Hindenburg! Every Indian knows this name today. A report (January 24, 2023) by Hindenburg Research, which “specialises in forensic financial research”, decimated the nine Adani stocks within weeks. Ironically, the name stems from a tragedy—in 1937, the Hindenburg balloon airship caught fire, and 35 of the 97 crew and passengers died. Hindenburg Research claims, “We look for similar man-made disasters floating around in the (stock) market and aim to shed light on them before they lure in more unsuspecting victims.”
The research firm investigates stocks that are overvalued due to inept management, cooked-up financials, and share price manipulations. It rolls out “impactful research results” based on “hard-to-find information from atypical sources”. Before this, it takes a market position to benefit from a slide in share prices. Thanks to Hindenburg, Gautam Adani, once the world’s third richest person, saw his personal wealth erode by more than half, and ranking slip to 24 (Forbes List on February 15, 2023), even as the nine stocks in his ports-to-power empire lost more than $120 billion within weeks.
Everyone has one question in mind: What are the fair prices of Adani stocks? Is Adani Enterprises, the group’s parent, worth ₹3,436.35 a share, its closing price on January 23, 2023, or less than ₹100? In its report, Hindenburg claimed that Adani Enterprises was valued at over 500 times its earnings, compared to industry average of 12 times and, hence, had a downside of 97.58%. The real worth of the stock was lower by this percentage, or below ₹100. This was true for Adani Total Gas (downside: -97.64%), Adani Green Energy (-97.1%), Adani Ports (-93.26%) and Adani Transmission (-92.43%).
In a blog (February 4, 2023), Aswath Damodaran, who teaches corporate finance and valuation at New York University, was less pessimistic. He wrote that “a valuation of Adani Enterprises with upbeat assumptions … and without factoring any of the Hindenburg accusations of fraud and malfeasance, yields a value of just ₹945 per share”. However, the optimists contend that the price can still rebound to ₹3,000 or above by end-2023.
What happens to Adani stocks in the near future will depend on how often the short sellers like Hindenburg attack them. Short sellers sell in waves. The initial phase is over within days or weeks. Since they normally don’t own the shares, their strategy is akin to borrowing an asset, selling at a high price, and buying back at a lower one before returning it. Consider what happened to Adani Enterprises between January 23, 2023, and February 8, 2023, or 12 trading days, excluding holidays.
On January 23, the day before the Hindenburg report, more than 19 million shares, way above the daily average, were traded. It marked the beginning of the bear attack. The selling pressure intensified on January 25 and January 27, when daily volumes touched nearly 44 million. From 34.5 million on January 30, the daily trades hovered between 11.6 million and 21 million over the next four sessions (January 31–February 3). The assault eased by February 6, or the tenth trading day, as daily volumes dropped below 4 million, followed by less than a million on February 8.
Adani Enterprises’ stock price tumbled from ₹3,436.35 (January 23) to ₹1,572.7 (February 6). It recovered to ₹2,164.25 by February 8. Most short sellers began to exit by February 1, when the price tumbled from ₹2,995 to ₹2,135.35 during the day. Others were out later, beginning February 3, when the stock reached a 52-week low of ₹1,017.45 during intraday trade. From the highest intraday level (₹3,508 on January 24) to the lowest one, the downside was 71%, a landslide but lower than the predicted loss of 97.58%.
Most stocks targeted by Hindenburg lose values within days. PureCycle Technologies crashed from almost $26 on April 30, 2021, just before the Hindenburg report (May 6, 2021), to $12.43 on May 14, 2021. Tecnoglass was down from almost $32 on December 3, 2021, to below $19 on December 10, 2021, a day after the research firm’s report. But, subsequently, the two stocks behaved in radically different ways. Tecnoglass bounced back to above $35 (February 3, 2023), after reaching a low of $17.42 (June 17, 2022). Twitter, which was attacked by Hindenburg in May 2022, showed a similar down-up trend.
PureCycle remained busted; its 52-week low is now just over $5, with a 52-week high of below $11. Yet another example: DraftKings, which quoted over $53 on June 11, 2021, days before the Hindenburg report (June 15, 2021), dropped to below $44 on July 16, 2021, recovered to $62.46 by September 10, 2021, and slumped to a low of $11.39 on December 30, 2022. Among the giants that Hindenburg took on, Nikola’s stock walloped from $35.55 on September 4, 2020, six days before the former’s report, to $2.51 on February 13, 2023.
The difference between the duds and those who finally triumph depends on policy makers, regulators, courts and media. If there are immediate follow-ups, CEOs resign, criminal links are exposed in some cases, and stocks tank. One isn’t sure about Adani. In his Parliament speech, Prime Minister Narendra Modi didn’t mention Adani. State-owned investors and lenders with exposure to Adani Group continue to support it. The government agreed to form a panel, only to study the fall in share prices, and gaps in regulatory mechanisms. Will it investigate Adani or Hindenburg, or both?
But Moody’s downgraded its outlook for a few Adani firms. MSCI may reduce the weightages of four Adani stocks in its global stock index. The reason: free floats, or shares held widely by investors, were lower than its previous estimates. On March 31, 2022, Adani Enterprises had 226,071 shareholders. Of these, 595, including promoters (almost 75%) and large institutional investors, owned 98.47% of the stock. It implies that the latter group, with small trades, can hugely influence the stock. On February 8, 2023, less than a million shares were enough to hike its price by 20%. Good news for the optimists?
Alam Srinivas
Independent journalist and author