Adani into Debt Trap?

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A recent report by Hindenburg Research – a US-based research team on Adani Group and created panic selling among investors on Adani group shares. Hindenburg Research in their report went on to say that the Adani Group is pulling out the largest scam in corporate history by deceiving the investors with their growth story and it raises the question among the investor regarding Adani Group's growth story after analyzing the growing Adani group debt.

In their detailed report researched for over two years, Hindenburg has raised 88 questions over Adani Group management, charging them for artificially pumping their stock prices up through accounting frauds, and excessive debt on Adani group, and also using their political influence to get away with several compliance measures.

All these allegations against the group have hit its stock prices hard and the Adani Group’s market capitalization has reduced by 2.37 lakh crore rupees that have resulted in Gautam Adani’s position slipping down to 7th from 4th as the world’s richest man.

Adani Group’s expansion spree

The journey of Adani Group started as Adani Exports in the 1980s has diversified into many businesses from airports to ports, defense, mining, cement, and media. Recently on 16 September 2022, the Adani Group also acquired Holcim’s India unit consisting of ACC and Ambuja for $10.5 billion, through which they entered into the cement Industry.

Recently Adani acquires 29.18% stake in NDTV from Ambani

Adani Group’s overleveraged

Although Adani Group is growing rapidly the group’s expansion has been majorly fueled by debt. The Adani total debt of the listed group companies is estimated at 21 Billion dollars and not just that, Adani Group’s revenue profit and its market value are quite different from each other.

If you go by a report from Business Standard, the revenue of Adani group’s listed stocks is 4.5 Billion Dollars, excluding Adani Wilmar but the combined profit of the group is 1.14 Billion Dollars. At the same time, the collective market value of 6 stocks is approximately 148 Billion dollars.

The Gross Adani Group debt of six listed Adani group firms had a gross debt of Rs. 2,309 billion as of FY22 - end and Net debt after accounting for cash in hand was Rs. 1,729 billion.

Adani Total Debt in 2022

Company	Total Debt (in crores)
Adani Enterprises	41,024
Adani Power	48,796
Adani Wilmar	2,568
Adani Green	52,188
Adani Ports & SEZ	45,453
Adani Transmission	29,815
Adani Total Gas	995

The consolidated Adani group’s debt is around Rs. 2.2 lakh crores of which Adani Green’s debt constitutes Rs. 52,188 crores followed by Adani Power’s debt of Rs. 48,796 crores. Adani Wilmar’s debt and Adani Total Gas’s debt together account for Rs. 2,568 and Rs. 995 crores respectively.

Adani Group’s Solvency and Interest Coverage Ratio

Company	Total Debt/Equity(%)	Total Debt/Total Capital(%)	EBITDA/Gross Interest
Adani Enterprises	154	61	1.6
Adani Green Energy	2,023	95	1.5
Adani Ports and SEZ	123	55	3.8
Adani Power	311	76	2.4
Adani Total Gas	43	30	12.1
Adani Transmission	272	73	1.8

The Debt/Equity ratio of all the companies of Adani Group is relatively high, especially Adani Green as it is the second-worst debt/equity ratio of any company in Asia.

High debt to equity in any company is worrisome for equity shareholders of any company as the company is liable to pay its debtors primarily and eventually high debt-ridden companies lose investor's confidence in them as it becomes risky to invest in such companies for the long-term.

With the Fitch report coming into the public eye, it caused some degree of panic among the investors as the market capitalization of all the companies of the Adani Group has shown a considerable decline.

The current P/E ratio of Adani Group is 519 which is very much on the higher side. A high P/E ratio indicates that a stock is overvalued and may fall in the future. The P/E ratios of other entities of Adani Group also have high P/E ratios which show that they may be overvalued and in a bear market, the shares may fall.

Adani Group Companies P/E ratio

Company	P/E Ratio
Adani Green Energy	765
Adani Transmission	436
Adani Enterprises	357
Adani Total Gas	751
Adani Wilmar	111
Adani Power	16
Adani Ports	36

As most of the expansion of the Adani Group is fueled by debt it has put too much pressure on the balance sheet as too much debt is not good for any company. Also, most of the new expansions are in sectors that are capital intensive and may not generate enough cash flows initially which could pose a threat to the long-term investors.

Company	Current Price	Jan 2020	Returns
Adani Enterprises	Rs.2,927	Rs.208	14x
Adani Green	Rs.2,347	Rs.197	12x
Adani Ports	Rs.806	Rs.383	2x
Adani Power	Rs.411	Rs.63	6x
Adani Wilmar	Rs.688	Rs.381	2x
Adani Total Gas	Rs.3,239	Rs.360	9x
Adani Transmission	Rs.3,318	Rs.347	10x

In the past two years, Adani Group entities have given multifold returns especially Adani Enterprises and Adani Green which means that investors are heavily investing in these companies despite them being highly over-leveraged.

Though Adani Group is considered too big a company to fail because of its shining history, its strong ties with the government and banks make it a hot choice among investors. The recent report by rating agency Fitch has brought the Group’s shortcomings under scrutiny.

Fitch says in its report that in the worst-case scenario Adani Group could fall into a debt trap and even default. Given the high debt-to-equity ratio of the group and such high valuations of the group it could be risky to invest in the group and if one company of the group defaults it could have a trickle effect on all the companies.

The reports by Fitch and other metrics show that the Adani shares might be overvalued and the worth of many of the group’s entities may not be what their prices reflect and in the future, if the entities default on their payment, it may cause the share prices to fall drastically resulting in loss to many investors.

Adani Group Replied back to Fitch CreditSight Report

Adani Group has countered the Debt report by CreditSight and after meeting with CreditSight they have discovered some errors in their reports on two companies of the Adani Group - Adani transmission and Adani Power.

CreditSight officially said that after a meeting with the Adani Group they have discovered errors in their calculations of Adani Transmission and Adani Power.

For Adani Transmission CreditSight Rectified its Net Profit or Earnings before Interest, Tax, and Amortization (EBITDA), Now estimated at 52 Billion Rupees from 42 Billion rupees whereas for Adani Power it rectified its Gross debt estimate to 489 billion Rupees from 582 Billion Rupees.

Adnai Group Statement:

Adani Group’s finance and other executives reverted to the report of CreditSght that came out last month and has said that the management is of the opinion that the Group’s leverage is at a manageable level and their expansion is not majorly fueled by debt.

They said that Adani’s Group’s leverage is healthy and in the last nine years, their net debt to EBITDA has declined to 3.2 times from 7.6.

Conclusion

The net worth of Gautam Adani has risen to $137.4 billion making him the Third richest person in the world but most of his wealth is paper money which could go down if his share prices fall. Though the companies of Adani Group are fundamentally strong, the reports by Fitch have surfaced some serious concerns regarding the leverage of the Adani Group which has brought the shares of Adani Group under scrutiny.