What is the future of Adani Group?

Here are a few facts to know about the Adani Group:

• Almost 83% of Adani's wealth has been built in the last 3 years. Most of this is reflected due to the inflation of their stock price.

How does this work? Think about it this way: if you own 75% equity in your company (valued 100Rs), then you have ₹ 75.

But, suddenly if the stock price goes up to ₹ 300, you are now worth ₹ 225.

This is precisely what is happening with Adani Wealth.

Most of it has come due to bloating of the stock prices

 

• Now the allegations are, that by maintaining a "low float" the stock price has been manipulated.

How this works: owners own close to 75% of stocks, create a bunch of shell firms, and make them buy more stocks, so the total de-facto ownership goes up quite significantly.

Therefore, SEBI has a rule that promoters can't have more than 75% ownership.

Since there are very few stocks (supply) and if the demand goes up, the stock price will skyrocket. This is precisely what has happened with Adani.

 

• The point is that if one break apart Adani's assets and liquidate them, most Banks which have lent to Adani group won't get most of it back.

Most of the wealth is paper wealth. If Adani stocks crash the markets, we are looking at a sustained multi-year localized problem.

- First several banks will default.

- Then there will be a restructuring of loans/bailing out with public money (for Banks)

- More stringent regulations will come, which will slow down the credit flow.

Such instances have happened in the past. And, this spells at least a 2-3 year dry run, in case this blows up.

Below are key points explained in layman's terms of 98 pages report of 

Hindenburg research. They have presented a fairly detailed viewpoint, covering several aspects of corporate governance:

      Financial Red Flags

• 5 of 7 key listed companies have reported ‘current ratios’ below 1, indicating near-term liquidity pressure.
• 4 of 7 listed companies are on verge of delisting threshold due to promoter ownership of more than 75%
• Adani Enterprises changed 5 CFOs in the last 8 years, a key red flag indicating potential accounting issues

       Incompetent Auditors

• The Independent auditor of Adani Enterprise and Adani Total gas is a tiny firm called Shah Dhandharia & Co. They have no website. Only 4 partners and 11 employees.
• Audit partners signing off financials were 23 and 24 years old. Freshly out of school within no position to handle and affirm such a complex corporate structure.

       Fake and Unreliable Foreign Investors

• 5 out of 5 FIIs invested in the Adani group have 97% of assets concentrated in Adani Stocks. This is a blatant case of concentration risk and exactly the opposite of what FIIs usually do.
• The CEOs and MDs of these FIIs were previously involved in multi-billion dollar international fraud. One of them has a close alliance with a notorious stock manipulator Ketan Parekh.
• These funds seem to be stock parking entities of the Adani group and manipulating delivery volumes of Adani Stocks. Also, involved in 'Wash Trading' i.e buying and selling the same stocks to pump intraday trading volumes (evidence provided in the report)

       Family Holdings & Related Party transaction

• Gautam Adani's brothers Rajesh & Vinod and brother-in-law Samir Vora are in top management positions in group companies and offshore entities. All three of them have been accused of serious fraud and arrested in past.
• Vinod Adani controls 38 Mauritius companies with no signs of operations, or employees. They all are registered at the same address and have no meaningful online presence (fake websites with copy-pasted information)
• These companies have moved billions of dollars into Indian Adani entities without related party disclosure and the nature of the deals. The funds then seem to be used to engineer Adani's financials and make it look creditworthy and fit for loan against stocks.

The Research firm has openly challenged Gautam Adani to answer 88 questions listed in the report If he truly embraces transparency as he claims. and stated that "We believe the Adani Group has been able to operate a large, flagrant fraud in broad daylight in large part because investors, journalists, citizens, and even politicians have been afraid to speak out for fear of reprisal"

Adani group issued the statement that this is a timely played gimmick just before Adani Enterprise FPO and this firm has never contacted them for seeking clarification.

Here are a few other things other than the Hindenburg Research report about the Adani group,

ü  As per Wikipedia, "Hindenburg" was founded in the year 2017 and they have just five employees. (For publishing and spreading panic and earning from short selling, this much of an employee is enough)

ü  Their website is pretty old age without much information about themselves. One can contact them through email only. (They mostly rely on cold email information rather than collecting information through a dedicated route).

ü  If they truly cares about the people then the layoffs which are ongoing in the current scenario should be one of the main topic by having a heading "Largest Layoff in corporate History" but they are busy in earnings by short selling. (Indian conglomerate Group has never laid off a single person in this market)

ü  The share prices are rising of the group but all things are backed by growth and we are investing just because it's an old-age company with a great growth-oriented story that last more than 15 years. ("Hindenburg" might be long on New Age startups and he is losing on that bubble unicorn company)

ü  Indians believe in the legacy of the business and also their commitment to society. The report doesn't have a single word of praise towards him about the work he had done for society which itself suggests that their report is biased and they just want to earn from their short-selling position.

Now, India is a much more developed country and this might be creating panic in the stomach of some foreign countries or corporates. They just can't digest the success and due to this, they are publishing this type of report at regular intervals.

It's in our hands "whether we want to go ahead with this report or we want to see India as a developed nation!"

What is your view?

Is Adani group about to collapse like a deck of cards?

OR

Is Hindenburg Research being optimistic?