Adani group is 'deeply overleveraged', warns CreditSights

Richest Indian Gautam Adanis portstopowertocement conglomerate is deeply overleveraged with the group predominantly using debt to invest aggressively across existing as well as new businesses CreditSights a Fitch Group unit said on TuesdayIn a report titled Adani Group Deeply Overleveraged CreditSights said In the worstcase scenario overly ambitious debtfunded growth plans could eventually spiral into a massive debt trap and possibly culminate into a distressed situation or default of one or more group companiesStarting out as a commodities trader in the late 1980s the Adani group has diversified from mines ports and power plants into airports data centers and defenceRecently it forayed into the cement sector with a USD 105 billion acquisition of Holcims India units as well as into alumina manufacturing Most of this expansion has been funded by debtOver the past few years the Adani Group has pursued an aggressive expansion plan that has pressurized its credit metrics and cash flows CreditSights said The Adani Group is increasingly venturing into new andor unrelated businesses which are highly capital intensive and raises concerns regarding spreading execution oversight too thin it addedAlso Read Mumbai police suspect role of Doha man in lsquo2611typersquo threatWhile there is evidence of promoter equity capital injection into group companies the Adani Group is exposed to moderate levels of governance and environmental social and governance ESG risksThe Adani Group has a strong track record of churning out strong and stable companies through its Adani Enterprises arm and boasts a portfolio of stable infrastructure assets tied to the healthy functioning of the Indian economy the report saidThe Adani Group has six listed entities on the Indian stock exchanges and a few of its group entities have US dollar bonds outstandingThe six listed Adani group firms had a gross debt of Rs 2309 billion as of FY22end Net debt after accounting for cash in hand was Rs 1729 billionIn general the Group has been investing aggressively across both existing and new businesses predominantly funded with debt resulting in elevated leverage and solvency ratios it saidThis has caused concerns about the Group as a whole CreditSights said adding that it remains cautiously watchful of the Groups growing expansion appetite which is largely debtfundedThe Adani Group is the third largest conglomerate in India after Reliance Industries and the Tata Group It has a total market capitalization of over USD 200 billionIn recent years the Adani Group has become increasingly aggressive in expanding its existing businesses as well as establishing new ones in different industriesThe rapid expansion has largely been fuelled by debt funding which has caused the leverage gross or net debt EBITDA of several group companies and hence of the overall consolidated group to soar in the past few yearsWe as well as many clients and other investors are becoming increasingly concerned about the groups rapid pace of growth and its high leverage levelsAlso Read MP Rains IAF to deploy helicopters for relief operations in floodhit VidishaExcessive debt and overleveraging by the group could have a cascading negative effect on the credit quality of the bond issuing entities within the group and heightens contagion risk in case any entity falls into distress the report saidCiting expansion into areas where it has no prior experience or expertise such as copper refining petrochemicals telecom and aluminum production it said the businesses typically dont have the ability to repay the debt immediately considering that they do not make profits in the initial few yearsAnd so they will rely on rollingoverrefinancing the obligations in the initial few years which is in turn dependent on maintaining solid banking relationships and on strong capital market conditions it saidBeing the primary incubator for Adani Groups new and developing businesses Adani Enterprises Ltd AEL invariably incurs the highest capex amongst its sister entitiesOver the past five years AEL has invested heavily in new growth sectors that include airports cement copper refining data centers green hydrogen petrochemical refining roads and solar cell manufacturingLooking ahead it plans to foray into the enterprise data in telecom for internal use at present and has massive plans to grow its green hydrogen and airports businessesEarlier this month the Group also announced plans to set up a 41 million tonnes per annum integrated alumina refinery and a 30 million tonnes iron ore beneficiation plant in Odisha that could cost over Rs 58000 croreOn governance it said the promoter family sits on the boards of all the Adani entitiesGautam Adani 60 is the Chairman of all 6 listed Adani entities and his family members are present on the Boards too including brother Rajesh Adani director at various entities son Karan Adani director and CEO of APSEZ nephew Sagar Adani director of AGEL and another nephew Pranav Adani director at AEL amp Adani Total GasWhile the entrepreneurial vision of Gautam Adani is impressive it also comes with high keyman risk as the senior management capability in the group companies in his absence may prove to be inadequate CreditSights saidAdani it said may look to hand over the reins of his business empire to the next generation at some point in the next 10 years as gauged by the senior managementdirector roles handed to his son or nephews in Adani entitiesHowever he has not publicly disclosed any succession plans for the future it saidThis story has been sourced from a third party syndicated feed agencies Midday accepts no responsibility or liability for its dependability trustworthiness reliability and data of the text Midday managementmiddaycom reserves the sole right to alter delete or remove without notice the content in its absolute discretion for any reason whatsoever