Thanks to the Hindenburg report, Adani Group stock fell by Rs.55 crore this week. The report stated that Adani companies had taken on substantial debt, including pledging shares of their inflated stock for loans. This debt is putting the entire group on a precarious financial footing. Seven of Adani group stocks including Adani Total Gas, Adani Enterprises, Adani Transmission, Adani Green Energy, Adani Ports, Adani Power and Adani Wilmar together lost Rs 54,542 crore in market value after the report was published. Their combined market cap fell to Rs 17.20 lakh crore from Rs 17.75 lakh crore in one day.
Why has the Hindenburg report created such panic in the market? Does the report have any merit? Let us try to understand why the market is reacting in this manner.
Hindenburg Research is a widely known and respected financial research firm founded in 2017, known for its investigative and critical approach to publicly traded companies, particularly those in the technology sector. Named after the 1937 Hindenburg disaster, which they characterize as a human-made avoidable disaster, the firm generates public reports via its website that allege corporate fraud and malfeasance. The firm is led by Nathan Anderson, who is known for his research on the companies and their management, which often leads to a report with recommendations for short-selling the stock. Hindenburg Research has been involved in several high-profile short-selling campaigns, and is known for its detailed and well-researched reports, which often uncover previously unknown information about the companies it covers.
One has to be aware that Hindenburg Research is not in the public service business but in the business of making money. It makes financial bets that the stocks of the companies will fall after the firm issues its research. When the stocks do fall, Hindenburg makes its money in what is called a “short” trade.
What is short selling?
Short selling, also known as shorting, is a trading strategy where an investor borrows shares of a stock from another investor and sells them in the market, with the expectation that the stock’s price will fall. The investor then buys back the shares at a lower price, returns them to the original owner, and pockets the difference as profit.
For example, if an investor believes that a stock currently trading at $100 per share will decrease in value, they can borrow shares from another investor and sell them at $100. If the stock’s price drops to $80, the investor can buy back the shares at that price and return them to the original owner, making a profit of $20 per share.
Short selling is considered a high-risk strategy, as the potential losses are unlimited if the stock’s price goes up instead of down. It is also a risky strategy because if a stock’s price goes up instead of down, the investor is obligated to buy the shares at a higher price and the losses are unlimited.
Hindenburg Research has been involved in several high-profile short-selling campaigns in the past and has made a number of accurate predictions about the companies it has covered. Similar to Hindenburg Research other companies like Muddy Waters and Citron Research are part of a small club of activist short sellers. They consider themselves as financial detectives who can smell corporate wrongdoing from a mile away.
Accurate Predictions By Hindenburg
In 2020, Hindenburg Research released a report on the electric vehicle start-up Nikola Corporation, which had recently gone public. Hindenburg’s report alleged that the company had misled investors about its technology and partnerships, and the stock price of Nikola Corporation fell significantly following the release of the report. The company’s founder resigned and the SEC and Department of Justice launched investigations.
In 2020 Hindenburg research also published a report on the Chinese education company RYB Education, which had recently gone public. Hindenburg’s report alleged that the company had misled investors about its enrollment numbers and financials, and the stock price of RYB Education fell significantly following the release of the report. The company’s CEO and CFO resigned and the SEC and Department of Justice launched investigations
In 2018, Hindenburg Research published a report on the Chinese social media company Momo Inc, which had recently gone public. Hindenburg’s report alleged that the company had misled investors about its user numbers and financials, and the stock price of Momo Inc fell significantly following the release of the report. The company’s CEO resigned and the SEC and Department of Justice launched investigations.
Wrong Or Unproven Predictions By Hindenburg Research
In 2019, Hindenburg Research claimed that the pharmaceutical company NantKwest had fabricated data and misled investors. However, the company was later cleared of any wrongdoing by the Securities and Exchange Commission.
In 2020, Hindenburg Research released a report stating that the biotech company Moderna would not be able to deliver on its COVID-19 vaccine promises. However, Moderna’s vaccine has since been authorized for emergency use by the FDA and is being distributed globally.
Hindenburg Research predicted that the online marketplace Etsy would struggle due to increased competition and a shift to e-commerce. However, Etsy’s stock has risen dramatically since the pandemic began, as more people shop online.
Hindenburg Research alleged that the digital health company Teladoc Health had inflated its revenues and misled investors. However, the company’s stock has continued to rise and it remains a significant player in the digital health industry.
Hindenburg Report On Adani
“The report stated Adani companies had taken on substantial debt, including pledging shares of their inflated stock for loans. This debt is putting the entire group on a precarious financial footing.“
In the case of the Adani Group, it is common knowledge that the company, with the blessings of the Modi government has grown exponentially in the last decade. With its imminent FPO(follow-on public offering) of $2.5 Billion, the Adani group is poised to reach for the stars. It seems like the Hindenburg report has been timed to sabotage this meteoric rise of the Adani Empire. The report’s immediate effects were the sharp decline of Adani’s stock, dampening the Adani FPO and Mr. Gautam Adani slipping to the 4th position on the Bloomberg Billionaire index.
It is clear that the Hindenburg report needs to be taken seriously albeit with a pinch of salt. We can neither dismiss the report completely nor can we take it in its entirety. Hindenburg is after all a company looking to profit from its research so we cannot blindly believe in it nor can we ignore the facts especially with so many cases of corporate fraud in India like BharatPe and GoMechanic . One has to be cautious of financial misreporting by companies. In most cases, both the investors and founders are in cahoots so as to increase the company’s valuation. The best course of action is to launch an investigation and see if the report has any merit before we declare the Adani Group guilty. The Adani Group on its part has refuted the allegations made by the Hindenburg report and is considering legal action against Hindenburg Research, but actual facts can only be known as the events unfold.