ADANI GROUP IS IN A DEBT TRAP – SHOULD INVESTORS WORRY

In this article, we are going to look at the current financial situation and the prudent risks associated with mounting levels of debt. Adani Group is deeply overleveraged. However, not all debts are bad as we see in the case of Reliance Industries which used massive loans to expand its business empire.

Mukesh Ambani led RIL, has reduced net debt levels to zero by selling stakes in his new age businesses which boosted investor sentiments and re ratings. However, the case with Adani Group is not that great as it not only suffers from massive debt levels but also from serious corporate governance issues.

In this post, we are going to check whether Adani Group is a worthy bet for long-term investments or not....

ADANI GROUP – CLASSIC CASE OF CRONY CAPITALISM

All eyes are on the Adani Group! Having a track record of building strong companies through Adani Enterprises Ltd, the group boasts a portfolio of stable infrastructure assets tied to the healthy functioning of the Indian economy.

Indian opposition parties have already in the past taken dig at the strong friendship between Narendra Modi and Gautam Adani. Rahul Gandhi had earlier alleged that PM Modi doled out 45,000 acre land at Re 1/sq metre to Adani Group. So, the political backing has swollen up its business empire.

ADANI’S THROAT IS STUCK IN DEBT

Red flags for the mighty Adani Group! On Tuesday, CreditSights, a credit research firm, released a report on the group’s debt position. It says that the Adani Group is deeply over-leveraged and is likely to fall into a debt trap. Worst-case scenario, it might default on repayments, which is no good news for shareholders!

The six listed Adani Group entities have a combined gross debt of ₹2.31 lakh cr. as of March 2022. And the net debt after accounting for cash in hand is ₹1.73 lakh cr.

Adani Green Energy has a shockingly high debt-to-equity ratio of 2,021%. This is the second worst debt-to-equity ratio in the 892 companies listed in Asia! To be specific, it is seeking funds worth US$ 70 mn for the already highly leveraged renewable energy business.

Adani Group is not just expanding its existing footprints (in ports, coal mining, airports, data centres, cement, and green energy) but is also entering into unrelated, capital-intensive businesses (media, health care, and digital services).

In this year alone, Adani Group has recorded three dozen big and small acquisitions.

Additionally, it has acquired the Haifa Port in Israel for US $1.2 bn and Swiss firm Holcim’s Indian cement units for US$ 10.5 bn. Very recently, Adani also bid to buy a ~30% stake in NDTV on a loan-based agreement! 🔍

 at the financial up companies in order to understand the situation better.

SERIOUS ESG RISKS

A worrisome debt situation is not the only issue, Adani Group is also exposed to serious levels of governance and ESG risks. 🤔

Experts are also concerned that the race to gain dominance over Reliance can lead Adani to take hasty financial decisions, inviting more trouble for itself. Currently, the total market value of the Adani Group is ₹19.44 tn, a little over Reliance Group companies’ value of ₹17.82 tn. 😶‍🌫️

Foreign investors in Adani stocks include certain opaque funds. The concern here is that the majority AUM of these funds is in Adani stocks, but there is little clarity on the ultimate, beneficial owner of the funds. 👁️

The report also suggests that there is not enough information on the injection of equity capital by promoter into the group companies. If the leverage on the balance sheet has to be reduced, it is necessary for promoter equity to flow in. Naturally, you may wonder who’s funding all these new ventures. 🤔

Among Adani Group’s debt are SBI loans of ₹12,770 cr. for its greenfield Navi Mumbai international project and ₹6,000 cr. for phase 1 of its greenfield copper refinery project in Gujarat. It has also availed loans of US $250 mn from Standard Chartered Bank and Barclays Bank to fund capex and development at six airports managed by Adani Airport Holdings (AAHL).💰

So, from my point of view I think it's better to avoid investments in Adani Group securities as of now.

Thank You 😊 🙏