Adani Group Stocks: Maybe We Didn't Pay Attention?

The chart shows Adani making strong high in mid-November 2022 and then going through a consolidation until a sharp peak on Dec. 20, 2022. Note how the entire consolidation was filled with either long body red candles or small body candles. The top made on Dec. 20 was reversed immediately on the next with a long body candle from which the stock never recovered. This was a full month and more before the report release. We had another strong selloff on Jan. 10 on increased volumes and again the stock price could not recover at all. It slowly drifted lower every successive day until the slam dunk at end of January.

The selling, as it were, started from Dec. 20 and initial three large candle days actually the downtrend in motion. The Rs 3,500-3,600 area was support zone from the past and hence prices consolidated there as traders recouped and investors found . But it seems, from the charts, that the trouble peaked on Jan. 10, so the shorts started there and continued all the way subsequently. Hitting oversold zones at Rs 945 and helped by some ‘valuation’ report from Prof Ashwath Damodaran, the stock has rallied to 38% retracement at 2,239 so far.

What’s next? See chart 2. This is the weekly chart and we can note that the price level around Rs 1,565 has got built as a area for the stock. What this means is that if prices were to close below Rs 1,565 on a weekly chart basis, then the chances are very bright that the prices should fall again and a retest of the Rs 945 bottom would occur.

When that crash had happened, I had put out a note saying that the low had hit a 78.6% Fib retracement and asked to buy. The rally carried to Rs 2,239 and typically, in stocks that have turned bearish or where a strong down move is in progress, a retracement doesn’t usually go beyond 38%. So, chances are pretty good that the rally in Adani Enterprises is completed and now the down move should commence. Panic bottoms hold only for a while. Hence, if the decline resumes, as seems quite possible, the next projected target should be around Rs 650 levels.

Recently, Devina Mehra of First Global did some further work on Damodaran’s valuation and said that the could easily fall to Rs 645 levels if one assumes a slightly higher cost of capital. Now, it does seem to me that one thing that may surely go up for the Adani Group will be cost of capital. So, chances that we will have a down break also increase if that were to happen

Where Adani Enterprises goes, so shall the rest of the group. The pace and extent may vary. But they will follow the leader. The selloff in Adani Transmission began in September 2022 and never looked back. Adani Green saw its top being made in May 2022 and has been headed lower since. Adani Ports, too, started dropping since September 2022, as did Adani Wilmar while Adani Power topped out in August 2022. It is only Adani Total that topped out in January 2023, but it had been preceded by a consolidation for about three months in a tight range, hinting at some distribution perhaps. There has been very minimal rallies in all these stocks, implying that there is no review of them despite the steep fall.

What emerges here is that all the stocks from the group were flashing topping out signals right from around September 2022. But the hoopla around the group was so big that almost all of us got distracted by the price rise and no one questioned their sky-high valuations or steadily deteriorating technical picture. Analysts of all hues are at fault at losing the ball in the case of Adani stocks.

Hindenburg has hit on the super expensive valuations and have forwarded or built arguments of arguable kind to support their conclusion for a short sell. Be that as it may, it did need someone to cry wolf loudly enough for the market and its participants to sit up and pay attention. Fortunes have been made and lost in the moves in the stock since Jan. 27 but only the courageous have chosen to trade in these names. The rest have simply chosen to ignore what’s going on, waiting for ‘the dust to settle. 

Funnily though, all tweets and opinions have all been about where to buy the stocks. I have had many people enquire and I am sure this is also the case with most active market players. Hardly anyone is looking to go short in the two names that are in F&O. In fact, people are finding in Adani Ports, which everyone feels is the only stock in the group with some ‘fundamental merit’.

Were people hurt in the big crash? Not many I would think. The float is very low in every stock and hence public participation was quite limited and institutional presence anyway was very limited, barring LIC. Traders got into the act during the strong drive up and some may have been burnt in the sharp slide. But some of them may also have switched camps to play short as well. The high volatility in both Adani Enterprise and Adani Ports in futures segment has seen options activity in the counters pick up tremendously.  

In terms of correlation, it seems that Adani Ports, Adani Power and Adani Wilmar are more willing to rally compared to Adani Transmission, Adani Total Gas and Adani Green. Chart 3 shows the relative performance. This aspect may continue to be the case into the future as well. Trends of Adani Ports will be closely allied as this is the other stock available in F&O segment.

So, here is what we have observed:

1. Declines in Adani Group started long before the Jan. 25 event. It may have been the handiwork of the Hindenburg folks, shorting the stocks through their India counterparts or it may be the result of people who were in the know of what was to come ahead.

2. The rally from the lows has been very meagre and that suggests that the selling may not be quite done yet. 38% rallies are seen in Adani Enterprises and Adani Ports, the two stocks that are in F&O. The others are woefully minimal yet.

3. Fundamentally, the valuations have always been very high but no one chose to question it. They just chose to stay away. Technical weakness was visible from around September 2022 but no one remarked on it. Thus there has been a huge failure on the part of the analyst community.  

4. People are seeing current prices from the lens of what they were quoting earlier and finding and looking to buy. This has never worked anytime as a strategy and will unlikely work this time too.

5. Panic lows were created in Adani Enterprises and Adani Ports and high volatility has been present over the last week or two in these stocks. But panic lows seldom hold and one must therefore consider a possibility that these lows would be broken or at least tested.

6. Adani Enterprises is the leader stock and the focus of all attention of traders and investors. Its pathway shall influence the way the other five stocks from the group shall move.

7. Value area for Adani Enterprises is at Rs 1,565 and weekly close or two below this level should, in all probability, resume the downtrend. The lower target on it can be to around Rs 650 levels next.