Conducting a fundamental analysis of Gautam Adani's large Indian conglomerate, rating agency CreditSights dubbed it 'deeply overleveraged'.
The agency, in the report, said that the group is investing aggressively across existing as well as new businesses, predominantly funded with debt.
Over the past few years, the Adani Group has pursued an aggressive expansion plan that has pressurized its credit metrics and cash flows, stated the report. It added that it sees little evidence of promoter equity capital injections into the group companies, which we feel is needed to reduce leverage in their stretched balance sheets.
“The Adani Group has 6 listed entities on the Indian stock exchanges, and a few of its group entities have $ bonds outstanding (as seen in the bond box below). In general, the Group has been investing aggressively across both existing and new businesses, predominantly funded with debt, resulting in elevated leverage and solvency ratios. This has understandably caused concerns about the Group as a whole, and what implications it could have on the group companies that are bond issuers,” cautioned the report.
In the worst-case scenario, overly ambitious debt-funded growth plans could eventually spiral into a massive debt trap, and possibly culminate into a distressed situation or default of one or more group companies, it added.
The Adani Group has been on a diversification trend, expanding from ports and coal mining to airports, green energy, data centers, etc. The group recently announced an infusion of $70 billion into renewable projects.
In recent years, the Adani Group has become increasingly aggressive in expanding its existing businesses, as well as establishing new ones in different industries. Noticeably, a majority of these businesses are capital intensive, and require large investments and constant funding in the initial years (and thereafter too), considering these projects have long gestation periods. Further, considering the businesses do not make profits in the initial few years, they typically don’t have the ability to repay the debt immediately and rely on rolling over/refinancing the obligations in the initial few years, which is, in turn, dependent on maintaining solid banking relationships (touched upon later in the note) and on strong capital market conditions, explained the report.
Within the past decade, and especially in the past 2 years (even amid poor stock market conditions of 2022), all of Adani Group’s publicly listed entities have witnessed a meteoric rise in their stock prices (as shown above) and valuations, making the Group the third most valuable conglomerate in India, after Reliance Industries and the Tata Group. The shares of the Adani Group companies have a low free float as the promoter family owns stakes very close to the maximum stipulated by the stock regulator for listed companies in India, noted CreditSights.
The report has made several points on the faulty practices of the group's business as well as its competition with the Reliance Group.
With a net worth of $116 bn (as of 22 July 2022, per media reports), Gautam Adani has been in the news of late for his astronomical rise in wealth, becoming the 4th richest person in the world after displacing Bill Gates. However, it noted that this is paper wealth, and largely tied to the value of his holdings in the Adani Group stocks, which have risen significantly in recent years (we discuss this in more detail later). It is difficult to gauge the family’s ability to inject their own funds in a scenario where any of the Group companies require equity injections by the promoter, said the report.
The report also highlighted that Adani Group's strong competition with Mukesh Ambani-helmed Reliance Industries could push Adani Group to make some imprudent financial decisions.
The rating agency stated, “As the two mega conglomerates in the Indian corporate sector compete for market share in a few new economy businesses (e.g., renewable power, telecom), it could lead to some imprudent financial decisions from both sides, such as higher capex spends, aggressive bidding, and overleveraging. On the whole, RIL has been on a deleveraging trend over the past few years, and boasts robust credit metrics (gross and net leverage at 2.6x and 2.2x as at end-FY22) and interest cover (7.8x at FY22).” It added that Adani has elevated leverage and poor interest cover and cash outflows in almost all its entities and is at greater financial risk.
Recently, Gautam Adani surpassed Mukesh Ambani as India’s richest individual. The report also noted that the companies are up against each other in the same sectors. Adani Green Energy forayed into the renewable generation business in 2015, and Reliance followed in October 2021, while Reliance entered the telecom sector with Jio in 2015, and Adani followed into the sector in 2022 by successfully bidding for spectrum in the recently-held 5G auctions, it pointed out.
However, they draw comfort from the group’s strong relationships with banks as well as the administration of Indian Prime Minister Narendra Modi, CreditSights said. It also added that the company has a strong record of churning strong and stable companies, and there are policy tailwinds supporting the development of its infrastructure assets.
“In the Adani Group's favor, we take comfort in its solid banking relationships with both domestic and international banks, which have been willing to lend the group large amounts for both its existing businesses and new ventures,” it said.
Overall, the report stated that it remains cautiously watchful of the Group’s growing expansion appetite, which is largely debt-funded. It retained its existing market performance recommendations on the two Adani entities under our coverage, Adani Green Energy (AGEL) and Adani Ports and Special Economic Zone (APSEZ).
“As we have looked deeper into the Group, its corporate structure, the credit risks and mitigants faced by the Group, we are not changing our recommendations on the 2 credits under our coverage on the back of this note. If the Group were to face any issues on a broader scale, or if either APSEZ or AGEL were to see continued increases in their leverage ratios/liquidity issues in the future, we may consider revising our stance/recommendations on the respective credits,” it said.
The Adani Group is the third largest conglomerate (after Reliance Industries and the Tata Group) in India based on total market capitalization of over $200 bn as of 18 August 2022. Founded in 1988 as a commodity trading business by businessman Gautam Adani, the Group has expanded rapidly across key industry verticals such as energy, utilities and transportation. The Group has 6 established listed entities, namely Adani Enterprises (AEL), Adani Green Energy (AGEL), Adani Ports and Special Economic Zone (APSEZ), Adani Power, Adani Total Gas and Adani Transmission.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.