group companies continue to slide for a third straight session six billion dollars gone in a day a short seller Hindenburg reset accusing the conglomerate of share price manipulation and fraud using shell companies to pump up the stock of adani Enterprises the report this combination of selective misinformation the baseless and miscredited allegations India's adani group says it's exploring legal action against the U. S short seller Hindenburg research he says Hindenburg is making an attack not just on the company he's also making an attack on India and its growth Ambitions of our company are very strong we will continue to focus on a long-term value creation and grow hi everybody on 24th of January 2023 the Hindenburg report launched a direct torpedo against the adani group and it caused a havoc in the Indian Capital markets and like we saw this had such an insane impact on the adani stocks that seven adani companies lost more than 100 billion dollars in market cap and ever since this report has come out the entire Indian public has been segregated into two extreme categories while on one side people believe the report blindly and started bashing the adani group for pulling off a fraud on the other side people dismiss the Hindenburg report itself and labeled it as a direct attack on the Indian economy so we decided to read both the documents as carefully as possible to help you understand both the Hindenburg report as well as the adani group's responses to the report and after we put out all the arguments in front of you it's completely up to you to decide who's right and who is wrong but the best part is regardless of who wins or loses the one thing that's good about this drama is that it helps us capture a retention to teach you the most remarkable Concepts in business so in this episode today let's do a deep dive and try to understand what are the most powerful arguments of Hindenburg against the adani group what are adani's responses to these arguments and most importantly what are the study materials to help you understand this adani Hindenburg Saga better this video is brought to you by think schools communication masterclass course people if you love the way I tell stories and if you also want to learn how to present your ideas in the most powerful manner possible come join my communication masterclass course this is a six weeks course wherein I have designed special exercises to take you step by step from The Beginner's level all the way up to the tedx level presentation skill and if you have any doubts while doing the course I do live q a sessions on a weekly or bi-weekly basis and I will personally answer all of your questions to help you become a great presenter so if this sounds useful to you and if you want to master the art of communication use the link below and join our communication masterclass course let's start from the basics and understand why the hell is Hindenburg bother about adani so much and what do they gain from this information War well as it turns out Hindenburg is a financial research company that looks to find self-created or man-made issues and uses a method called Short Selling to make a profit by the fall of a company stock prices so if you are familiar with the concept of Short Selling please skip to this timestamp but if you're not here's a very very simple example to understand this concept let's say things solar is one of the listed companies in the Indian stock market with a stock price trading at 10 000 rupees a share and ayush is a super sharp investor who thinks that the price of things solar share is overvalued and it's going to fall drastically so what IU should do is he would borrow one lakh shares of things solar for 30 days from parsh who is parsh he is one of the shareholders of think solar and the condition of this transaction is that after the loan tenure ayush has to return 1 lakh shares back to bash and in return for this lending power should receive a commission of 0. 21 and this commission is based on a lot of factors like stock volatility market conditions Financial indicators Etc and this transaction would be mediated by a stock broker who would again receive a commission to carry out this trade so now ayush has one lakh shares of things cool worth 10 000 rupees each and now what he would do is he would rapidly start selling things solar shares at 9000 Rupees so in total he would sell shares worth 90 crore rupees and when he sells 1 lakh shares at such a steep discount the entire Market will feel as if there's something terribly wrong about things Solar stock and soon enough there'll be a panic in the market whereby even other investors who bought things Solar stock they will start selling it in large numbers and when this snowballing of panic happens think Solar stock price will come crashing down and will eventually Touch 8 000 rupees in just a few weeks but now ayush would cleverly buy back the shares at just 8 000 rupees so when ayush buys one lakh Chess at 8 000 rupees it would cost him only 80 crore rupees so you see well I use sold things solar shares for 90 crore rupees he bought them back at just 80 crore rupees eventually making a profit of 10 crore Rupees and then he would return the shares to Posh this is how ayush would make money through Short Selling or as they say by shorting things solar's stock and just like that even in this case Hindenburg would have borrowed these stocks from a broker while adani's stock price were extremely high and they would have sold it in the market and after that when they came out with a report when the stock prices Came Crashing Down now or a few weeks later they would buy back these stocks eventually they would make a profit so regardless of whether these allegations are true or not if the fear-mongering causes the stock to crash which it did Hindenburg would make a hefty profit now is this illegal well not really is this right or wrong I don't know but just because they are short selling you cannot just ignore the Hindenburg report without actually reading it and understanding it if this is very very clear to you let's try to understand the hindenburg's allegations and adani's responses to the same now we all know that adani who had a net worth of roughly 120 billion dollars he had gotten most of his wealth in the last three years at the end of 2019 his net worth was around 20 billion dollars but the rest 100 billion dollars got accumulated in the past three years itself and this according to Hindenburg is largely through the appreciation of his stock prices in his group's seven key listed companies if you see in the last three years itself adani Enterprises stock price has shot up by 1398 gas has shorter by 2121 and green has shot up by 908 percent so the question is how on Earth did adani companies accumulate so much wealth and what is a secret to their growth where apart from their Cutting Edge execution one very very critical factor for their growth has been their debt strategy and this is one of the most important things that the Hindenburg report points out so let's use a simple example to understand this and by any chance if you remember this example from our video that we made about six months back please skip to this timestamp if you don't here's an oversimplified analogy to help you understand the adani's death strategy better let's say we have a listed company called thing Enterprises with a market cap of 10 000 crores a revenue of 2500 crores and a net profit of 500 crores and under this company we have three more companies called thing power think infra and think green these three daughter companies are not listed yet but they have a huge potential to scale in the next 10 years now you see if think Enterprises bags are tender to build a port that would cost 7500 crores think Enterprises will have to reject it why because we do not have the profits to pay 7500 crores at the same time the banks would hesitate to give us a loan of 7 000 500 crores with such low profits of just 500 crores and the last Way by which we could raise money would be by pledging our shares as in if mice taking the company is worth 7 000 500 crores I would pledge 10 of my shares in the company worth 750 crores and then the bank would do a risk analysis and give me a loan worth 350 crores but in this case today 7500 crores I can't pledge 80 percent of a mistake and raise these loans right that would be ridiculous but this is where a consultant designs an intricate framework to help me get these projects effortlessly firstly we would decide to list all our daughter companies in the stock market and because of the brand value of think Enterprises all the three companies would have a stellar IPO so in the next five years think green has a market cap of hundred thousand crores think power Hits 10 000 crores and think infra stands at 5000 crores and now our shareholdings amount to 75 000 crores seven thousand crores and three thousand five hundred crores respectively and now if think infra wants to raise 7500 crores here's how they would do it firstly it would raise 2 000 crores by projecting its profits so if you are companies generating 500 crores of profit the banks would not mind lending you 2 000 crores because they know that you can easily repay the loan with just your profits of the next four years so this way 2000 crores has been raised and now we need another 5500 crores this is where we have method number two in this method what think would do is since think Green's stock price is very very high it would pledge 10 percent of its own shares to get a bank loan so in this case 12 percent stake worth 12 000 crores is pledged to the bank to get a loan of 6 000 crores and once they get this loan they would loan 5 000 crores to think Enterprises and use the rest one thousand crores for its expansion so now we have 7 000 stores in total and now we just need 500 crores extra for this we will just issue a bond of 500 crores and raise the money directly from the people that's it 7500 crores of capital has been traced and now we could take a giant project and make headlines in the market this is all by taking a loan through pledging the shares of the daughter company and then passing it on to another group company think can help itself grab giant projects and now if you look at the adani group you will see something very very similar let shares is definitely a new Norm which is used by several aggressive promoters and Gautam adani is no exception to that adani group has pledged its entire Equity stake in the newly acquired companies initially adari Enterprises was the only company listed in the stock market but from 2008 onwards they started listing their companies and now they have seven listed companies which are adani Wilmer adani Enterprises adani ports and scg adani power adani transmission and many of these companies also have their own subsidies and then as per the requirements of the company they orchestrated an intricate framework of cash flow just like the one that we learned right now so if you see their statements you will see that adani transmission India is a subsidiary of adani transmission and its financial statements for 2014-15 show that it Borrowed 2794.
24 crores by pledging all immovable and movable assets of two transmission lines and almost half of this money that it borrowed that is about 1222. 97 crores went as a loan to another listed company and that is adani Enterprises similarly between 2039 and 2018 adani power struggling with cash flow this was because when the power project was built in Mundra it was expected to get cheap supply of coal from Indonesia but when Indonesia raised the price of its exported Coal adani Power Mundra claimed that its cost of coal had risen so much that it could no longer Supply Power at original rates so during this period the company's annual reports show several instances whether adani Enterprises made loans to adani power directly and it also gave out loans indirectly through its subsidiaries like Alani infra or cutch power generation and if you look at the extent of the share pledging you will see it in this graph whereby from 2019 to 2020 the promoter gross pledge position actually went from 38 37 and 28 to 58 54 and 50 and this was for three companies which are adani ports transmission and Enterprises so you see this entire complexity is a permutation and combination of two moves using one group company's loan eligibility to pass it on to another group company and lastly to direct cash flow to a troubled group company and like we saw in a previous episode this master plan of cash flow created a virtuous cycle for the iranis whereby when an adani company wants to contest for a tender they are able to easily raise funds after raising funds they bag huge infra projects and once they do every single News Channel media house starts screaming out the progress of the attorneys this in turn boosts investor confidence and more people invest in adani stock so again when the stock price of these companies go up they're able to pledge the value of those stocks to get even bigger loans which again helps them back giant government projects now is this risky absolutely it's very risky because it could lead to a vicious cycle whereby if the Share value drops the banks could sell the shares and when such huge volumes of shares are released the investor sentiment would go negative and that would cause the stock to crash and this would further lead to more selling this is why the Hindenburg report says equity share pledges are an inherently unstable source of lending collateral because if share prices drop the lender can make a collateral call if no additional collateral is available the lender could require a forced liquidation of shares often perpetuating a self-fulfilling cycle as stock prices move lower and selling continues secondly they also point out something called the current ratio of the adani group for those who don't know current ratio is a financial indicator that measures the company's ability to pay its short-term obligations it's basically calculated by dividing companies current assets by current liabilities now if you don't understand this here's a very simple example of the same and if you already understood this please keep to this time's time let's start with current assets current assets are the assets that the company can immediately sell and generate cash and by immediate I mean in less than one year this would include the cash receivable amounts inventories Etc so in case of things solar which is a made-up company we would have 100 crores in a bank balance from previous years of profits we would have 50 crores worth of solar panels in our inventory that could be sold plus we would have clients who are yet to pay us 40 crores for our products plus we would also have office spaces that could be sold to generate another 30 crores so in total our current assets as in the assets that can give us Instant Cash are worth 100 crores plus 50 crores plus 40 crores plus 30 crores equal to 220 crores if this is very very clear to you let's come to current liabilities current liabilities are nothing but the amount of money that we are due to pay in the next one year for example in our imaginary company called think solar we have 50 crores in loan installment to be paid this year plus we are yet to pay our glass and silicon suppliers a total of 40 crore rupees plus we have salaries to be paid which is again going to cost us another 15 crore rupees so in total our current liabilities are equal to 50 crores plus 40 crores plus 15 crores which is equal to 105 crores so our current ratio is current assets divided by current liability which is 220 divided by 105 which is 2. 09 so this is a healthy number why because I have 220 crores worth of assets that I can immediately turn into cash but only 110 crores worth of liabilities to be paid for but if this ratio goes less than one it becomes risky why because it means that you do not have enough assets to liquidate and pay back your debt now in case of think solar if I had 220 crores in liabilities to be paid for but only 110 crores worth of assets that can give me cash it's very risky right this is what the Hindenburg report points out with the adani group whereby they stated that 5 out of the seven adani companies have current ratios of less than one in fact the current ratios of adani green and total gas stand at 0.
5 and 0. 2 so yes it is risky but is it wrong absolutely not and Common Sense is if Hindenburg is smart enough to know this ICICI and SBI are not stupid to oversee this isn't it and the funny thing is Hindenburg is telling this to you in 2023 but the transactions that I showed you right now those are dated back to 2015 and 98 so it's not new information at all and the banks already know it and we made a video six months back so it's not new information and there's nothing too revealing about it if this is very very creative let's look at adani's response to this allegation to count under the allegations regarding their debt the group said that the growth of their ebitda or profit before tax is 2x the growth of debt over the last five years so while profits have grown at 22 percent the net debt which is the total debt of the company minus its cash that has grown at a smaller pace of 11 annually in the last decade so even though the value of debt is high the debt to profit ratio has actually decreased over time and a classic metric to understand the same would be the ratio called net debt to RR ebitda or net debt to run rate ebitda in simple words if a company has a net debt of 10 million dollars and a run rate ebitda of 5 million dollars the net debt to run rate I beta ratio would be 2 which is 10 million dollars divided by 5 million dollars and this indicates that the company has two times more debt than its earnings can support so higher the ratio the more risky the company gets and guess what While most people think adani is sinking in debt in the past three years it's actually the complete opposite of it in fact the group has come out of debt very very rapidly in the last three years so if you look at this table it says that net debt by RR a bit of less than 1 is no risk one to three is moderate risk three to five is high risk and above 5 is very high risk so if you look at this table in 2013 adani had a net debt to ARA repeater of 7. 6 which was very very high risk but by 2016 it came down to 4 which was still high risk but now in 2022 they have brought it down to 3.
2 which is a little above moderate risk in fact if you look at this table three out of the six adani companies are only in moderate risk phase one of them is in low risk one of them is at high risk and green is at very high risk but because they have a huge house of companies to balance it out if you look at their total net debt to run rate Vida it is slightly above moderate risk category secondly the adani is released this graph showing the pledged promoter shares of adani group that have reduced drastically from 58 54 50 and 13 to just 17 7 4 percent and just three percent so you see the risk with share pledging has actually been reduced in the past three years and not increased this is the first part of both sides of the story and like I said I am not going to tell you anything it's completely up to you to decide if this is right wrong risky or safe if this is very very clear to you let's come to the last part of the episode and that are the miscellaneous and fraud related allegations by Hindenburg report on the adani group now for the benefit of time I am skimming through them in groups so that it can save us time and even the Irani group has actually given out a common response to multiple allegations that have been put forward so let's go through them the first set of allegations are regarding stock manipulations you see guys according to sebi rules once a company is listed on the stock market its promoters or the Insiders or the owners of the company they can have a maximum of 75 stake in their own company and it's mandatory for 25 of the shares to be held by the public but Hindenburg implies that there are several shell companies related to the aganis which are buying adani shares to purposefully inflate the stock prices eventually to increase the overall group's controlling stake to even more than 80 percent in some cases companies have created shell companies countries including UAE Caribbean island and Mauritius that led to corruption money laundering and tax theft in the Hindenburg report they claim that adani is accused of stock price manipulation using shell companies Hindenburg accused adani group of a Brazen stock manipulation and accounting fraud scheme a run over decades partly through the use of shell companies that also said now if you look at the second table you'll see that there are these companies like apms Cresta and opal that are based out of Mauritius and they have an unusually high percentage of portfolio in just adani companies so apms has 99. 4 dedicated towards adani companies ltss 97 of Assets in adani and opal is said to have 100 of its assets invested only in adani companies and all these funds are controlled by a single company called Monte Rosa Holdings which together holds 4.
