In a worst-case scenario, overly ambitious debt-funded growth plans could eventually lead to a massive debt trap, and possibly end in a crisis or default of one or more group companies. ”
In a worst-case scenario, overly ambitious debt-funded growth plans could eventually lead to a massive debt trap, and possibly end in a crisis or default of one or more group companies. ”
richest indian Gautam Adani’s port-to-power-to-cement CreditSites, a unit of Fitch Group, said on Tuesday that there is a “profoundly greater leverage” with the group using primarily debt to invest aggressively in existing and new businesses.
In a report titled ‘Adani Group: Deeply Overleveraged’, CreditSights said, “In a worst-case scenario, overly ambitious debt-funded development plans could eventually spiral into a larger debt trap, and potentially lead to a crisis situation or a crisis.” Could end up in default. Or more group companies.”
Beginning as a commodity trader in the late 1980s, the Adani Group has diversified from mines, ports and power plants to airports, data centers and defence.
Recently, it forayed into the cement sector in alumina manufacturing with the $10.5 billion acquisition of Holcim’s Indian units. Much of this expansion has been funded by loans.
“Over the years, the Adani Group has pursued an aggressive expansion plan, which has put pressure on its credit metrics and cash flow,” CreditSites said.
“Adani Group is increasingly venturing into new and/or unrelated businesses, which are highly capital intensive and raise concerns about spreading performance oversight too low,” it added.
While there is evidence of promoter equity capital injection in group companies, the Adani Group is exposed to moderate levels of governance and environmental, social and governance (ESG) risks.
“The Adani Group, through its Adani Enterprises arm, has a strong track record of churning out strong and stable companies, and a portfolio of stable infrastructure assets linked to the healthy functioning of the Indian economy,” the report said. “
The Adani Group has six listed entities on Indian stock exchanges, and some of its group entities have US dollar bonds outstanding.
The six listed companies of the Adani group had a gross debt of Rs 2,309 billion at the end of FY12. Net debt in terms of cash in hand was ₹1,729 billion.
“In general, the group is investing aggressively in both existing and new businesses, primarily funded with debt, resulting in increased leverage and solvency ratios,” it said.
CreditSights said this has raised concerns about the entire conglomerate, adding that it remains alert to the conglomerate’s growing expansion appetite, which is largely debt-funded.
Adani Group is the third largest conglomerate in India after Reliance Industries and Tata Group. Its total market capitalization is over $200 billion.
In recent years, the Adani Group has become increasingly aggressive in expanding its existing businesses as well as setting up new businesses in various industries.
The rapid expansion has been fueled largely by debt funding, which has caused the leverage (gross or net debt/EBITDA) of many group companies and hence the overall consolidated group to increase over the years.
“We, as well as many customers and other investors, are becoming increasingly concerned about the rapid pace of growth of the group and its high leverage levels.
“Excessive debt and over-leverage by the group can have a massive negative impact on the credit quality of bond issuing entities within the group and increase the risk of infection in case any institution is in crisis,” the report said. is,” the report said.
Citing expansion in areas where it has no prior experience or expertise such as copper refining, petrochemicals, telecommunications and aluminum production, businesses usually do not have the capacity to repay loans, given that they are in the first few years. do not make profit. ,
And hence, they will rely on “to meet/refinance obligations over the initial few years, which, in turn, is dependent on maintaining solid banking relationships and strong capital market conditions,” it said.
Being the primary incubator for new and growing businesses of the Adani Group, Adani Enterprises Limited (AEL) has always had the highest capital expenditure among its affiliates.
Over the past five years, AEL has invested heavily in new growth areas which include airports, cement, copper refining, data centers, green hydrogen, petrochemical refining, roads and solar cell manufacturing.
Looking ahead, it plans to foray into enterprise data in telecommunications (currently for internal use) and has larger plans to develop green hydrogen and airport businesses.
Earlier this month, the group also announced plans to set up a 4.1 million tonne per annum integrated alumina refinery and 30 million tonne iron ore beneficiation plant in Odisha, which could cost over ₹58,000 crore.
On governance, it said the promoter family sits on the boards of all Adani entities.
Gautam Adani, 60, is the chairman of all 6 listed Adani entities, and his family members are also present on the board, including brother Rajesh Adani (director of various entities), son Karan Adani (director and CEO of APSEZ), nephew Sagar. Huh. Adani (director of AGEL), and another nephew Pranav Adani (director at AEL and Adani Total Gas).
“Gautam Adani’s entrepreneurial vision is impressive, but it also comes with high key-man risk, as in his absence the senior management capacity at group companies may prove inadequate,” Creditsites said.
It has been said that Mr. Adani may look to pass the reins of his business empire to the next generation in the next 10 years, as evidenced by the senior management/director roles assigned to his sons or nephews in Adani entities.
“However, he has not publicly disclosed any succession plans for the future,” it said.