Five Takeaways on the Adani-Hindenburg Saga

It was always tough for sensible investors to see Adani valuations not as a multiple of income, but as a multiple of peer valuations!

By Chetan Shah

Several trading sessions before the $100 billion crash in Adani group valuation, and soon after the release of the Hindenburg report, a friend had said, “Market shoots first and asks questions later.”

There is nothing here to malign or defend Adani. Just an objective subjective statement observing the wealth creators and the mercenaries, and India as their playground.

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1. Transparency about Market Trades

There is no transparency on the volume of short-selling done by Hindenburg and associated parties before publishing their report on the eve of Adani flagship’s now-recalled US$2.5 billion equity offering.

They claim to have traded in derivatives listed outside India in regimes that do not require disclosures of their trades.

In Indian markets, institutional investors must disclose their short-sold positions, and no big names appear there in the case of Adani.

2. The Spark and the Throttle

Now, most Adani companies are majority owned by the family, leaving relatively little float compared to their peers. Neither the public shareholding is large enough to generate wide cash against delivery sell-off nor the lenders to who the founder shares are pledged have sold out.

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Therefore, it seems that while Hindenburg triggered the derivatives sell-off, it is the Indian retail speculators who have gone severely bearish on the listed Adani stocks, which have continued to fall every trading session since the report, wiping out US$ 100 billion in market capitalisation.

3. You Could Either be a Company Predominantly for Investors or One for Mercenaries

With initially very high leverage (not very high right now), extreme speed of organic and inorganic growth, extreme diversification from ports to energy to cement to food using an incubator Holdco model, rumours of political favours and no credible analyst coverage, Adani had poised itself to become the darling of mercenaries (traders, speculators, potentially insiders and investment bankers) riding on its scale and ambition. 

It was always tough for sensible investors to see Adani valuations not as a multiple of income, but as a multiple of peer valuations!

These companies were enjoying stratospheric valuations for the group’s resources, infrastructure, food and other brick-and-mortar businesses at EV to Sales ratios that would put tech giants to shame.

The same mercenaries who may have gained by bidding up the stocks are probably gaining by beating them down, with onlookers joining in egged on by the Hindenburg assault. They were not Adani’s supportive investors as described in the recent corporate communication.

4. Lessons

A couple of lessons for Adani and everyone interested.

(a) Even while you hold a large majority shareholding in your listed companies, traders can wreck your fortunes if you operate in the grey zone.

(b) For market mercenaries, which include not only mom-n-pop punters but also the so-called “research firms”, activist investors, hedge funds and other capital market players, a wealth creation opportunity is supreme and it is not to be lost to the notions of factual research, conflicted position of the researcher, nationalism issues and so on.

5. My Advice if Adani Cares

As someone invested in the growth and prosperity of India, I hope that regulators and lenders will continue to stiffen the margin requirements for short sellers to avoid a market-wide panic and a temporary but expensive stalling of the fast-moving Indian economic juggernaut.

I hope Adani sobers up and works to save the large and high-quality ports, airports, energy assets, food businesses, etc. he has built. 

From Sydney, my best wishes to wealth builders and mercenaries everywhere, and to the success of India!

Author: Chetan Shah is Principal Consultant with Active Directions Sydney-based consulting firm. He specialises in cross-border partnerships, M&A, strategic investment, funding of capital-intensive projects, debt restructuring, disposal of businesses and managing private equity investors and capital market / IPO bankers.