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Adani Group: Sentiment and ESG scores mirror the controversy

Synopsis: Adani Group stocks have hit a major turbulence this week. The intraday charts of Monday, 14th June 2021 for the group’s companies are scary. Adani Enterprises was down more than 25% and Adani Ports was down almost 20% at one point during the session. The other four (Adani Transmission, Adani Total Gas, Adani Power and Adani Green Energy) hit the lower circuit, barring which they would have fallen a lot more. Tuesday saw some recovery but not much. Based on proprietary AI-ML techniques, EMAlpha captures the sentiment scores for stocks in emerging markets. This analysis for Adani Group suggests that the sentiment had fallen sharply on Sunday and then crashed on Monday. What is interesting to see here is that there is not much in the High Frequency (Daily) ESG scores which is consistent with the type of developments over the last few days. EMAlpha High Frequency ESG scores are purely driven by news flow and do not use company reported information such as Sustainability and ESG reports.

Adani Group Stocks hit a major turbulence this week

Adani Group Stocks on Monday, 14th June 2021 at BSE:

  • Adani Ports and SEZ down 8.36%
  • Adani Enterprises down 6.26%
  • Adani Transmission down 5.00%
  • Adani Total Gas down 5.00%
  • Adani Power down 4.99%
  • Adani Power down 4.13%

The intraday charts for the Adani Group stocks on Monday, 14th June 2021 are scary. Adani Enterprises was down more than 25% and Adani Ports was down almost 20% at one point during the session. The last four hit the lower circuit, without which, they would have fallen a lot more. In the second half of Monday and on Tuesday, the stocks showed some recovery but not enough. As a result, Adani Group stocks on Tuesday, 15th June 2021 at BSE were:

  • Adani Ports and SEZ down 0.94%
  • Adani Enterprises up 2.45%
  • Adani Transmission down 5.00%
  • Adani Total Gas down 5.00%
  • Adani Power down 4.97%
  • Adani Green Energy up 2.79%

EMAlpha sentiment scores captured this dip well

Based on proprietary AI-ML techniques, EMAlpha captures the sentiment scores for stocks in emerging markets. This analysis for Adani Group offers interesting insights on Sentiment and High Frequency (Daily) ESG scores.

Sentiment scores

  • The blue line (Figure 1) had fallen sharply on Sunday and then crashed on Monday. This reflects a sharp deterioration in sentiment scores.
  • This is consistent with the type of developments that have happened over the last few days. There was fast evolving news flow which was driving the sentiment scores.
  • Also note the upward slope of the blue line on Saturday as most of Friday news was on how the group was planning more IPOs for its businesses and its foray into cement.

High Frequency (Daily) ESG scores

  • What is interesting to see here is that there is not much in the red line which reflects the High Frequency (Daily) ESG scores for the Adani Group from the news flow. There was nothing much on ESG for Adani Group or its companies and that line remained flat.
  • Another important thing to note is that the blip in ESG scores around 6th June 2021 is noise driven by news flow which is because of fluctuations in the short-term news flow. So, the red line is ESG scores and is purely based on daily news flow.
  • ESG scores in the red line are not using sustainability reports and we have only used the news flow for calculating this ESG score so that it is an apple-to-apple comparison between the sentiment score and the ESG score.
  • We call the Daily scores as High Frequency ESG scores because unlike Sentiment where the changes are minute-by-minute, the ESG news flow for a stock is less frequent and that is the reason behind lesser utility of higher than daily frequency for ESG scores.

Figure 1: Adani Group – Sentiment and High frequency ESG scores

Source: EMAlpha

The Timeline

Over the weekend (12th and 13th June 2021), there were murmurs that the National Securities Depository Ltd (NSDL) had frozen the accounts of Albula Investment Fund, Cresta Fund and APMS Investment Fund. These three foreign funds together own between 2.1% and 8.91% stakes in the Adani Group companies.

In the morning session on Monday, 14th June 2021, the stock price reaction in Adani Group stocks was mainly driven by the news flow. That the frozen accounts won’t be able to sell or buy new securities was seen as a big negative.

Later, on the same day and around afternoon, news reports appeared that the Adani Group responded to the earlier reports regarding a freeze as ‘blatantly erroneous’, and also said that they have registrar and transfer agent confirmation that the accounts in which concerned funds with shares are present are not frozen.

In the evening on Monday, there were reports that NSDL has clarified that there is no freeze on accounts of these three FPIs holding Adani Group’s stocks.

On Tuesday, the confusion over the status of these three foreign funds which are big investors in Adani Group companies has continued.

Stellar run for the group’s companies in recent times

In any company where the shareholding is opaque and when you combine it with stellar performance in recent months, the investors will be on edge whenever such events take place.

Figure 2: Adani Enterprises Ltd. Stock Price in last five sessions

Source: Google

Figure 3: Adani Ports and Special Economic Zone Ltd. Stock Price in last five sessions

Source: Google

Figure 4: Adani Power Ltd. Stock Price in last five sessions

Source: Google

Figure 5: Adani Transmission Ltd. Stock Price in last five sessions

Source: Google

Figure 6: Adani Green Energy Ltd. Stock Price in last five sessions

Source: Google

Figure 7: Adani Total Gas Ltd. Stock Price in last five sessions

Source: Google

Post pandemic, the stock price movement for Adani Group stocks has been phenomenal. It has defied all conventional logic.

Figure 7: Adani Total Gas Ltd. Stock Price in last five sessions

Source: NSE

How EMAlpha can help

Sentiment has been a big driver of stock prices and especially in cases where the volatility is high, it matters even more. The EMAlpha sentiment and ESG scores have been reasonably accurate and there is a strong linkage between stock price performance and these scores. The following is how EMAlpha can help the investors:

  • The news spread has become much faster with social media and internet. Some of the reports may be difficult to verify and their authenticity questioned, but they still influence the stock price movement. EMAlpha tracks this news flow and helps in deciphering their impact on stock price movement.
  • The local news flow collection picks up several important issues and the local language along with English news analysis can be tracked for important developments. The potential fallout of such events is usually better predicted using local news analysis.
  • In emerging markets, the ownership of some stocks is highly opaque, and this is a big issue. This often makes the stock prices volatile. EMAlpha product combines technology with domain expertise in picking up signals on the institutional investors of a stock.

References

  1. Adani Ports and ESG: Comeuppance Served https://www.emalpha.com/adani-ports-and-esg-comeuppance-served/ (Accessed on 14th June 2021)
  2. Adani Group clarifies report of freezing of FPI accounts ‘blatantly erroneous’ https://www.livemint.com/companies/news/adani-group-clarifies-report-of-freezing-of-3-fpi-accounts-blatantly-erroneous-11623663359330.html (Accessed on 14th June 2021)
  3. Accounts of 3 FPIs owning Adani Group shares frozen https://economictimes.indiatimes.com/markets/stocks/news/a/cs-of-3-fpis-owning-adani-shares-frozen/articleshow/83496483.cms (Accessed on 14th June 2021)
  4. NSDL clarifies no freeze on accounts of 3 FPIs holding Adani Stocks: report https://www.livemint.com/companies/news/nsdl-clarifies-no-freeze-on-accounts-of-3-fpis-holding-adani-group-s-stocks-report-11623682767662.html (Accessed on 14th June 2021)
  5. Adani investors fret over three Mauritius funds https://economictimes.indiatimes.com/markets/stocks/news/barred-or-not-adani-investors-fret-over-three-mauritius-funds/articleshow/83540163.cms (Accessed on 15th June 2021)
  6. https://www.bseindia.com/stock-share-price/adani-ports-and-special-economic-zone-ltd/adaniports/532921/ (Accessed on 14th and 15th June 2021)
  7. https://www.bseindia.com/stock-share-price/adani-enterprises-ltd/adanient/512599/ (Accessed on 14th and 15th June 2021)
  8. https://www.bseindia.com/stock-share-price/adani-power-ltd/adanipower/533096/ (Accessed on 14th and 15th June 2021)
  9. https://www.bseindia.com/stock-share-price/adani-total-gas-ltd/atgl/542066/ (Accessed on 14th and 15th June 2021)
  10. https://www.bseindia.com/stock-share-price/adani-green-energy-ltd/adanigreen/541450/ (Accessed on 14th and 15th June 2021)
  11. https://www.bseindia.com/stock-share-price/adani-transmission-ltd/adanitrans/539254/ (Accessed on 14th and 15th June 2021)

EMAlpha Products and Services

In most Emerging Markets, information discovery is a major challenge. For example, even if global investors do show interest, how do they solve the problem of timely access to information? The world’s largest capital allocators hold USD 60 trillion and they include GPIF (Japan), GPF (Norway), ADIA (Abu Dhabi), GIC (Singapore) etc. However, only 10% of the capital gets allocated to EMs and ~90% goes to G10. The big hurdle for EMs is: Foreign investors cannot access relevant local information in a timely fashion.

Most market participants and investors from across the world realise that the low rates in G10 makes EM attractive for investors. But, a) Information access is usually a cost and time intensive process for investors, and b) In many EMs, language is a big barrier and because of multiple regional languages, there is a significant delay before news makes it to the mainstream English language. To address these issues, you need solutions like, a) Real time news collection from multiple languages and, b) Instantaneous machine translation and text analytics leading to actionable recommendations for investors.

There are further challenges such as ensuring that companies behave responsibly and that they adopt sustainable business practices. There is a need to ensure that the investors are contributing towards making the world a better place by making investment decisions which reward responsible behaviour of companies. Case in point, ESG (Environmental, Social & Governance) which is increasingly being used as a filter for investment decisions. There are other issues as well such as which data to use and a lack of a standardized framework for evaluation.

Some of these issues are too important to be postponed to a later date and it is in this regard that EMAlpha is making its contribution. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

EMAlpha also has solutions for Multilingual data collection and real time targeted information which are based on proprietary processes to collect relevant data across multiple markets. The coverage expands across emerging market equity, currencies and commodities and the work has also been very successful in testing the signals in some key markets for live trading strategies. This is a continuous cycle and a virtuous loop that allows for iterative improvement through AI-human feedback.

With developments in AI and technology in areas like NLP, there are considerable new possibilities to bridge the gap in information between Emerging Markets and the more Developed Markets. This is an area which is turning out to be very exciting because some of the tools mentioned were not available even a couple of years ago. This implies that the evolution in the field will only get faster as time goes on. While the Emerging Markets and the Capital Flow Conundrum is a complex one, there is now much more hope and optimism that with the usage of technology, things will only get better.

At EMAlpha, the ESG team is doing further research on why some issues like Social get more prominence as compared to others like Environmental or Governance issues. To look at specific cases in the context of ESG is a very intense yet interesting exercise and this has been an incredible learning experience for the EMAlpha Research team. The data, information and ratings are a humongous challenge for ESG and it takes time to reach to the depth of the issues as the field is evolving very quickly.

EMAlpha is making a solid contribution in tackling these challenges. EMAlpha has solutions for ESG which are practical, user friendly and although not too simplistic yet easy to use. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

We strongly believe that the entire ESG ecosystem requires multiple stakeholders to pull in the right direction in order to make it operational and that will be the most critically determining factor for ESG’s success in making the corporate responsibility actually work. Most importantly, the investors should view ‘E’, ‘S’ and ‘G’ individually and should not confound issues when it comes to the comprehensive ESG evaluation. It is important to understand the right reasons behind ESG investing because this bias could hurt their investment decision making and portfolio performance.

Research Team
EM Alpha LLC

For more EMAlpha Insights on Emerging Markets, please visit https://emalpha.com/insights/. To know how you can use EMAlpha’s unstructured data and ESG (Environmental, Social and Governance) solutions for better investment decisions, please email us at research@emalpha.com.

About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

Disclaimer:
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