The real reason behind crash in ACC and Ambuja Cements

After Hindenburg published its report there has been carnage in Adani group stocks. Amid this chaos, even the recently acquired

and Ambuja cement experienced deep cuts. These were good transparent businesses with healthy cash flows and a history of resilient performance. But still these stocks crashed along with the rest of the Adani pack. What could be the reason behind it?

This is a situation where the promoter is trapped in a fire that is slowly engulfing some of his companies. Promoters have only two options – get out of the burning house with minimal damage or bring water from the house which is still unaffected.

Which option the promoters chose decides the future course for all his companies. In the past, there have been many instances where promoters have fallen prey to the hope bias and disposition effect and paid a heavy price for it.

In the early 2010s, Anil Ambani’s

Communication (R Com) was in the middle of a lot of problems like huge debt, failed investments, lawsuits, and stiff competition. At one point in time, Anil Ambani owed over USD 700 million to Chinese banks. He finally declared bankruptcy in 2020 and stated he has no meaningful assets left.

Although his downfall was majorly due to only one of his group companies – Reliance Communication. But his other businesses like

, and went bust too. Most of his resources (time, energy and money) were utilized by one company (R Com) as a result his other companies paid the price of his negligence.

A similar situation was observed in Satyam Computer’s case, where the promoter channelized its flagship IT company’s cash flows to fund the group’s capital-intensive real estate business.Promoters who don’t cut off the body part (a group company) which is affected with gangrene allows the infection to spread in the whole body (the entire group). The old trading adage of cut your losers and let your winners run, is true in running companies too. It sounds simple but is difficult to practice in trading as well as business.

Smart leaders understand the importance of this. Both the Birla and Tata group had made significant investments in telecommunication and were part of the telecom war. Both the groups burned their fingers but their timely exit and not using their cash cow businesses to fund their bleeding telecom ventures has potentially safeguarded them from a grim situation now.

Most of the Adani Group companies are involved in capital intensive and low margin business. They have to consistently deploy large sums of capital for growing. This controversy has impacted the reputation of its flagship company which could make it difficult to raise funds going ahead.

was forced to call off its FPO as a result of the controversial report.

Investors are worried that since the company is in the middle of a fire, it might have to divert resources from businesses which are doing well. In this case the two cement companies which are considered as cash cows of the Adani group might have to bear the brunt in resolving this crisis.

Market knows history has not been kind to those who milk their good assets to fund the bad assets.

Technical Outlook:
The Benchmark index on the daily chart is still restricted within the big Budget Day candle which was formed on 1st February. Nifty witnessed a range-bound price action throughout the week and formed a minor candle within its previous weeks range and closed 0.01% higher at 17,856.50 levels on a weekly closing basis.

Nifty on the daily chart inched higher but failed to show much momentum to surpass 18,000 levels on the closing basis. An index is trading in the range of 50 DEMA and 200 DEMA (Daily Exponential Moving Average).

The momentum oscillator RSI (14) on the daily time frame is hovering near the 35 – 55 range with a bullish crossover near 50 levels. For the past three months, the oscillator is capped below 55 levels, which indicates a bearish to sideways tone for the prices.

In the coming week, 17,600 will be sacrosanct support for the index, while 18,000 could be an immediate hurdle. A break above 18,000 levels will infuse buying towards 18,250 levels.

ET CONTRIBUTORS