Hindenburg attack shows risk of going global for Adani empire

By Chris Kay

Gautam Adani was on top of the world, diversifying his conglomerate into everything from green energy to media as his fortune soared by $40 billion last year, and mounting ambitious expansion plans from Israel to Morocco.

Sure enough, the global spotlight has arrived — but not the sort he craved.

The world’s fourth-richest man is now the target of Hindenburg research, a US short seller, which characterized his meteoric rise as the “the largest con in corporate history” in a voluminous Jan. 24 report. It led to a $12 billion wipeout for Adani investors in a day — an extraordinary turnaround in fortune for a group of stocks, many of which led gains in the S&P BSE 200 Index last year.

Also Read | Adani Group looks to invest in petrochem, mining in Azerbaijan

While the ports-to-power giant has refuted the report — published on the day it was opening a $2.5 billion share sale for institutional investors — the charges are at best a reputational hit to the nascent global ambitions of the once-shy, self-made billionaire. At worst, it may turn away global investors from whom Adani is seeking broader legitimacy and overseas funding.

This level of scrutiny is also something Adani has largely managed to avoid in his home country, where he has mostly faced criticisms over high levels of debt and political barbs for his perceived proximity to Prime Minister Narendra Modi. None of that came close to hurting his conglomerate’s meteoric rise.

That may now be changing. While Hindenburg is relatively small for a short seller, it has a history of taking down companies like Nikola Corp., an electric vehicle maker.

“If you become rich you should expect to be questioned, that is how the game works,” said Deepak Shenoy, the chief executive officer of Bengaluru-based wealth management firm Capitalmind. “Everybody’s going to question how come these companies are worth so much.”

The last time the Adani Group faced questions was in August, when debt research firm CreditSights highlighted the rising and massive leverage across the Adani Group. The following month, CreditSights dialed back its tone after the conglomerate issued a 15-page rebuttal, saying leverage ratios of its companies were “healthy” and citing its own calculations on how debt had reduced. While the initial report did hurt some of the group’s stocks, many of them rebounded later.

But the allegations by Hindenburg are markedly different — and the short seller is unlikely to back down — posing the biggest challenge yet for Adani, 60. The firm said the Adani Group was involved in “brazen” market manipulation, accounting fraud, used offshore shells for money laundering and siphoned from listed companies.

“Infrastructure firms are generally relatively sleepy, low growth, low multiple enterprises, yet valuation metrics of the Adani listed companies are comparable to the frothiest of high-growth tech companies,” Hindenburg said in its report. “Compared to industry peers, we see 85 per cent+ downside purely on fundamentals.”

Credit: Bloomberg

In a Jan. 25 statement, the Adani Group dismissed the report as “a malicious combination of selective misinformation and stale, baseless and discredited allegations.” It also questioned the timing of publication on the eve of Adani Enterprises Ltd.’s follow-on offer, and on Thursday, said it’s exploring legal action against Hindenburg.

When asked for further comment on Thursday, a spokesperson for Adani Group referred to the company’s two earlier statements issued on the Hindenburg report.

Many Indian analysts believe the domestic fallout will be limited for the Adani Group, mainly because the group’s fortunes and strategy are tied to Modi’s infrastructure development goals for the country.

The “short has garnered momentum because of its timing ahead of the follow-on offer,” said Sameer Kalra, founder of Target Investing in Mumbai. “My guess is Hindenburg may exit after small declines, given how illiquid the stocks are. India doesn’t have a great track record of rewarding short sellers.”

Listing Plans

Yet the explosive claims could be damaging not just for the $2.5 billion follow-on share sale this week, which is aimed at broadening the investor base of the thinly-traded stock and paring debt, but also over a longer time horizon as more Adani companies seek investors. The real test for the follow-on offer, a fund-raising route that hasn’t been popular in the last decade, will be when it opens for retail subscriptions on Friday.

The conglomerate plans to list at least five companies between 2026 and 2028, Chief Financial Officer Jugeshinder Singh told Bloomberg News earlier this month.

In fact, Adani tends to come under more damaging scrutiny whenever he ventures outside of the safe ground of India. Prior to the Hindenburg report, the Adani Group were attacked in Australia by climate activists for developing a coal mine. Global environmentalists decry Adani’s recent drive into green energy as muddied by his continued development of new fossil fuel projects. The first-generation tycoon built his fortunes on a bedrock of coal trading.

Locally, there have been some regulatory investigations by government agencies, but none amounted to a serious threat to group’s expansion.

In June 2021, they saw a short-lived selloff after India’s junior finance minister told lawmakers that some of the companies were being probed for possible violation of local laws.

No one has taken the fight as far as Nate Anderson’s Hindenburg, which has dredged up ugly allegations with 88 questions for the Adani conglomerate. Its track record is significant: Of the about 30 companies Hindenburg has targeted since 2020, their stocks on average lost about 15 per cent the next day, according to calculations by Bloomberg News. The shares on average were down 26 per cent six months later.

“Given Hindenburg’s reputation, one can assume that these allegations have been thoroughly researched,” said Guillermo Hernandez Sampere, head of trading at asset manager MPPM GmbH.

For some, the reckoning has been a long time coming.

“There is enormous political clout behind Adani and his meteoric rise,” said Sharmila Gopinath, a specialist India adviser at the Asian Corporate Governance Association. “I’m taken aback sometimes by how he has managed to get the kind of national reputation and image that he has with such little scrutiny.”