Originally published on 29th January 2023 exclusively for our paid members. It is being published as blog for the larger audience. It also can give a glimpse about the way we handhold our members through their investment journey. 



Dear Investors,

You may be rightfully feeling uncomfortable and concerned about the market fall in India in last two trading sessions on 25th and 27th January ’23. Also, many of you may be looking for an update from us about what must be done with your existing portfolio.

It’s our effort to address these issues here. We are dividing the note in three parts:

What actually happened which caused market fall?

What may happen when going forward in the short term?

What we should do with our present investments and whether fresh investments are advisable right away?

One caveat: The situation is constantly evolving with constant and conflicting news flows. Our report is based on whatever information is available till now. Please keep that in mind.

What actually happened which caused market fall? --- Adani Enterprises, the flagship company of Adani Group which have come out with a public offer of Rs. 20,000 cr FPO to make investments in their myriad businesses and also to pare some debt, which is almost Rs. 2 lakh crores as on date. By any standard, the company is overleveraged, generate insufficient cash flow as on date and their stocks are very highly valued. Since we don’t track it closely, we really don’t want to delve further here. Enough news items are floating around and you may choose to read those from credible sources. Their issue public for retail participation was opened on 27th Jan and will close on 31st Jan.

On 25^th morning, suddenly, a well-regarded US based forensic research firm, Hindenburg Research, who has a reasonably good track and run by a credible name in investigative financial reporting, Nate Anderson, came out with a voluminous report casting aspersions on many aspects of India’s Adani Group. They have also declared that they have a short position in Adani issued overseas bonds.

I read the report in detail. We won’t discuss merits and demerits of all those allegations. Allegations against this group is not new but possibly none were as detailed as this Hindenburg report, which claimed, it took them two years to prepare it! Adani group has responded to it with their 19 pages note and also informed that they will give more detailed response after closure of the issue on 31^st Jan.

This news seriously spooked market sentiment and many opportunistic short sellers took advantage of this sentiment to bring down shares of most other companies too. There is nothing illegal or unethical in it. These types of events do happen in any matured markets. All we need to focus is how fast the sentiment recovers for better or where we need to exit market, if needed, for risk management. 

Market was looking weak for few days but we thought may be, it was due to impending budget or weak Q3 ’23 or weakening domestic and global economic environment. The Hindenburg Report aided to this already uncertain environment!

Since Adani Enterprise and Adani Ports both are part of NIFTY 50 (though their combined weight in Index is about 2%), any major weakness in the stocks affected the overall sentiment.

What may happen when going forward in the short term? --- As of now, Adanis have claimed that their Rs. 20,000 cr public issue will go as per declared rate and as per present schedule. Adani Enterprise share closed at Rs. 2761/- on 27^th Jan and lower band of issue price is Rs. 3112/-. So, market price is 11% below the offer price. We think, unless Adanis had unofficial confirmations from some sections of investors, they wouldn’t have made these brave declarations. In case this scenario plays out, there will be short covering in the stock and market may bounce back fast. The short build up in February Futures are not abnormally high compared to historical average Open Interests. So, it may be likely that this event plays out without much further dramatic movements in market. But if the proclamation turns out to be "untrue" then we may see further fall in Adani shares which will drag entire market down. 

Adani shares were included in different MSCI Indices for last few months. Taking notice of the Hindenburg report, they notified that they will re-look into the weightage of the Adani stocks in their indices. Through these indices US$ 3.5 billion were invested in Adani shares. In worst case, if they exclude the shares from their indices, US$ 3.5 billion outflow is possible from Adani stocks in quick time. That may affect the market once again. If the present FPO goes through smoothly and free float of Adani shares increase then MSCI will hopefully relook into it. We will know more about it in coming days.

But remember, Adani bonds are shorted in overseas market and we don’t know if those are squared off as yet. Hindenburg didn’t short Indian listed stocks; whatever happened here is a local issue. Unless the broader issues raised at international forum are fairly and squarely addressed by Adani in detailed, transparent and forthright manner, it will linger and can affect their growth aspirations seriously as large part of their borrowings are raised from overseas markets. One minor positive for Adani group on this matter is --- Large sums are invested and planned to be invested by Middle East sovereign funds, whose investments are not only directed by return they generate on their investments but also to enhance their strategic and political clout in the invested countries. So, how deftly Adani handles these issues will be known in coming days.

One fear people have is about Indian banks exposure to Adani groups. As on date, only 40% of Adani total loans are sourced from India (Rs. 80,000 cr appx) and that too was mostly funded by public sector banks. Private sector bank exposure into Adani is very small. But we feel, compared to overall loan book of both public and private sector banks net exposure to Adani is not such that it may pose any structural risk to these banks balance sheet. Also, the assets already developed and are being developed by Adani is valuable and strategic. So, the collateral available with bank has reasonable value. Also, Adani has no track record as yet of defaulting on any loan, delaying interest payment etc. (as much we can gather).

Main issue of Adani is opaque holding structure, low floating stocks, proximity to governments, absurd valuations and expanding itself in too many diversified fields too rapidly with weak management bandwidth. These issues were there, is there and will be there. We can avoid investing here and move on to other myriad opportunities as we always did.

How and why companies like Adani survive and thrive in spite of so many questions around them are a subject in itself but it falls in the realms of political economy of ‘governance of capital’ and interrelation between citizen, government, business, public policy, incentive towards 'direction & flow' of capital. It’s a subject we can sidestep for our present purpose.

What we should do with our present investments and whether fresh investments are advisable right away? --- Wait to see how market opens tomorrow. Frankly we don’t know how market will react in short term. Remember last full budget of this present central government is on 1^st Feb. Also, the FED meeting of USA is scheduled for 1st Feb and commentary from them will also be critical for direction of global interest rate and dollar Index (DXY). So next few days will be volatile and its advisable not to invest significantly. You can buy small quantity slowly if you find stocks below our recommended price.

But don’t sell anything. If we feel there is market level risk, we will update you. NIFTY is currently at 17604. We will see if it falls below 17400 level on weekly charts and then will take a definite view.

Investment has its own set of worries, confusions and stresses. But adjusting oneself behaviourally one can benefit. We will always be there to guide, support and advice you to best of our abilities.

Best regards,

Aveek Mitra