Hi everybody on 24th of January 2023 the Hindenburg report came out with some serious allegations about the market cap of the adani group companies and then we all know what happened a Donnie group a Donnie group last week’s report from Hindenberg research that accused Donnie of Fraud and stock price manipulation a Donnie.
Group companies continued to slide for a third straight session the Dan group says it’s exploring legal action against a US short seller Hindenberg research he says Hindenburg is making an attack not just on the company he’s also making an attack on India and its growth ambition in just 10 days the adani group lost $110 billion in value and Gotham adani’s.
Fortune went down from $121 billion to $61 billion and the stock market of India was in complete chaos but you know what in the next one year something magical happened and Gotham madi’s total wealth went from $ 37.7 billion a year back back to1 billion again and while most people think that the Hindenburg report harmed the adani group companies.
When we looked deeper we realized that this short selling was perhaps a great thing for the yanis because today their cash balance is the highest ever at 4,895 crores which is $5.5 billion on top of that if you look at their 5-year ABA it was just growing at a c of 26.3% but now their portfolio level eitaa has just jumped by 47% year-.
On-ear in the first half of 2024 and this is their highest ever halfe growth in history the question is what exactly changed so drastically after the Hindenburg episode that the adani stocks have started Rising again what was their business strategy to win the trust of their shareholders and lastly what are the business lessons that we need to.
Learn from the incredible comeback of the adani group this is a story that dates back to 2020 when adani’s exponential growth story began so if you see this chart Gotham adani’s net worth reached a peak after covid to go from $19 billion in 2019 to more than $120 billion in 2022 and between 2020 to 2023 as you can see.
In this table the stock price of their company shot up exponentially in fact the lowest performing stock in their portfolio also appreciated by 98% in these 3 years this was because the anes were breaking record after record for example the adani ports in scz became the biggest private Port operator in the country with a 94% market share in.
Private ports similarly adani Enterprises holds the title of India’s largest coal Trader adani green energy is one of the largest solar developers in the world adani total gas operates the largest city Gas Distribution business in India and adani power is the largest private thermal power producer in India this is when both National and.
Intern naal press were fascinated by the growth of the Adis and just when everything was going well the Hindenburg report came out Hindenberg report they claim that adani is uh accused of stock price manipulation using shell companies that are then using their money to pump up the stock of adani Enterprises so it’s a wide ranging report that really.
Raises some big concerns about who is many times seen as the biggest most powerful name in India the Adon group’s Shares are in a free fold adani group stocks they are falling in trade today after Reuters highlight details from a Hindenburg research report but the question we he is in spite of such a big setback how did the Adis come back on.
Track and what exactly was their business strategy well to understand this comeback strategy we must understand the allegations that Hindenburg made so let’s quickly understand these allegations and then the adani strategy the first allegation was that the adani group has used share pledging to take loans from the banks.
And the Hindenburg report pointed out that the method of share pledging could be very risky now if you know why it is risky please skip to this time stamp if not here’s a very simple explanation of the same let’s say there is a company called thing Tech which has 100 million shares floating with 60 million shares owned by Shrea who’s the promoter and.
Let’s say the share price of think Tech is 500 rupees so Sha’s 60 million Shares are worth 60 million into 500 equal to 30 billion rupees or 3,000 crores so if shya wants to raise money for expansion she can either take up loans issue bonds or she could dilute her equity but here’s where using share pledging she could keep her 3 million shares with the.
Bank and take out a loan so 3 million shares of think Tech are worth 150 CR rupes and by keeping these shares as collateral with the bank she can take out a 100 CR rupee loan so if she can’t pay back her loan amount the bank can sell SHA share and recover its loan amount now the reason why this method is risky is because tomorrow suddenly if.
Think Tex stock crashes from 500 to 100 rupees the 3 million shares that Sha kept collateral with the bank will be worth only 30 CR rupees so even if the bank sells these shares the bank cannot recover the money that was lent to Shrea this is how share pledging works now remember this example because we will use it later in the episode so what the.
Hindenburg report said was that the adani group was listing their companies and pledging shares to get loans and then they were passing these loans on to other group companies for investing in new projects so was it risky absolutely yes but was it wrong not at all because Ry doesn’t mean wrong right secondly the report also pointed out the current.
Ratio of adani group for those who don’t know the current ratio is a financial ratio that measures a company’s ability to pay its short-term obligations and it is calculated by dividing a company’s current assets by its current liabilities and again if you understand current ratio please skip to this time stamp but if you don’t here’s again a.
Very quick explanation 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 inventory Etc and current liabilities are nothing but the amount of money that we are due to pay in the next one year so for any company.
If current assets are worth 50 crores and the current liabilities are worth 25 cror the current ratio would be 50 cror divided by 25 crores which is 2 so this means the company has twice the money it would need for the next one year so if this ratio is below one it’s a negative sign if this ratio is equal to 1 it is normal and if it is above one it is.
Absolutely fantastic and the hinden mugg report pointed out that five out of the seven group companies of the adani had a current ratio of below one which was risky and apart from these two major allegations there were several other allegations like the adani group owning shell companies in tax events and all of these allegations have very easily been.
Addressed in a special episode that we made about a year back and you may refer to that episode from this eye button if this is very very clear to you let’s look at how the Adis made a comeback let’s talk business now adani group stocks rallied to C their best day since a scathing report by Hindenburg research all the 10 adani stocks are up into the.
Green some are up by even up to 20% on an intraday trading basis Adan Enterprises for instance is up 7% adani energy and adani transmission are up nearly 12% each adani total gas is also up nearly 50 kn% now this is absolutely stunning to me as a student of business because if you look at the adani group something crazy has happened to all.
Their numbers in the last one year the current ratios of most of the adani group companies have improved in the last 9 months and several big investors have already invested in the company which shows their confidence in the adani group and suddenly the same stocks that crashed are now rising up again so the question over here is how exactly.
Did this happen well the first and the foremost thing that the Adis did was deleveraging and they did two things to deleverage firstly as the shares started tanking there was there was a possibility of the Adan entering into a vicious cycle now listen to this very very carefully when a company pledges its shares to get a loan the share price.
Decreases and the company gets something called a margin call now again this is a very simple concept that you need to know before we move on so let’s understand Margin Call using a very very simple example so in our previous example Shrea pledged 150 crores worth of shares to get a loan of 100 CR rupees now when the stock price is tanked by.
80% this collateral was worth only 30 CR rupees but how much collateral did the bank need they needed collateral worth 150 CR rupees so what will the bank do the bank will ask Shrea to pledge more shares so that the total worth of the collateral could be 150 CR rupees and since think teex share price has dropped from 500 Rupees to 100 rupees now Shrea.
Has to pledge another 12 million shares which are worth 120 crores so that her collateral of 30 crores will have another 120 crores added to make the collateral worth 150 crores this is called as margin call so now if the investors see a margin call what will happen they will see Margin Call as a negative sign because now the company.
Has to pledge more shares as collateral for the same amount of debt and that means the company’s credibility has gone down and eventually what will happen the investors will get frightened and they will start selling the shares eventually the share price will also go down this will again trigger investors and they will start pulling their money out of.
The company by selling their shares and this selling will again decrease the price of think Tech share so again Shrea will get a margin call because of which she will have to pledge more shares so do you see this is a vicious cycle where promoters pledge shares as collateral if a bad event happens share prices tank and then promoters get a margin call.
Then this Margin Call triggers the investors even more because it creates a panic this Panic pushes them to start selling their shares and then the prices tank further and eventually the Vicious Cycle continues but you know what guys in case of the adanes before the cycle could even start they very smartly pulled themselves out of this vicious.
Cycle and instead created a virtuous cycle for themselves so when the report came out there were talks that Adis would get a margin call from the bank because their share prices had gone down but before they could get the margin call the Adis paid back a large portion of their de by March 12th which they took by pledging their shares of adani.
Ports adani green energy and adani transmission and this was done before the schedule date an update on the adani group now they have prepaid $2.15 billion worth of share backed financing ahead of a deadline a $500 million loan taken for the acquisition of uja cements was also paid back ahead of time they have already prepaid or repaid almost.
All loans which is backed by shares so you know what happened instead of a v I cycle a virtuous cycle was created how since the Adis paid back their debt and unplaced their shares they didn’t get the margin call and the moment the headlines of advanced payment hit the market the investors confidence was retained so they invested even more.
Money and the share price started increasing this led to even more investors investing in the company which meant more money to invest in business this is how the adani turned a vicious cycle into a virtuous cycle and to add to that the Adis called off their fpo of ,000 crores after the completion of the FBO process and they returned all of.
Investors money even after getting a full subscription so this showed the investors that the group is standing in Union with the investors now to further regain the confidence of the investors the Adan bought in some of the most valuable players in the world to invest in their company so in the last 12 months you must have seen that the adani.
Group started selling their Equity to multiple entities for example gqg completed a 15,000 446 CR investment in a portfolio of adani companies and these Investments were made across adani ports and scz adani green energy limited adani transmission limited and adani Enterprises limited secondly they also received a funding of $553 million from.
The United States for a Port Terminal in Sri Lanka’s Capital Columbo thirdly the Abu Dhabi International holding company invested 400 million dollars into adani Enterprises and lastly the Qatar investment Authority or qia they required a 2.7% ownership in adani green energy valued at $474 million us so when the company repay the debt.
And got in such big names as investors it again made headlines and they won the trust of the investors and with this money that they got by selling Equity they paid back their debt again to make positive headlines so the adanes addressed the three major allegations outlined in the Hindenburg report which were huge debt pledging of shares and.
Family control today their ABA for 9 months of fi 24 increased by 58% year on-ear and because of that their ratios have improved in fact there is a ratio called the debt to Aba ratio and this debt to Aba ratio shows how much debt a company has as compared to how much money it makes before paying interest taxes and other expenses so if the ratio.
Is two it means that for every one rupee that the compan is making it has a debt of 2 rupees so the lower this ratio the better is the health of the company in this case the adanes reduced their debt to IA from 3.8 before the Hindenburg report to 2.5 after the report and as of first half of 2024 their debt to equity ratio stood at 0.67 as against 1.52 in.
Fy22 similarly their debt to service coverage ratio has improved from 1.47 in f522 to 2.12 in H1 of f524 if this is very very clear to you let’s move on to the next strategy of the adanes and that is focusing on higher margin business and cutting down on diversification long story short the Adis are majorly focusing on their infra.
Projects and they’re taking a step back from the fmcg sector and if we see their core infrastructure businesses 82.8% of their portfolio which includes energy transport and Logistics they registered a robust 23% year on-ear growth in EPA and now the adani group is planning a 7 lakh CR capital expenditure over the next decade for expanding its.
Infrastructure business so while they’re going extremely bullish on their infrastructure projects they are also discussing a possibility of selling their entire 43.9 7% stake in the Wilmar joint venture this is because the profit margin in fmcg business is barely 2 to 3% whereas adani ports has a profit margin of 62% and adani power has a.
Profit margin of 37.7% in fact the Adis have become so bullish that the ABA of adani Enterprises has has grown by 99% Yes you heard that right it has grown by 99% and here’s where we started wondering how did the ab of such a large company increase by 99% so you know what we started digging.
Deeper but the sad Factor we here is that we couldn’t find that but we found something very very interesting we found two projects that the Adis are pursuing very very aggressively which will go on to become projects of national importance and projects of extraordinary Advantage for the ad danis so the question is what are these two projects.
The first project is its b2c infra business which are airports and in the airports portfolio during the quarter of October to December 2023 1990 new routes nine new Airlines and five new flights were added to the portfolio and if you’re in Mumbai you would know that the Greenfield Nai Mumbai project is on track for completion in December 2024.
Nai Mumbai airport is preparing for operational Readiness by the December 2020 4 Mumbai airport has redefined excellence in aviation cater to a massive 9 CR passengers per year and 2.5 million tons of cargo by 2032 now the reason why this is a very big deal is because the market research says that the passenger.
Movement in the Indian airports has increased with an annual number of over 85 million and currently the per capita journey by an Indian is 0.1 per capita on an aggregate basis so Indians on an average take one flight every 10 years and this number is expected to rise to at least 0.6 by 2032 so there is expected to be a 6X.
Jump in the overall passenger traffic which means the airport is a gold mine for the adanes the second project that I found extremely fascinating is your copper smelter plant and this is a very big win for India also so let’s look into it the adani group is building the world’s largest single location copper manufacturing plant at the at Mundra in.
Gujarat the plant with help cut India’s dependence on Imports and Aid energy transition as per the adani group if you see the trend of copper trade since the early 2000s India has been a net exporter of copper but since the last 5 years now India has become a net importer of copper in fact in fi23 the corporate import value Rose to a record.
High of 11,636 crores whereas in fi8 it was just 1,93 crores so the question over here is how did we go from being an exporter of coer to such a heavy importer of copper well firstly the demand of copper is increasing because of EVS so electric vehicles use at least 2.5 times more copper as compared to the internal.
Combustion engine Vehicles the second reason is that the market is facing a copper shortage because sterlite tutuki unit got shut down due to protest this plant was so important for India that it contributed nearly 40% of India’s total copper production so now we are importing copper instead of exporting copper.
On May 22nd the protests in Tamil nad’s chin reached 100 days they want vidanta limited’s business unit sterlite copper plant to be shut vanta pointed out that you know the copper smelter caters to 40% of India’s demand for copper even as uh you know it is of course a National Asset and would be of course Very crucial to the nation’s copper demand.
You know and supply of course but this is where the Adis came in they are building a copper smelter plant with 500,000 tons of capacity at a massive cost of $1.2 billion this is being done in Mundra in Gujarat so this is not just good for the adanes but even for India this is one of the major reasons why India can again become a net exporter of.
Copper so again the Adan just built the perfect business at the perfect time this is the third strategy that the Adis are deploying Which is less focused on low margin business and very high focus on growing and futuristic business business and lastly the Adis are slowing down on their expansion through debt so if you read the news you would know that.
Adani enterprises has cancelled the acquisition of two Road assets which was valued at $375 million then the Adis were in talks with DB power to buy a 1,200 watt power plant but again that also got cancelled so this way their exposure to new risky projects is decreasing because of which they don’t need to pledge more shares at the same.
Time because their business is growing due to more Focus they’re able to steadily grip the market this is how by paying off their debt before the schedule date by un pledging their shares by focusing on their Core Business by onboarding big investors to get credibility and lastly by slowing down the debt bagged expansion the Adis.
Came back even stronger in the Indian market after the Hindenburg report and Sher on the cake even the Supreme Court has already given a clean sheet to the group and the allegations made by the Hindenburg report so again this further boosted the investors confidence in the adani group and this us to the last part of the episode and that are the business.
Lessons that we need to learn from all this drama lesson number one in this world of information Warfare it is very very important to know how to play your cards and turn information into your advantage in this case just like the Hindenburg used information to attack the adanes the Adis prevented a vicious cycle with early debt repayments which.
Eventually gained investor confidence the second business lesson actually comes from a very close friend of mine whose name is Neil and he told me last week that while good Business Leaders cultivate a great relationship while doing business great Business Leaders cultivate a great business relationship with the right people even when there is.
No business transaction because this cultivation of a meaningful relationship with the right people Beyond transactions can help you get an extraordinary advantage in this case the adanes had investment houses from Qatar and abudhabi to help them out because they had a meaningful relationship beyond their routine business so as a.
Business owner the one question that you need to ask yourself is how are you building a high quality relationship which goes beyond transactions and lastly once a great man said when the world throws bricks at you you can either face them mindlessly and let them hit your face or you could use the same bricks and build a castle for yourself.
In this case the Adan used the Hindenburg reports analysis to improve themselves so much that now the investors seem to have more confidence in them than before and I just hope you learned something very very valuable from this case study that’s all from my S for today guys if you learned valuable please make sure to hit the like button.
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