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Sell-off in Adani Group shares continues on Hindenburg report; brokerages say banks exposure to Adani Group limited

Adani Group termed the report malicious, mischievous, and unresearched

ADANI GROUP-HINDENBURG/

The sell-off in shares of Adani Group companies deepened on Friday, with several of them hitting their lower circuit levels in the backdrop of the report by the US-based short-seller Hindenburg on Wednesday, which raised issues regarding valuations of stocks and debt levels across the group.   

Shares of Adani Total Gas and Adani Green Energy plunged 20 per cent, Adani Transmission declined 19 per cent and Ambuja Cement fell around 17 per cent. Shares of other companies, including the flagship Adani Enterprises, Adani Power, Adani Wilmar, ACC and Adani Ports fell between 5 per cent to 13 per cent. Friday’s sell-off comes on top of the sharp declines various Adani Group companies had seen on Wednesday.

The broader BSE Sensex plunged over 1.9 per cent on Friday and was down around 1,140 points in afternoon trading as the report on Adani Group and the sell-off in shares of listed Adani companies had a cascading effect on stocks of banks and insurance companies. 

Hindenburg Research, founded in 2017, is a forensic financial research firm. The company does research and analysis on big companies to find potential issues and at times takes short positions in the target company, hoping to profit when the stock falls.

In its report, Hindenburg claimed that Adani Group has “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades.” It had also pointed to “substantial debt,” including pledging shares of their inflated stock for loans, putting their entire group on precarious financial footing. 

“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 per cent downside purely on a fundamental basis owing to sky-high valuations,” the Hindenburg report adds. 

On Thursday, Adani Group had termed the report malicious, mischievous, and unresearched.

“Clearly, the report and its unsubstantiated contents were designed to have a deleterious effect on the share values of Adani Group companies as Hindenburg Research, by their own admission, is positioned to benefit from a slide in Adani shares,” Adani’s group head – legal, Jatin Jalundhwala had said in a statement.

They are evaluating the relevant provisions under US and Indian laws for remedial and punitive action against Hindenburg Research, the statement further read.

Hindenburg followed up with another statement, where it said “Adani’s hasn’t addressed a single substantive issue” it had raised in its 106-page report. 

“If Adani is serious, it should also file suit in the US where we operate. We have a long list of documents we would demand in a legal discovery process,” it said. 

The Hindenburg report and the sell-off in Adani Group shares comes at a time its follow-on share sale in flagship Adani Enterprises to raise Rs 20,000 crore, the largest follow-on public offer (FPO) on Indian bourses till date, opened for subscription today. 

Adani Enterprises had set a price band of Rs 3,112 to Rs 3,276 for the share sale. At the upper end of the price band, the issue was priced at a 5.36 per cent discount to closing price on Thursday, Jan. 19, while at the lower-end it was a 10 per cent discount. On Friday, the Adani Enterprises stock was trading around Rs 2,916.20, a discount to the issue price. 

Proxy advisory firm InGovern Research questioned the timing of the report.

“The strategically timed release of the Hindenburg report on the eve of the FPO by Adani Enterprises seems to indicate that there was some objective to scare investors,” it said, adding the Hindenburg report itself may not impact the share sale. 

InGovern further noted in its report that though the Hindenburg report talks of high valuations and over leverage by the Adani Group, the nature of the industries, in which Adani Group companies operate and data on debt holding in Adani Group companies indicate otherwise.

“Adani Group companies are in the infrastructure businesses with monopolistic characteristics. Some of their infrastructure assets like ports already generating huge cashflows. Some other infrastructure assets are in the gestation period and would be generating positive cashflows in coming years,” pointed InGovern.

In a media interaction last week to announce the FPO, Jugeshinder Singh, the CFO of Adani Group had tried to allay debt-related concerns.

“The group has delevered in the past nine years. In 2013-14, our net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) was 7.6 times at the portfolio level. Today, it is 3.2 times,” he had said. 

Nevertheless, InGovern says the Hindenburg report is an opportunity for Adani Group to deepen its relationships with long-term institutional investors. 

“All Adani Group companies need greater equity research coverage by sell side analysts. Equity fund raising by Adani Group companies, which otherwise do not have very diverse ownership, will result in wider participation by institutional and retail investors. This will also add free float and help in greater price discovery besides dissuading investors to short sell stocks,” it said. 

In Adani Enterprises, for instance, the promoters held 72.63 per cent stake, while 27.37 per cent shares were held by public shareholders, as of quarter ending December 2022, as per stock exchange data. Among public shareholders, foreign portfolio investors held 15.39 per cent stake. 

The sell-off in Adani Group shares had a contagion effect on banks, over worries on their exposure to Adani Group debt. State Bank of India declined over 5 per cent, ICICI Bank and IndusInd Bank were down around 4 per cent and HDFC Bank fell around 2.7 per cent. Shares of Life Insurance Corporation of India (LIC) fell 3.7 per cent. The country’s largest insurer held 4.23 per cent in Adani Enterprises as of the December quarter, according to the stock exchange data. 

However, international broking firm CLSA said it sees no significant downside risk to Indian banks from Adani Group debt. It noted that Indian banks’ exposure to total Adani Group debt was less than 40 per cent.

“Within this, private banks’ exposure is below 10 per cent of total group debt and most banks have indicated that they have largely financed assets with strong cash flows, such as airports/ports,” said CLSA.

The broking firm added that while public sector lenders had exposure to 30 per cent of the group debt, this had not increased in the past three years. CLSA pegs the exposure of private banks at 0.3 per cent of 2023-24 loans and 1.5 per cent of financial year 2024 networth. The same for PSU banks is at 0.7 per cent of FY2024 loans and 6 per cent of networth, it said. 

Another broking firm Jefferies too has said it doesn’t see any material risk arising to the Indian banking sector. According to it, from a banking sector’s perspective, debt to this group forms 0.5 per cent of total loans, 0.7 per cent for PSU banks and 0.3 per cent for private lenders. 

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