Analyst firm Hindenburg Research published a report on 24 January criticising the Adani Group for its close relationship with the Indian government and using that relationship to enrich itself at the expense of shareholders and lenders. Since then, the conglomerate's shares have fallen by more than 60% and India's richest man, Gautam Adani, has lost much of his wealth. What was the report about, what is the situation now and what impact could this have on the Indian economy as a whole?
Source: Tradingview, Adani Enterprises
Hindenburg Research Report
According to a report by analyst firm Hindenburg Research, Adani Enterprises uses a number of accounting and business techniques to increase its profits at the expense of investors and lenders. The authors of the report claim that the company uses an aggressive accounting policy, which allows it to pass on costs and charges to its subsidiaries. The group would also use accounting tricks to increase profits at the expense of reducing taxes. According to the report, Adani Enterprises also artificially inflates the value of its assets, which has enabled it to raise loans worth up to US$7 billion.
From the Hindenburg Research report, we also learned about the close relationship between the Adani Group and the Indian government. The authors of the report claim that the Adani Group is using its influence in the government to gain business advantages such as contracts for large infrastructure projects. The report suggests that the Adani Group has been awarded many such contracts without tenders, which would indicate favouritism of the group by the Indian government.
The Hindenburg Research report also contains information about the group's potential links to: smuggling, corruption and illegal coal mining in mines that do not have the required permits, which would result in significant environmental pollution.
The report could pose a serious challenge to the Adani Group, which is one of India's largest conglomerates. It makes allegations about the company's accounting practices. Hindenburg Research states that group companies often made strange transactions that looked like attempts to multiply asset values and increase profits. The companies also allegedly used obscure and suspicious accounting methods to shift losses from subsidiaries to less important parts of the financial report.
One of the main accusations is also that Adani Enterprises used private ports to transport coal, which allowed the company to avoid port charges and taxes on coal exports. The analyst firm claims that this allowed Adani Enterprises to avoid having to pay more than 4 billion rupees (about $54 million) a year.
Hindenburg Research also reports that there are irregularities in the documents relating to Adani's subsidiaries, such as inconsistencies in asset values and unclear relationships between subsidiaries. Financial statements were also said to be missing key information and the misuse of technical terms may have misled investors.
Response from Adani Group
According to Hindenburg Research, Adani responded to the report with a 413-page document that mainly consisted of court documents, general financial information and details of irrelevant corporate initiatives. Of the 88 specific questions asked in the report, as many as 62 were said to be unanswered. The company was also said to have failed to address the basic accusations of the report, calling them "false, defamatory and intended to mislead". The company pledged to take all necessary legal action to protect its reputation and assured investors that it was fully compliant with all regulatory requirements.
In its response to the allegations, the analytics company comments that Adani has attempted to divert attention from the substantive issues by putting up a nationalistic narrative, claiming that the report is a "deliberate attack on India". Hindenburg Research's commentary concludes by stating that Adani's response does not question the existence of the transaction and does not seek to explain the obvious irregularities.
What could this mean for the Indian stock market?
With the Adani group forming one of the largest conglomerates of its kind in India, the declines in its shares have taken a significant toll on the valuations of the overall market. The iShares MSCI India ETF (INDA), which gives exposure to a broad market of large and mid-cap companies, has fallen by more than 6.5% since the release of the report, with Adani group companies accounting for 2% of the fund's portfolio value.
Source: Conotoxia MT5, INDA, Daily
Even small Indian companies do not seem to have been spared by this situation. The value of the iShares MSCI India Small-Cap ETF (SMIN), consisting of such companies from the country's stock exchange, has fallen by 4.6% since the event in question. Further declines appear to be possible as further news of the Adani group's actions, if any, reaches the public.
Source: Conotoxia MT5, SMIN, Daily
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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