Supreme Court Casts A Critical Eye On Hindenburg’s Allegations On Adani Group Asserting Regulatory Confidence; Are Adani Shares A Good Buy And Why Are They Still Falling?

On Friday, the Supreme Court declared its inability to unquestionably accept Hindenburg Research’s accusations against the Adani Group, including fraud, misgovernance, and stock price manipulation. 

Consequently, the court directed the Securities and Exchange Board of India (Sebi) to conduct an inquiry into the matter, refraining from treating Hindenburg’s claims as the unequivocal truth.

Supporting Sebi, an apex court bench, led by Chief Justice of India DY Chandrachud and including Justices JB Pardiwala and Manoj Misra, expressed confidence in the ongoing Sebi investigation and the impartiality of the expert committee chaired by former Supreme Court judge Abhay Manohar Sapre. 

The court appointed this committee on March 2 to scrutinize regulatory mechanisms safeguarding investor interests, triggered by Hindenburg’s report in January causing a decline in Adani stocks.

While reserving judgment on related petitions, the bench emphasized its refusal to proceed on the assumption that the Hindenburg report was factual. Chief Justice Chandrachud responded to allegations by counsel Prashant Bhushan, stating that Sebi’s role was questionable, asserting that doubt in a statutory body like Sebi shouldn’t be based solely on media reports.

Bhushan argued that Sebi had access to relevant information since January 2014, when the Directorate of Revenue Intelligence (DRI) sent a letter to then Sebi chairman UK Sinha. Chief Justice Chandrachud countered that the court couldn’t cast doubt on Sebi without proper material and questioned the appropriateness of forming a special investigation team solely based on suspicion.

Solicitor General Tushar Mehta, representing Sebi, clarified that the regulator had written to DRI, which indicated that proceedings had concluded in 2017. Regarding the ongoing probe, Mehta stated that Sebi had completed investigations into 22 of the 24 points and was in the process of concluding the remaining two, which required information from foreign regulators.

Mehta informed the court that Sebi had taken action in instances of wrongdoing related to shortselling, addressing concerns about how the regulator would respond to volatility and protect investor interest. Mehta also conveyed Sebi’s acceptance of the Sapre panel’s recommendations to strengthen the regulatory mechanism.

The Chief Justice stressed Sebi’s responsibility to protect investors, urging the regulator to take steps to prevent the loss of investor wealth due to shortselling. The bench sought information about regulatory changes falling within the purview of the Ministry of Finance and Sebi, with Mehta clarifying that some aspects fell within the government’s domain and others within the regulator’s.

Responding to allegations of conflict of interest against members of the expert panel, the court defended its choice of domain experts, expressing concern that unfair criticisms might dissuade qualified individuals from participating in such committees.

A Comprehensive Look at Adani Group Shares in 2023

The Adani Group has been thrust into the spotlight in 2023, courtesy of contentious allegations made by the American short-seller group Hindenburg Research. 

In the present, investing in Adani Group shares beckons both opportunities and challenges; while historical returns and market capitalization of most Adani Group companies are attractive, potential deterrents such as high price-to-equity (PE) ratios, intraday volatility, and limited dividend yields should be considered by investors. 

A Look Into the Adani Group Companies

A comprehensive analysis is essential for investors and stakeholders seeking a balanced perspective on Adani shares in the current financial climate. 

Adani Green Energy

With a relatively high PE ratio of 137.48, Adani Green Energy is perceived as trading at a premium valuation.

Adani Green Energy’s trailing twelve-month earnings per share (EPS) stands at INR 6.83, a key metric for assessing profitability.

The company boasts a substantial market capitalization of INR 1,48,748 cr, highlighting its prominence in the renewable energy sector.

Adani Green Energy’s PB ratio of 21.69 suggests a market valuation significantly exceeding its book value, indicative of high investor expectations for future growth. Not offering any dividend yield, Adani Green Energy aligns with firms reinvesting profits for expansion and growth.

With a beta of 0.96, the stock experiences moderate volatility, in line with broader market trends. Adani Green Energy’s 52-week high and low prices are INR 2,258.80 and INR 439.10, respectively.

Performance Overview of Adani Green Energy

Recent returns indicate a one-day decline of -1.01% and a weekly decrease of 2.43%. Over one month, a decline of -6.56% is noted, while the past year witnessed a substantial drop of -56.4%. 

Despite short-term fluctuations, Adani Green Energy has demonstrated remarkable long-term performance, boasting a 3-year return of 33.13% and an extraordinary 5-year return of 2286.4%, signaling significant potential for growth in the renewable energy sector.

Adani Enterprises 

Adani Enterprises presently commands a PE ratio of 102.46, indicative of a relatively high valuation in the market. It is essential for potential investors to acknowledge this premium when contemplating an investment in the company. 

The trailing twelve-month earnings per share (EPS) for Adani Enterprises stands at INR 23.49, providing valuable insights into the company’s profitability over the past year. Boasting a substantial market capitalization of INR 2,74,324 cr, Adani Enterprises positions itself as a major player within its sector. 

With a Price-to-Book (PB) ratio of 7.64, the company’s market valuation surpasses its book value, suggesting it trades at a premium concerning its assets. While the company offers a minimal dividend yield of 0.05%, potentially unattractive for income-oriented investors, it exhibits higher volatility with a beta of 2.25, signifying increased volatility compared to the broader market. 

Adani Enterprises’ stock has witnessed a 52-week high of INR 4,190.00 and a low of INR 1,017.45. In terms of recent price returns, the stock has demonstrated a decline of -0.90% over one day and a more substantial decrease of -3.31% in one week. 

Despite short-term fluctuations, the company showcases remarkable long-term performance with an outstanding 3-year return of 683.83% and a remarkable 5-year return of 1387.7%, highlighting its potential for growth within its sector.

Adani Ports & Special Economic Zone (SEZ) –

Adani Ports & SEZ holds a PE ratio of 27.53, indicating a moderate valuation in the market and suggesting that the stock is reasonably priced concerning its earnings. 

The trailing twelve-month EPS for Adani Ports & SEZ is INR 29.01, providing insights into the company’s profitability over the past year. With a market capitalization of INR 1,72,508 cr, the company solidifies its position as a major player in the sector of port operation and logistics. 

Maintaining a PB ratio of 3.89, Adani Ports & SEZ trades at a reasonable valuation concerning its book value. The company offers a dividend yield of 0.63%, potentially attractive to income-oriented investors seeking returns. 

Exhibiting a moderate level of volatility with a beta of 1.46, Adani Ports & SEZ is somewhat more volatile than the broader market. The stock’s 52-week high and low prices are INR 916.00 and INR 395.10, respectively. 

In terms of recent price returns, the stock has experienced a minor decline of -0.80% over one day and -1.99% in one week. Despite short-term fluctuations, the company demonstrates strong long-term performance, with a 3-year return of 128.2% and a substantial 5-year return of 154.41%, showcasing its potential for growth within the port operation and logistics sector.

Adani Power –

Adani Power currently boasts a relatively low PE ratio of 8.76, indicating that the stock may be trading at an attractive valuation in the market, potentially making it an interesting choice for investors seeking undervalued opportunities. 

The trailing twelve-month EPS for Adani Power is INR 38.13, reflecting the company’s earnings over the past year. With a market capitalization of INR 1,28,802 cr, Adani Power positions itself as a significant player in the power generation industry. 

Maintaining a PB ratio of 4.87, the company is reasonably valued concerning its book value. However, the company offers a dividend yield of 0.00%, suggesting it may not be a primary choice for income-oriented investors seeking dividends. 

Adani Power demonstrates a higher level of volatility with a beta of 1.76, indicating potentially increased risk associated with this stock. The stock’s 52-week high and low prices are INR 409.70 and INR 132.40, respectively. 

In terms of recent price returns, the stock has seen a minor decline of -0.46% over one day and a more significant decline of -4.53% in one week. Despite short-term fluctuations, the company demonstrates impressive long-term returns, with a 3-year return of 827.64% and a substantial 5-year return of 869.38%, illustrating its potential for growth within the power generation industry.

Adani Total Gas (formerly Adani Gas) –

Adani Total Gas currently boasts a relatively high PE ratio of 116.82, suggesting that the stock may be trading at a premium valuation in the market. 

The trailing twelve-month EPS for Adani Total Gas is INR 5.08, reflecting the company’s earnings over the past year. With a market capitalization of INR 65,224.24 cr, Adani Total Gas positions itself as a significant player in the gas distribution industry. 

Maintaining a PB ratio of 23.80, the company may be trading at a significant premium concerning its book value. 

Offering a modest dividend yield of 0.04%, it may not be a primary attraction for income-oriented investors. Adani Total Gas exhibits slightly higher volatility compared to the overall market, with a beta of 1.06, indicating the potential for more substantial price swings. 

The stock’s 52-week high and low prices are INR 4,000.00 and INR 587.75, respectively.

Performance of Adani Total Gas –

In recent price returns, Adani Total Gas witnessed a minor decline of -0.41% over one day and a more substantial decline of -2.99% in one week. 

Over one month, the stock experienced a notable decrease of -7.21%, and over three months, it faced a decline of -8.16%. Over the past year, the stock exhibited a significant decline of -81.19%. However, despite recent challenges, the stock delivered impressive long-term returns, with a 3-year return of 221.18%. 

Unfortunately, 5-year performance data is not available (N.A). These figures suggest that Adani Total Gas has faced recent challenges, but its long-term potential may still be of interest to investors in the gas distribution sector.

Adani Wilmar –

Adani Wilmar holds a relatively high PE ratio of 142.39, indicating a premium valuation in the market. The trailing twelve-month EPS for Adani Wilmar is INR 2.38, reflecting the company’s earnings over the past year. With a market capitalization of INR 44,085.10 cr, the company positions itself as a significant player in the FMCG food and beverage sector. 

Maintaining a PB ratio of 5.61, Adani Wilmar implies a valuation premium concerning its book value. While the company offers a minimal dividend yield of 0.00%, potentially unattractive for income-oriented investors, recent price returns indicate a decrease of -0.86% over one day and a decline of -2.68% in one week. 

Over the past year, the stock exhibited a notable decline of -51.03%. However, data on its performance over 3 years and 5 years are not available. 

These figures suggest that Adani Wilmar has faced recent challenges, particularly over the past year, which may be a consideration for investors in the FMCG food and beverage sector.

Adani Energy Solutions (formerly Adani Transmission) –

Adani Energy Solutions commands a PE ratio of 68.51, indicating its valuation in the market. The trailing twelve-month EPS for Adani Energy Solutions is INR 11.16, reflecting the company’s earnings over the past year. 

With a substantial market capitalization of INR 85,324.04 cr, the company positions itself as a significant player in the power transmission sector. 

Maintaining a PB ratio of 7.40, Adani Energy Solutions suggests that it may be trading at a premium concerning its book value. Despite a minimal dividend yield of 0.00%, the stock exhibits higher volatility with a beta of 1.62, indicating the potential for more substantial price swings. 

Recent price returns indicate a decline of -1.29% over one day and a more significant decline of -4.17% in one week. Over the past year, the stock exhibited a significant decline of -76.41%. 

However, the stock has delivered impressive long-term returns, with a 3-year return of 163.44% and a 5-year return of 368.98%. These figures suggest that Adani Energy Solutions has faced recent challenges, but its long-term performance may still be of interest to investors in the power transmission sector.

ACC (Associated Cement Companies)-

ACC has a PE ratio of 51.99, suggesting a relatively higher valuation in the market. 

ACC’s trailing twelve-month Earnings Per Share (EPS) stands at INR 38.74, reflecting the company’s earnings over the past year. With a substantial market capitalization of INR 37,821.29 cr, ACC positions itself as a significant player in the pan-India cement industry. 

Maintaining a PB ratio of 2.69, ACC indicates a valuation premium relative to its book value. Offering a dividend yield of 0.46%, ACC may attract income-oriented investors looking for regular dividend income. 

ACC has a beta of 1.05, indicating that its stock price has experienced movements broadly in line with the overall market. Recent price returns indicate a decline of -1.25% over one day and a slight decrease of -1.21% in one week. 

Over three months, ACC has shown a stronger performance, with a rise of 12.2%. However, over the past year, the stock has faced a decline of -9.25%. Over a 3-year period, ACC’s performance is relatively strong, with a return of 29.01%, and over 5 years, it has delivered a return of 30.81%. 

These figures suggest that ACC has had variable performance in recent weeks, with more robust longer-term performance, and it is considered a key player in the pan-India cement sector.

Why Adani Companies Shares Can Be a Good Buy

1. Historical Returns

Numerous Adani companies have demonstrated exceptional historical returns, with some achieving growth exceeding 1,000% over the past five years. These robust returns may appeal to investors seeking substantial capital appreciation.

2. Market Capitalization

Adani Enterprises and Adani Green Energy boast significant market capitalizations, underscoring their strong positions in their respective sectors. This factor can instill confidence in investors regarding the stability of these companies.

3. Diversification

The Adani Group encompasses a diverse range of companies spanning various sectors. This diversity provides investors with the opportunity to diversify their portfolios within a single conglomerate, potentially enhancing risk management.

4.Moderate Dividend Yields

While some Adani companies offer modest dividend yields, even these minimal returns can contribute positively to overall investment returns. This feature may attract income-focused investors looking for a balance between capital appreciation and regular income.

5. PE Ratios

Despite varying PE ratios, Adani companies may attract growth-oriented investors willing to pay a premium for stocks with promising growth prospects. The potential for robust future earnings can make these stocks appealing.

6. Beta Values

Certain Adani companies, such as Adani Green Energy and Adani Total Gas, exhibit lower beta values, indicating relatively lower volatility compared to the broader market. This lower volatility can be an attractive feature for risk-averse investors.

Why Adani Shares May Not Be a Good Buy

1. High PE Ratios

A notable concern is the elevated PE ratios of many Adani companies, signaling a premium valuation. This characteristic may discourage value investors seeking stocks with lower valuations.

2. Volatility

Several Adani companies display high beta values, indicating significant volatility. This may make risk-averse investors cautious, as higher volatility often correlates with increased risk.

3. Lack of Dividend Yield

The majority of Adani companies offer minimal or no dividend yields, potentially dissuading income-oriented investors seeking regular income from their investments.

4. Mixed Short-Term Performance

Certain Adani stocks show mixed short-term performance, with fluctuations over one-month periods. This volatility could pose challenges for short-term traders seeking more predictable market behavior.

5. Market Sentiment

The Adani Group has faced controversies and regulatory scrutiny, impacting market sentiment. Negative news or developments can adversely affect stock prices, introducing an element of uncertainty for potential investors.

6. PE Ratio Discrepancies

Adani Wilmar’s exceptionally high PE ratio compared to its sector may raise questions about its valuation, potentially making investors cautious about the stock.

Controversies Surrounding Adani Group

The Carmichael coal mine project in Australia, launched by Adani in 2014, faced hurdles, including activist pressure, international bank refusals for financing, and legal challenges related to environmental impacts. 

The project, now under the name Bravus Mining and Resources, has commenced coal exportation as of December 2021; controversies include scrutiny of Adani’s Australian mining head’s prior involvement in a pollution incident in Zambia and legal challenges from environmental groups regarding the mine’s impact on groundwater.

Overwhelming Corporate Debt

As of 2022, the Adani Group faced substantial financial challenges, particularly in relation to corporate debt. The conglomerate’s total corporate debt had reached a staggering $30 billion, prompting concerns about the group’s cash flow and credit metrics. 

Credit rating agencies and analysts issued warnings, and in August 2022, CreditSights, a unit of Fitch Ratings, expressed concerns about Adani’s aggressive expansion strategies, highlighting the potential for a “worst-case scenario” leading to a debt trap and potential default. Despite discussions with CreditSights to address these concerns, the fundamental issue of overleveraging persisted.

The CreditSights report garnered significant attention for its dire assessment, underscoring the need for a comprehensive financial reassessment.

Gautam Adani and Political Ties

Gautam Adani, the Chairman and Managing Director of the Adani Group, has faced allegations of close associations with prominent Indian politicians, including former Chief Minister of Gujarat and Indian Prime Minister Narendra Modi and his political party, the Bharatiya Janata Party (BJP). 

These connections have raised concerns about potential cronyism, particularly as Adani’s companies have been recipients of numerous government contracts in the energy and infrastructure sectors.

• In 2012, an Indian government auditor accused Modi’s administration of providing discounted fuel from a Gujarat state-run gas company to the Adani Group and other companies, heightening allegations of favoritism.
• Likewise, the Modi government made a controversial exception to its energy policy, allowing Adani Enterprises Limited to mine a coal block holding over 450 million tonnes of coal within one of India’s densest forest regions.

Both the Adani Group and Modi’s government have consistently denied allegations of cronyism, but these claims continue to be a topic of public debate.

Stock Market Rigging Concerns 

In 2007, the Securities and Exchange Board of India (SEBI) took action against multiple Adani companies, prohibiting them from engaging in the purchase or sale of securities for two years. 

This action was in response to their involvement in a stock market manipulation scheme that occurred between 1999 and 2001. The scheme aimed to artificially influence stock prices and was executed through entities overseen by Ketan Parekh, the primary accused in India’s largest stock market scandal.

After paying a fine of $140,000, the Adani companies eventually resumed their trading activities; however, the episode left a lasting mark on the group’s reputation.

Tax Evasion Allegations And Complex Financial Trails

On February 27, 2010, the Central Bureau of Investigation (CBI) arrested Rajesh Adani, the managing director of Adani Enterprises Ltd., on charges of customs duty evasion totaling INR 80 lakh.

In August 2017, Indian customs authorities alleged that the Adani Group was diverting millions of funds from the company’s books to tax havens controlled by the Adani family overseas. The scheme purportedly involved the use of a Dubai shell company to siphon off funds. The Guardian published details of a $235 million diversion, further highlighting the complex financial practices of the group.

An investigation by the Directorate of Revenue Intelligence in 2014 uncovered a convoluted money trail from India through South Korea and Dubai, ultimately leading to an offshore company in Mauritius, allegedly owned by Vinod Shantilal Adani, Gautam Adani’s older brother. 

These revelations deepened suspicions of tax evasion and financial irregularities within the Adani Group.

Stock Manipulation and Accounting Fraud Allegations, Hindenburg’s Report

In January 2023, Hindenburg Research released the findings of a two-year investigation, leveling damning allegations of market manipulation and accounting malpractices against Adani. 

The report accused Adani of orchestrating “the largest con in corporate history” and perpetrating a “brazen stock manipulation and accounting fraud scheme” spanning decades.

Hindenburg’s report disclosed that it held short positions on Adani Group companies, triggering a seismic response in financial markets. Bonds and shares of Adani-affiliated firms plummeted, resulting in a market value loss exceeding $104 billion, equivalent to nearly half of the group’s total value.

Adani’s response came in the form of a comprehensive 413-page document, condemning Hindenburg’s conduct as “calculated securities fraud” and characterizing the report as a “calculated attack on India” that threatened the nation’s integrity and growth ambitions. 

Hindenburg countered that Adani’s response sidestepped the core issues raised in the initial report, accusing Adani of using nationalism as a shield.

Cancellation of the FPO

The repercussions of these revelations were far-reaching. Adani took the unprecedented step of canceling its planned $2.5 billion follow-on public offer (FPO) due to heightened market volatility, concurrently announcing the return of FPO funds to investors. 

The Reserve Bank of India initiated inquiries into banks’ exposure to Adani firms, leading to Citigroup and Credit Suisse discontinuing acceptance of Adani Group bonds as collateral. Additionally, S&P Dow Jones Indices removed Adani Enterprises from its sustainability index, and Norway’s Oil Fund divested its entire stake in Adani shares.

Adani’s pursuit of legal action against Hindenburg Research sparked further debates regarding the credibility of the allegations.

Regulatory Scrutiny Continues

In an unexpected twist, a group of truckers in Himachal Pradesh celebrated the Hindenburg report, perceiving it as a catalyst in their struggle against Adani’s decision to shutter two cement plants due to a disagreement over freight rates. 

The report played a pivotal role in mobilizing truckers and gaining political support for their cause.

A March 2023 report revealed that an entity affiliated with the Adani Group had financially supported a company that violated sanctions imposed by the United Nations Security Council (UNSC) on trade with North Korea. This disclosure further heightened scrutiny on the group’s financial dealings.

India’s markets regulator, the SEBI, confirmed in February 2023 that it was investigating allegations made by Hindenburg Research against companies owned by Gautam Adani, signaling ongoing regulatory action.

Judicial Proceedings

• On March 2, 2023, the Supreme Court of India constituted a six-member committee to investigate issues surrounding the Adani Group’s stock market crash following the Hindenburg report. 

However, as of May 19, the committee expressed its inability to draw definitive conclusions, citing insufficient information from SEBI. The Supreme Court granted a three-month extension for SEBI to conclude its investigation by August 14, 2023.

• On June 24, 2023, the share value of Adani Group experienced a substantial decline following reports that the United States Department of Justice and U.S. Securities and Exchange Commission were probing the company’s communications with U.S.-based investors, triggered by a report from a short seller.

• On August 31, 2023, the Organized Crime and Corruption Reporting Project made allegations suggesting that substantial funds, amounting to hundreds of millions of dollars, had flowed into publicly traded Adani Group stocks. 

These investments purportedly occurred through investment funds in Mauritius, marked by a lack of transparency. These funds were allegedly linked to partners associated with the Adani promoter family, implying significant financial gains from these clandestine transactions.

The Last Bit: As the controversies surrounding the Adani Group continue to evolve, potential investors are left with uncertainty; the fallout from these revelations has transcended financial markets, affecting international perceptions of the conglomerate. 

The delicate balance between legal proceedings, regulatory actions, and market sentiment leaves the future of the Adani Group in flux. Any decision to invest in the conglomerate demands thorough scrutiny, a nuanced understanding of the ongoing investigations, and a keen awareness of the dynamic forces shaping its course.