.

Adani countered with a 413-page rebuttal calling the report malicious and a “calculated attack on India”. In response, Hindenburg said Adani failed to answer many of its questions. 

  • Since the initial report was published January 24, the Indian conglomerate has had US$120 billion collectively wiped from its value, equal to more than half its original market capitalisation.

    Owned by billionaire Gautam Adani (pictured) – briefly the world’s second richest person and reported to have close links to India Prime Minister Narendra Modi – Adani Group has operations spanning infrastructure, renewables, energy, mining and utilities.

    Questionable claims

    Amongst several allegations, Hindenburg claimed overseas shell companies affiliated with or controlled by the Adani family have been used to inflate share prices. This could also breach India’s listing rules, which require 25 per cent of shares in a company to be free-float.

    The shell companies are used to move assets and launder money to obscure the financial health of the conglomerate, Hindenburg alleged. The short seller also noted the use of inexperienced auditors in addition to large levels of debt that could leave the broader conglomerate at risk.

    In a blog post, New York University finance professor Aswath Damodaran said it’s not uncommon for infrastructure firms to hold significant debt but that Adani’s low operating income relative to interest repayments is concerning, as is the group’s size. He commended Hindenburg’s work but said it relies on a mix of “serious contentions, circumstantial evidence and questionable claims”.

    “To be able to manipulate and move the market capitalisation of a company by a hundred billion… you would expect to see huge numbers of shares being traded by these entities, and I don’t see that,” Damodaran explained.

    “The questionable claims are the ones to do with earnings manipulation, since if Adani is manipulating earnings, it is not doing a very good job, reporting low margins and return.”   

    Mark Humphery-Jenner, associate professor at UNSW Business School, said Hindenburg’s research brings up important legal and ethical questions that warrant interrogation. He emphasised that a short seller’s business model is finding poor investments and profiting when the price goes down.

    “One concern is that an ‘activist investor’ might take a short position, publish a malicious report, and then cash out after spreading false information,” Humphery-Jenner said.

    The allegations and fallout forced Adani to ditch a planned equity issuance and debt sale. MSCI, an index provider, said it would cut the weighting of Adani Group companies after reassessing the number of free-floating shares.

    Valuation overdone      

    Hindenburg said even if investors ignore the rest of its findings, looking at its key companies on a purely fundamental basis shows the conglomerate is wildly overvalued. Using the valuations of similar companies, the short seller estimated Adani’s seven listed entities had 85 per cent downside.

    Investors had flocked to Adani’s companies in part to gain exposure to the rise of India, but also to chase the exceptional share price performance. Flagship subsidiary Adani Enterprises has gained 1,398 per cent over the past three years. Revenue growth has been strong, but operating margins and returns on capital remain in the low-single digits.

    Damodaran agreed that the valuation of Adani is excessive. He concluded Adani Enterprises should be trading around 75 per cent lower than its share price before the report and about 50 per cent lower than the share price today.

    “I don’t think that there is much doubt that the market was overstretched when it valued the Adani companies collectively at US$220 billion and Adani Enterprises at US$53 billion,” Damodaran said.

    As for the ethics of short selling, Humphery-Jenner said that if the report is truthful, Hindenburg is simply sounding the alarm before the crash. Investors also need to be rewarded for this work; otherwise, their resources are better deployed elsewhere.

    “Ultimately, then, companies such as Hindenburg are generally a net positive if they comply with all relevant laws, securities regulations, and privacy guidelines,” regardless of whether they profit from short selling, Humphery-Jenner concluded. “If the report is truthful, blaming Hindenburg for Adani’s crash is like blaming an alarm for a fire.”




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