4 Reasons Why Adani Group Stocks are Falling

Editor's note:

Adani group stocks were under the spotlight on 14 March 2023 amid the ruckus over the Adani-Hindenburg saga in Parliament as the second leg of the budget session kicked off on 13 March 2023.

Four Adani stocks, namely, NDTV, Adani Total Gas, Adani Transmission, and Adani Power, hit their lower circuit.

Two Adani companies, Adani Transmission and Adani Total Gas, were put under the long-term additional surveillance mechanism (ASM) framework.

Both BSE and National Stock Exchange (NSE) have issued two separate circulars in this matter. The bourses also put NDTV and Adani Green Energy under the long-term ASM framework Stage - II.

The move also comes close on the heels of the two exchanges putting Adani Group companies, including Adani Enterprises, Adani Power, and Adani Wilmar, under the short-term additional surveillance measure (ASM) framework Stage - I from Thursday,9 March 2023.

Also, this isn't the first time that Adani Group shares are experiencing such a wild swing. The group companies experienced a similar downtrend in February 2023.

We discussed the probable factors behind the decline in this editorial back then. Much has changed since then.

Read on to know more...

Why are Adani Group shares falling?

The Adani group has lost over Rs 12 trillion (tn) of its market value from the peak levels after Hindenburg's bombshell report.

The scathing report alleged that the group indulged in accounting fraud and manipulation of stocks, a claim that brought Gautam Adani down from the third richest person in the world to below the top 30 at present.

Adani Group Stocks Performance Since Hindenburg Report

Company	Change (%)
Adani Total Gas	-81%
Adani Transmission	-75%
Adani Green Energy	-74%
Adani Enterprises	-65%
Adani Power	-49%
Adani Wilmar	-37%
NDTV	-33%
Ambuja Cement	-31%
ACC	-25%
Adani Ports	-22%

Source: Equitymaster

These allegations were the tipping point which broke the bubble in overvalued Adani stocks. What followed was a series of other reasons and factors which caused the downfall of Adani.

Here are the latest developments on Adani group stocks.

#1 Index rebalancing

Following the Hindenburg report, index provider MSCI (Morgan Stanley Capital International), an investment research firm that provides stock indices, portfolio risk and performance analytics, in its meeting on 10 February 2023, reduced the weightage of four Adani group stocks.

It reduced Adani Enterprises, Adani Total Gas, Adani Transmission, and ACC's free float by 0.82% after reassessing the number of shares freely traded.

MSCI then delayed the changes for Adani Total Gas and Adani Transmission to the May 2023 benchmark review.

Adani Enterprises will see a weight reduction of 20 basis points in the MSCI Global Standard Index with effect from tomorrow, 1 March 2023.

Following reduction in the MSCI index, the Financial Times Stock Exchange (FTSE), a leading global provider of benchmarks, analytics, and data solutions, also announced changes for the Adani group and its associated securities.

It will proceed with the scheduled index review changes for the Adani Group and its associated securities in line with index methodologies and policy guides with effect from 20 March 2023.

The FTSE has also restricted trading in these securities due to the respective daily price limits being hit.

As index rebalancing usually results in fund outflows from the stock, Adani companies are once again under pressure.

#2 International giants and their decision on accepting Adani bonds

Brokerage firm Credit Suisse and the wealth investment arm of Citigroup, have stopped accepting bonds of Adani-led companies as collaterals for margin loans. This is done in a bid to intensify scrutiny on the beleaguered Adani group post allegations.

Credit Suisse has also assigned a zero-lending value for notes sold by Adani Ports and Special Economic Zone, Adani Green Energy, and Adani Electricity Mumbai.

When a private bank cuts lending value to zero, clients typically have to top up with cash or another form of collateral, and if they fail to do so, their securities can be liquidated.

The group has also abruptly pulled a record domestic stock offering in the form of FPO after group shares tanked. It has also shelved plans to sell Rs 10 billion (bn) (US$ 122 million) of bonds via a retail issue.

#3 Slowdown in growth?

The Adani group has now decided to hold off fresh capital expenditure as the group prioritises bolstering its financial health over-aggressive expansion.

According to media reports, in line with this decision, the group has halted its investment in a coal-to-polyvinyl chloride (PVC) plant in Mundra, Gujarat. The company was looking to spend US$ 4 bn on the project.

The project was expected to produce PVC grades such as suspension PVC (resin), chlorinated PVC, and emulsion PVC.

Further, it has also planned to call off aggressive bidding for road projects in the fourth quarter, when several HAM and EPC projects will be awarded.

The ports-to-power conglomerate had committed a US$ 70 bn investment in clean energy by 2030, which may face a threat.

In February 2023, Total Energies announced its plan to put a hold on the US$4 bn hydrogen investment with Adani.

It will also moderate certain accelerations budgeted in its earlier capex plans.

What's more, the Adani group has now decided to scale down the revenue growth target to 15-20% for at least the next financial year, down from the 40% growth originally targeted.

#4 Exclusion from Dow Jones' Sustainability indices

The S&P Dow Jones removed Adani Enterprises, the flagship company of the Adani group, from its Dow Jones Sustainability indices on 7 February 2023.

Adani Enterprises entered the index only two months ago.

While the expulsion may seem unimportant, the move hints at the international investor community's distrust in the Adani group, and its ripple effect may be seen in how foreign investors perceive investment opportunities in India.

This has triggered FII selling in select Adani stocks.

Equitymaster's technical view on Adani group stocks

We reached out to chartist Brijesh Bhatia for what he has to say on Adani group stocks:

• It's been a nightmare for investors of Adani stocks as the group stocks have corrected over 50% from their highs since the Hindenburg Research report
  
  Since the report was out in the last week of January 2023, the rank of Gautam Adani has slipped from 3rd to 30th in the world's richest people list.
  
  The fall has a ripple effect globally as institutions are rebalancing and reducing the weights of Adani stocks in their portfolios.
  
  Is the worst over on the technical charts?
  
  It is difficult to evaluate the quantum of the fall on the group stocks, but I would take a bold call on Adani Enterprises stock.
  
  On the chart, I believe the pain may be over till the low of Rs 1,017 held by the bulls.

Adani Enterprises Weekly Chart

 

• The fall from Rs 3,300 to Rs 1,017 just took five days but the fall paused at 200WEMA (Weekly Exponential Moving Average).
  
  The 200WEMA is a technical analysis indicator that calculates the average price of an asset over a 200-week period, giving more weight to the more recent prices. The 200-week determines the long-term trend of an asset.
  
  With the 200WEMA, the 78.60% Fibonacci retracement was also placed at Rs 1,000 adding a layer of support on the chart.
  
  On the daily chart, the bullish bat harmonic reversal pattern is visible indicating a reversal is on the cards.
  
  The Bullish Bat Harmonic Pattern is a popular technical analysis pattern used by traders to identify potential buying opportunities in the financial markets. It is a retracement pattern that indicates a potential trend reversal to the upside.
  
  The pattern is formed by four price points, which are labeled X, A, B, and C. The pattern starts with a significant price decline (X to A), followed by a retracement rally (A to B), then a continuation of the decline (B to C), and finally a retracement rally (C to D) that potentially indicates the beginning of a new uptrend.
  
  On the chart above, the pattern highlighted in the inset is the bullish bat. The bullish reversal pattern at the multiple support area strengthens the chance of reversal.
  
  Additionally, the RSI (Relative Strength Index) is trending in an extreme oversold zone which weakens the bearish momentum.
  
  The above technical pattern would negate on breach of Rs 950.
  
  Traders and investors should keep in mind the kind of risk involved in catching a falling knife.

What next for the Adani group?

Even after the enormous wealth destruction in Adani stocks, the group has a promising future and has already laid out a comeback strategy to address debt concerns.

In line with its strategy to address debt concerns, Adani group on 28 February 2023 announced plans to repay up to US$ 790 million (m) share-backed loans by end of March 2023.

It is also planning to refinance Adani Green Energy's 2024 bonds via three-year credit line of US$ 800 m.

Additionally, the group's recent acquisition of the Haifa port is expected to act as a silver lining for the entire conglomerate's profit.

It remains to be seen how the Adani-Hindenburg saga will continue to affect the Indian share markets.

In the meantime, you could quickly refer to both fundamentals and valuations of Adani group stocks on Equitymaster's Indian stock screener.

To know whether or not it's time to buy the dip in the Adani Group stocks, or are they still expensive?

Co-head of research at Equitymaster, Rahul Shah wonders whether the Adani correction has created a great buying opportunity.

Tune in to the video below to know more...

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...