Gautam Adani’s overambitious growth plans could fall into a massive debt trap: CreditSights report

  • The Adani group’s debt-funded growth plans could fall into a massive debt trap, a CreditSights report says.
  • Most of the group’s expansion is dependent on bank loans, internal accruals and capital market financing.
  • the most of Gautam AdaniHis wealth is on “paper” and is tied to the value of his holdings in the Adani group’s stock, Fitch says.
  • The Adani group competes with Mukesh Ambani’s Reliance Industries in all sectors, but the latter is in a deleveraging trend while the former is over-indebted, CreditSights said.
  • Mr Adani and the Indian Prime Minister, Mr Narendra Modi, know each other well, and it will in any case ensure that the growth agenda of the former is not hampered, as the report shows.

Billionaire Gautam Adani, the fourth richest man in the world, has launched several new businesses in recent years, from cement to airports to data centers. The group’s aggressive plans, most of which have been fueled by debt, are making CreditSights, a Fitch Ratings company, “cautiously vigilant.”

In a released report called “Adani Group: Deeply Overleveraged,” Fitch said the bulk of its expansion needs come from debt financing from existing and new companies. “In the worst cases, over-ambitious debt-funded growth plans could end up in a massive debt trap and potentially lead to a dire situation or the default of one or more group companies,” the report said.

However, it has the ‘Market perform’ recommendations for the two Adani Group Companies under their cover Adani Green Energy and Adani Ports and SEZ.

Gautam Adani’s ‘paper wealth’
In recent months, the Adani group has acquired Holcim’s cement businesses for $10.5 billion, to become the second largest cement operator overnight. It also recently bought the Israeli port of Haifa for $1.18 billion.

The Adani group also has plans to increase its renewable portfolio fivefold, in addition to investing in green hydrogen, airports, roads, alumina, copper refining, data centers as well as expanding its coal and PVC business.

There is little evidence of capital injections and reliance on bank loans, internal accruals (ie operating cash flows) and debt capital market financing. There are ‘some’ cases where it received equity injections from other strategic or financial investors, such as TotalEnergies’ 20% stake in Adani Green Energy and 25% stake in Adani New Industries.

But “these pale in comparison to the total capex needs of the entity involved,” the report says. The bureau also takes no solace in the personal wealth that the group chairman possesses.

Gautam Adani has ousted Bill Gates as the fourth richest man in the world. “We note, however, that this is paper wealth, and largely linked to the value of his holdings in the Adani Group

stocks, which have increased significantly in recent years. It is difficult to measure the family’s ability to inject their own funds in a scenario where one of the group companies requires capital injections from the promoter,” the report said.

The Ambani Effect
Even after Adani Mukesh ousted Ambani as the richest Indian, his group competes with Anbani in many sectors – be it green energy, green hydrogen and even telecom. Although the Adani group has bought 5G spectrum only for its private network, the report does not rule out its foray into the consumer telecom sector.

“As the two mega-conglomerates in the Indian corporate sector compete for market share in a few new economy companies, this could lead to some careless financial decisions from both sides, such as higher capex spending, aggressive bidding and excessive leverage,” the report said. .

Ambani’s Reliance Industries, unlike Adanis, has had a deleveraging trend in recent years. “Adani has increased leverage and poor interest coverage and cash outflows across virtually all of its entities, and is at greater financial risk,” said CreditSights.

Healthy relationships with Modi administration
Despite all the negatives, there are also bright spots in the group. The group has a healthy relationship with the national ruling party.

“Mr Adani and the Indian Prime Minister, Mr Narendra Modi, know each other well and go back to the latter’s time as the Prime Minister of Gujarat State. At the very least, this ensures that there are no barriers to Adani Group’s growth agenda,” the report said.

There are also political tailwinds that support infrastructure activities. The Indian government increased its spending on infrastructure in FY23 by more than 35% – in railways, roads, electricity, telecom and affordable housing. The Adani group is present everywhere and will lead to better growth opportunities.

Apart from the great performance of all its group stocks, making it now the most valuable group after Reliance and Tatas, the Adani group has also demonstrated its ability to raise funds within and outside India.

“We are taking comfort in the Group’s strong access to diverse funding channels (onshore and offshore banks and capital markets), relatively stable recurring revenue-generating infrastructure assets, presence in key sectors of the economy and the positive infrastructure-favoured macro background in the country,” the report said. There is a risk that the group will reach “single borrower limits” at all banks, the report said.

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