Why are markets being affected by the Adani-Hindenburg Saga?

date 30  January,  2023
time 3 mins read

Indian Markets have been in the bullish zone till the mid of Jan-2023 and were all set to go into the budget session with an undertone of a positive sign. And in a major setback, at a go, the stocks came into the hands of the bears starting with a steep sell-off in the Adani group stocks after the American whistle-blower and short-seller research firm Hindenburg Research released a shocking 106 paged short sell research report with many serious allegations on the Adani group’s debt and the sharp rise in the share’s prices of the various subsidiary companies in a short time frame.

In the shocking report for the market participants, Hindenburg alleged stock manipulation and accounting fraud in the Adani Group. “Even if you ignore our findings and investigations and analyze the financials of Adani Group at face value, its seven key listed companies have 85% downside purely on a fundamental basis owing to sky-high valuations,” the report said.

The said report has created havoc in the overall market sentiment, especially in the Adani group followed by the overall big bang banking sector which had witnessed deep cuts of around 5% in a single trading week. On the other hand, the broader markets too witnessed pressure from the market participants as the sentiment turned extremely negative on the street.

Below is the selloff data of the Adani group stocks in the last week:

Company Name% Fall in the last week

The timing of the release of the report is under question as Gautam Adani’s ₹20,000 crores follow-on public offer is live in the market with the anchor investor book already oversubscribed. In the last two trading days, the wealth of the Adani Group chairman has been drastically affected and has pushed him from the second to seventh slot in the elite list of the world’s richest billionaires.

 Adani Group’s head of legal Jatin Jalundhwala has come into the media and called the report by the US research group maliciously mischievous and unresearched. They are also evaluating the relevant provisions under US and Indian laws for remedial and punitive actions against the research report.

Why is the market nervous:

From the market point of view, it is always evident that the equities and the prices move on a pure sentiment basis on day to day basis. Long-term investing can be a different story but the short-term movement is definitely dependent on the news and flows and the investor sentiment.

Even after two days of clarification, threat, and legal action against each other, the Adani group companies continue to plummet even on the second straight day of live trading. Three of the companies locked in the lower circuit of 20% while a couple of stocks even saw more than a 20% decline in a single day.

Whenever there is a negative news flow with respect to any flagship group in the markets, especially with respect to fraud and the promoter identity, there will be a huge sentiment dampener for the participants. Among the sectors, first hit by the news of the debt repayment default by the Adani group were the banks. The first round of sell-off was witnessed in the banking stocks with PSU banks leading the fall from the front. Later the other sectors and broader markets followed the weakness and started to see a heavy sell-off.

It is obvious that any sudden and shocking news will always have a drastic initial reaction in the markets and later stabilizes as the news gets digested by the market players. We expect the markets slowly stabilize as we approach the budget day and the total focus will be on the budget announcements and the global events like the Federal Reserve Interest Rate decision and followed by the RBI meet outcome. The nerves of the markets are expected to cool down in the next few days and slowly the sentiment will also get stabilized.

Technically, the index is under the bear grip with sentiment dampening from the short-term news flows. From the historically drafted levels, we expect 17300-17600 to be the best accumulation levels in the index where index constituent stocks may be accumulated from the long-term perspective. Among the sectors, we expect Auto, IT, Banks, cement, and pharma stocks to do well in the coming months, and a dip in these frontline stocks of the sectors may be utilized to accumulate for investment perspective.

It is said that good investment is always done at the bad times while the best yield is generated at the bad time of the markets. Nobody can catch the exact bottom of the markets but the accumulation levels can be extracted from the charts and the historical data.