Adani Enterprises (NSE: ADANIENT) shares rose 20% in India today on a delayed reaction to the Supreme Court's discussion of Adani and Hindenberg on Friday. In fact the share prices of all of the Adani Group companies rose on the day. A fair enough reaction given that all 10 of the listed shares fell substantially when the Hindenberg report first came out. We have to admit that we don't read the Supreme Court decision in quite the same way as the market does. We think it's a very limited discussion, not a general insistence that Hindenberg was or is wrong. We also have no view on whether Hindenberg is right either, we're just saying that this latest news isn't quite as exculpatory as the market seems to think.
The background here is that the Adani Group is made up of at least 10 listed companies. There are some cross shareholdings, obviously. Hindenberg went on, in its short sellers report, to insist that there were hidden loans to companies within the group, those loans were then used to finance cross group share purchases. That would be fine when prices were rising. But if prices started to fall - or if the debt burden could not be supported - then the effect would quickly go into reverse. Shares would have to be sold to pay back debt, the effect of the sales would lower prices thus destroying the security supporting other parts of the debt burden. In short, gearing is great on the way up and can be fatal on the way down.
Adani Enterprises share price from Google
Our reading of the Supreme Courts announcement was: “The specific phrasing is: “...it is not possible to conclude that there was a regulatory failure on the price manipulation allegation.” Which isn't, not really, quite and wholly the same as stating that there's no price manipulation as alleged.” We stand by that. There's sufficient ambiguity in that bureaucratic language to say that no specific instance of regulatory failure has been found. That's not the same - to us at least - as saying that Hindenberg is entirely wrong in its allegations.
Do note, again, we're not saying Hindenberg is right either. Only that this Supreme Court release does not, to us, read like a refutation of the claims.
We therefore think that this might have a little further to run.
One final point, the reason that Adani Enterprises has risen more than the other shares in the group is that ADANIENT is most exposed to the problems if they turn out to be true. Ports, as one example, has its own and strong cashflows. That not quite so true of Enterprise.
