Our Views on the Hindenburg Report on the Adani Group

Over the last couple of days, there has been back and forth between Hindenburg and the
Adani group and lots of media coverage. Our quick take on this issue based on our
following of Adani group companies for the past 12+ years.

On Short Selling and Shareholder Activism

Hindenburg, as a short seller, should be considered as just another market participant who
has a motivated view to release a negative report with aim to bring down the stock price.

1. Short selling is not new in Indian Markets.

2. Short selling is a market mechanism and NOT wrong.
3. Short selling is healthy for Indian capital markets.
4. Short selling is a view on a stock price, it may NOT work.
5. Shareholder activism should be welcomed in Indian markets.
6. Indian companies should learn to such take such reports in their stride.
7. There is a need for more investor activism in India.
8. As Indian market matures, they should get used to these kinds of activist investors
taking interest in domestic companies.
9. However Short selling is not Shareholder Activism.
10. Short sellers are opportunist and very short-term focussed. Such activism could be
disruptive for management and companies.
11. Short sellers are not held in high regard in global capital markets and even in the USA,
many short sellers, including Hindenburg, are under investigations by the SEC and DoJ,
as the short sellers are thought to achieve their objectives at all costs and detrimental to
the interests of other investors.
12. Positive shareholder activism, like ValueAct Capital does, is when investors engage
positively with management and work towards bringing about change.
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On Data in Hindenburg Report
There are no new facts in the Hindenburg report, and, at best, it is a compilation of all past
allegations against the Adani group.
1. Hindenburg has 3 types of data:
a) Easily verifiable data on Marcap, P/E multiples, Debt, shareholding patterns, etc.
available to all investors.
b) Data points that cannot be easily verified: Mauritius entities, etc.
c) Aspersions based on past (some over 20+ years), some of which were fully disclosed
as part of various offering documents by the Adani group.
2. Some of the allegations in the Hindenburg report have been the subject of regulatory
scrutiny in the past.
3. There are no specific complaints made to SEBI for investigation by Hindenburg. SEBI,
the Indian securities market regulator, or the MCA, largely act on specific complaints of
fraud or market manipulation.

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Timing of Release of Hindenburg Report
The strategically timed release of the Hindenburg report on the eve of the follow-on public
offering (FPO) by Adani Enterprises Ltd seems to indicate that there was some objective to
scare investors.
1. However, the Hindenburg report itself may not impact the FPO share sale.
2. The anchor book has already been oversubscribed on 25th January 2023, given that the
objective of many of the long-term investors would be to hold the stock for many years.
3. There could be some sentimental hit among retail investors when the FPO opens on 27th
January 2023.
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On Valuations and Leverage
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.
1. Valuations is in the eyes of those who have a position and are willing to bet on it.
2. These days, there are many new age companies with no revenue model and with no
earnings, Adani stocks may appear to be inexpensive.

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3. 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.
4. Even slight increases in customer pricing would lead to greater cash inflows.
5. Given the low free float of many of the listed Adani companies, the group can always
sell down equity to pay off debt and reduce leverage. The FPO is the first instance from
the group to get greater float and pay debt.
6. According to a CLSA report dated 26th January 2023, the Indian banking exposure is less
than 40% of total group debt.
7. Most of the incremental funding to the group is funded from outside India in the form of
USD bonds or Rupee bonds issued to overseas investors.

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An Opportunity for Adani Group
The Hindenburg report serves as an opportunity for Adani group to deepen its relationships
with long-term institutional investors.
1. All Adani group companies need greater equity research coverage by sell side analysts.
2. 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.
3. The Adani group companies should see this moment as an opportunity for greater
investor engagement of all classes of investors.
4. In the past few years, proxy advisory firms in India have recommended that investors
vote Against many proposals placed by Adani group companies. However, these
recommendations by proxy advisory firms are preceded by discussions with the
companies and with comments from the company. Else, just a one-sided communication
distorts opinions in the market.

*****

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