Gautam Adani's ports-to-power conglomerate is “deeply overleveraged” as the group invests aggressively across existing and new businesses, said CreditSights, a debt-research unit of credit rating agency Fitch. 

The report warned that the group's explosive expansion, which is funded predominantly with debt, could spiral into a massive debt trap in the worst-case scenario and possibly a default.

The "overly ambitious debt-funded growth" has put pressure on its credit metrics and cash flow.

“We see little evidence of promoter equity capital injections into the group companies, which we feel is needed to reduce leverage in their stretched balance sheets,” CreditSights said.

The Adani group is increasingly venturing into new or unrelated businesses which are highly capital intensive. This raises concerns regarding the group spreading execution oversight too thin.

According to the report, "excessive debt" and over-leveraging by the group could have a cascading negative effect on the credit quality of the bond-issuing entities within the group. That, it said, heightens contagion risk in case any entity falls into distress. 

CreditSights’ analysts, however, said they draw “comfort” from the group’s strong relationships with banks as well as the administration of Indian Prime Minister Narendra Modi.

 CreditSights’ report comes in the midst of Adani’s rapid diversification spree, with the business empire engulfing ports, coal mining, airports, data centres, cement and green energy. The group also pledged to invest $70 billion into renewable project.

According to Forbes magazine, Adani is the fourth-richest person in the world, with his fortune valued at $137.6 billion. 

Some key highlights of the report are:

· The Adani Group is entering new and unrelated businesses, which are highly capital intensive, raising concerns over execution oversight

· Potential strong competition between the group and Ambani’s Reliance to achieve market dominance could lead to “imprudent financial decisions”

· Adani Group is also exposed to moderate levels of governance and ESG risks

· The group has a “strong track record of churning out strong and stable companies” through its flagship, Adani Enterprises Ltd., and has built a portfolio of “stable infrastructure assets tied to the healthy functioning” of the Indian economy

· Its founder “enjoys a strong relationship” with the Modi government and has benefited from “policy tailwinds”

· CreditSights remains “cautiously watchful” of the group’s growing appetite for expansion, which is largely debt-funded

Starting his business as an agri-trading firm in 1988, Gautam Adani rapidly expanded the group's businesses across key industry verticals such as energy, utilities and transportation. The group has six established listed entities, namely Adani Enterprises (AEL), Adani Green Energy (AGEL), Adani Ports and Special Economic Zone (APSEZ), Adani Power, Adani Total Gas and Adani Transmission.

The group on Tuesday announced acquisition of 29.18% stake in NDTV, thus making an entry into television news media. As required by market regulator SEBI, it will launch an open offer to buy another 26% stake in the company.

Gautam Adani has been the top dealmaker in the country this year, with his group snapping up Haifa port in Israel in July for $1.2 billion and Swiss firm Holcim’s Indian cement units for $10.5 billion in May. There are also almost three dozen big and small acquisitions. Adani is expanding into media, health care and digital services.

The group is India’s largest private sector port operator, coal miner, city gas distributor and airport operator. It also plans to create the world’s largest renewable power generator.

Investors have believed in the tycoon's  ability to rapidly scale up his businesses, shoring up the share price of his companies even during the pandemic.  Adani Enterprises and Adani Green Energy Ltd. have surged more than 1,300% since the beginning of 2020. Adani Total Gas Ltd. has rallied about 1,900% and Adani Transmission Ltd. over 900%, while the benchmark S&P BSE Sensex surged almost 42% over this period.

The family’s “entire fortune and reputation is tied to the Adani Group companies,” CreditSights said. “Having such major ‘skin in the game’ could imply that the family would pull all stops to avoid default in any of the entities, since any material liquidity or solvency issue in one company would likely have a contagion effect on the valuation of the remaining companies too.”

Adani’s expansion appetite

Adani group has massive expansion plans, both in traditional as well as new businesses. 

"Despite elevated leverage levels and poor interest cover (due to past expansion and the capital intensive nature of the projects, funded largely with debt), virtually all Adani Group companies have large expansion plans on the horizon too, having adopted aggressive growth targets, which is not a financially prudent strategy,” the authors of CreditSights said. 

AGEL is one of the fastest growing Adani Group entities, as a frontrunner to achieve the Group’s goal of investing $20 billion in clean energy businesses over the next 10 years. In FY22, the capex surged to Rs 204 billion (roughly 5-6 times its average capex in previous years) owing to ongoing construction of its huge renewable project pipeline and the acquisition of Softbank-backed SB Energy. 

“Looking ahead, AGEL has ambitious goals to expand its operational capacity almost five-fold from 5.4 GW (as at 31 March 2022) to 25 GW by FY25 (31 March 2025), which would entail capex of Rs 150-200 bn per annum,” the report said.

The acquisition appetite remains strong even for well-established, traditional businesses such as APSEZ – one of the Group’s more stable entities. APSEZ went on a fierce acquisition spree from late-FY21 to FY22, where it spent a cumulative Rs 211 billion to acquire three Indian ports at Krishnapatnam, Gangavaram and Dighi. 

“Looking ahead, it has financially onerous plans to develop a greenfield port in east India (Tajpur), conclude a $1.2 bn acquisition of an Israeli Port (Haifa), and potentially acquire state-owned (through Indian Railways) container logistics company CONCOR for over Rs 400 bn (estimated based on CONCOR’s current market cap) sometime during or post FY23,” the report added.

The group has also worked out aggressive plans for new and developing businesses.

Being the primary incubator for Adani Group’s new and developing businesses, AEL invariably incurs the highest capex amongst its sister entities. Over 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 manufacturing. 

The group 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 businesses. 

Last week, the group announced plans to set up a 4.1 mtpa integrated alumina refinery and a 30 mtpa iron ore beneficiation plant in Odisha that could cost over Rs 580 billion. 

Such moves allow the group to enjoy business diversification benefits and tap onto the rapid growth prospects of these emerging industries, the report said. The group has also shown that it is very good at executing scale infrastructure projects well, starting with the Mundra port in 1998. 

“Yet, on the other hand, we remain wary of the group's limited expertise and track record in the new areas it is venturing into, which could hamper its ability to execute the projects and manage the operations successfully in the longer term. These ventures are also extremely capital intensive, which would likely increase the need for additional debt incurrence to fund the capex needs and thus leading to sustained high leverage for the group,” the report added.

The authors of the report feel many group companies of Adani would require equity capital injections to reduce their high leverage levels. “So far, we have seen little evidence of equity capital injections into the group companies (except into AEL) despite their high debt-to-capital ratios. Despite the promoter’s large net worth, it is difficult to predict the extent of the promoter’s capacity to continually provide liquidity support due to potential contagion risk to the whole group in the event of one or more group companies falling into distress,” they said. 

The lightning speed of growth fuelled by debt could put not just the Adani companies but also the banks in India at risk as it gets over-leveraged.

Key mitigants of credit concerns

CreditSights has outlined some mitigating factors to the credit concerns, including solid relationships with both domestic and international banks. The group’s lenders are diverse, allowing it wider, larger and easier access to funding channels. 

Another mitigating factor is that of the 4 $ bond issuers, AGEL, Adani Transmission and Adani Electricity have a high proportion of their gross debt (> 90%) in the form of secured debt, which includes all their $ bonds. Meanwhile, APSEZ's $ bonds are all unsecured, but its proportion of secured debt/gross debt is reasonably low at 28%. 

Additionally, the group has also been able to tap the $ bond markets repeatedly, and raised debt at reasonable rates.

CreditSights has also observed that at some point in time, Indian lenders may hit a wall against single borrower limits (set at 20% of their Tier-1 capital) for the Adani Group companies, at which point the entities may not be able to tap on to those domestic banks for additional borrowings (though refinancing of existing debt should be possible). Foreign banks prefer to lend through project loans at the individual company level so that these loans are adequately collateralised.

The third mitigating factor is the group’s diverse asset base in stable infrastructure industries.It has a strong track record of churning out strong and stable companies through its Adani Enterprises incubator arm, the report said. 

The Adani group companies have also managed to enjoy leading market positions in key sectors of India’s growing economy.APSEZ has grown rapidly to become the largest private port operator in the country. AGEL, established in 2015, has grown manifold to become the country’s second largest private renewable power producer based on operational capacity (after ReNew Power, which was established over a decade ago). Adani Transmission, Adani Power and Adani Total Gas boast market-leading positions in the private sector.