Global financial research firm Hindenburg Research recently delivered a scathing report on the Adani Group, an Indian multinational conglomerate heavily involved in commodity trading and infrastructure deals, calling it the “largest con In corporate history.” Does Hindenburg’s report warrant shorting Adani, and if the allegations are correct, would the fallout deliver a significant blow to the country’s capital markets?

What is Hindenburg Research?

Founded in 2017, Hindenburg Research publishes regular forensic-style reports on financial misdeeds. The company was named after the Hindenburg airship, which was spectacularly destroyed in 1937. This was later deemed to be a human mismanagement issue.

In that vein, Hindenburg aims to detect corporate fraud, accounting irregularities, derivatives analysis, equities manipulation, and undisclosed regulatory and financial issues. As the head of Hindenburg Research, Nathan Anderson had previously worked with Harry Markopolos, a key fraud investigator who exposed the Bernie Madoff Ponzi scheme in 2008.

What Are Hindenburg’s Allegations Against Adani?

On Tuesday, after a 2-year investigation, Hindenburg Research published its findings on the Indian conglomerate Adani Group, headed by Gautam Adani. According to Forbes’ real-time billionaire ranking, Adani is the world’s fourth richest man with a net worth of $119.1 billion.

The conglomerate, Adani Group, at $218 billion AuM, is heavily involved with India’s infrastructure: defense, agriculture, coal mining, logistics, real estate, and financial services. Hindenburg makes the following allegations against India’s largest business entity:

• Adani Group used offshore havens in the Caribbean Islands and Mauritius, alongside other shell companies and offshore funds, to hold equities in Adani-listed firms without disclosure.
• Major Adani Group subsidies carry “substantial debt” that puts the entire conglomerate at risk. Specifically, the jump in debt to $27 billion as of March 2022, a +40% annual increase.
• Adani family nepotism involving offshore entities to secure artificial turnover, among other irregularities involving a “labyrinth of offshore shell entities.”

Effectively, the Hindenburg report paints a picture of over-indebtedness, manipulation, and fake equities valuation to carry over the debt. More importantly, the report makes a steelman argument for its findings.

“Even if you ignore the findings of our investigation and take the financials of Adani Group at face value, its seven key listed companies have 85% downside purely on a fundamental basis owning to sky-high valuations.”

Reaction to Hindenburg Research Report

Hindenburg Research is known for tapping into publicly unavailable sources to make their claims, such as insider interviews and internal document reviews. This is why their reports are regarded as a big deal.

Chief Financial Officer (CFO) for the Adani Group, Jugeshinder Singh, published a statement claiming that the report’s goal is to tarnish the conglomerate’s reputation.

“The report is a malicious combination of selective misinformation and stale, baseless and discredited allegations that have been tested and rejected by India’s highest courts,”

The insinuation is that the report came just ahead of Friday’s public offering of Adani Enterprises, worth $2.5 billion. This would be India’s most extensive follow-on public offering (FPO), otherwise known as secondary offerings, after an IPO as additional new shares.

Speaking of stocks, Adani Group’s key companies have plunged over the week, just as the report gained traction. They mainly involve infrastructure ventures: Adani Enterprises (ADANIENT), Adani Ports (ADANIPORTS), Adani Power (ADANIPOWER), Adani Green (ADANIGREEN), Ambuja Cements (AMBUJACEM), Adani Total Gas (ATGL) and Adani Wilmar (AWL).

In search of liquidity, the market would expect companies above the ratio (Adani Wilmar and Adani Ports) to be used as compensation sources. This is predictable given that the Hindenburg report listed Adani Group’s five companies as having a ratio of liquid assets and near-term liabilities under 1.0, which puts them into short-term liquidity risk.

In search of liquidity, the market would expect companies above the ratio (Adani Wilmar and Adani Ports) to be used as compensation sources.

Actively Managed Funds Avoided Massive Adani Gains

A business as large and important as Adani Group could be seen as an infrastructural arm of the Indian government. Thanks to the conglomerate’s public contracts, the Adani Group stocks have gone up over 3,000% since April 2020.

Year-over-year, Adani-listed companies have gone up over +100%, led by Adani Power at +143%. However, despite the rising public interest in Adani-listed stocks, the same cannot be said of mutual funds. As of September 2022, mutual funds have largely avoided Adani Group, with their share in its stocks at typically under one percent.

This aligns with Hindenburg’s report, which pointed to the hyper-valuation of Adani-listed companies. In other words, mutual funds have counted on these companies’ valuations to go down from the get-go. Infrastructure companies are especially prone to overvaluations as they have long gestation periods.

Betting on High P/E Companies Carries Risk

India’s Adani Green and Adani Total Gas had P/E ratios over 700, which was 100x higher than their market counterparts, Tata Power and Gujarat Gas. Accordingly, most active funds haven’t gone anywhere near the affected Adani stocks, despite enormous gains. The price of devaluation would then be carried by passive funds.

This article originally appeared on The Tokenist

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