CreditSights: Adani Group could spiral into a massive debt trap
CreditSights, a subsidiary of Fitch Ratings, said Tuesday it was cautious about the Adani group’s growing appetite, which is primarily financed through debt.
A report by rating agent Fitch titled “Adani Group: Deeply Overleveraged” claims that the Adani Group has been engaging in an aggressive expansion that has strained its cash discharge and credit metrics.
Adani Group is growing into new, unrelated, capital-intensive businesses, raising concerns about a spread of performance management that is too thin.
It comes in the aggressive investments by the ports-to-power conglomerate, which is largely funded with debt, resulting in a high leverage ratio.
There have been concerns about the group as a whole, and what may happen to the bond issuers in the group. The worst-case scenario for overly ambitious debt-financed growth plans is that they can eventually spiral into a massive debt trap, ultimately leading to bankruptcy or the default of the group company,” Creditsights warns.
Almost all of Adani’s businesses have grown aggressively in recent years. Among other things, Adani Green plans to grow its existing businesses rapidly (for example, it plans to almost fivefold its operating renewable capacity by FY25), and enter new sectors where it has no prior experience (for example, copper refining, petrochemicals, data centers, telecom, aluminum/alumina production, and telecommunication).
In addition to the organic expansion, the Adani group also desires to achieve its ambitious growth plans through inorganic means. As a result of Gautam Adani’s acquisition, Ambuja Cement and ACC Limited became the second largest cement producer in the country.
Since these projects have long gestation periods, most of these businesses need continuous funding in the initial years, says CreditSights.
Borrowings are the main source of funding for most projects. For infrastructure projects in India, borrowing costs are typically around 9-11% per annum (based on benchmark rates in the country), which adds to a heavy interest burden.
It is not a financially prudent strategy for Adani Group companies to have high leverage levels and low-interest coverage (since past expansion and capital-intensive projects are largely funded with debt). “Virtually all Adani Group companies have large expansion plans as well, adopting aggressive growth targets, which is not a financially prudent strategy,” CreditSights adds.
As the group’s growth speed accelerates and its leverage levels rise, the rating agency shows respect. A cascading effect of excessive debt and overleveraging on the bond-issuing entities within the group could adversely affect the credit quality and heighten contagion risk.”
To reduce leverage in stressed balance sheets, credit watchers say they cannot see evidence of promoter equity capital injections.
In recent weeks, Gautam Adani has overtaken Bill Gates as the fourth wealthiest person in the world. The rating agency, however, notes that this is largely a result of the increase in the value of the Adani Group stocks.
According to CreditSights, it is hard to guess whether the family will be able to inject its own money into any of the Group companies in the case that equity injections are required by the promoter of the company.
Rating agency warns of moderate governance and ESG risks for Adani Group.
Due to their intense competition in a few new economy sectors (renewable power and telecommunications), the rating agency states that they are in intense competition with each other for market share. As a result, both sides may make imprudent financial decisions, such as increased CAPEX expenditures, aggressive bidding, and overleveraging.
In contrast, Adani Green Energy (AGEL) and Adani Ports (APSEZ) which are under the rating agency’s coverage have retained their existing Market Perform ratings.
Gautam Adani has grown the debt owed by the Adani Group, according to CreditSights, a financial services company owned by Fitch Ratings. Creditsites has published a report on the Adani Group. Adani Group’s stock exchange shares plunged after this report was published on Tuesday. Adani Power and Adani Wilmar’s shares fell by 5% after falling by 5%.
Gautam Adani’s Adani Group is deeply leveraged, according to a Creditsites report. In the report, Adani Group’s finances are squeezed as it grows quickly. There is a lot of funding needed for the Adani Group’s venture. There has been very little money contributed to the group companies by the promoters, according to the report. Mukesh Ambani’s Reliance Industries and the Adani Group are competing for market dominance, but poor decisions are also at risk, the report said.
According to the credit research firm, the Adani group has an important amount of unpaid debt, and utilizing this situation to your benefit could be detrimental. A debt trap can also be lurking for the company, according to the report. Adani group companies lack oversight, as noted in the report.
A report released by the Adani Group has caused six out of seven companies listed on its stock market to see a big decline. It fell by 3.62 percent for Adani Green Energy, 5 percent for Adavi Power, 3.87 percent for Adani Wilmar, 0.62 percent for Adani Transmission, 0.90 percent for Adani Ports, and 0.87 percent for Adani Enterprises.
edited and proofread by nikita sharma
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