How Big is Adani’s Debt?

In 2018, Subramaniam Swamy called Gautam Adani

"…the biggest NPA trapeze artist in Indian PSUs."

Three years later, the industrialist defended himself by saying his company

"…maintains an impeccable record of not having a single NPA in three decades of its existence."

We aren’t sure who wins this war of words but the Adani Group has certainly won big in terms of expanding its presence over the last few years. The Adani “juggernaut”, as they call it, has emerged as one of the fastest-growing conglomerates in India by investing heavily in capital-intensive sectors, especially infrastructure.

But this has been accompanied by a growing mountain of debt, way beyond the appreciable comfort zone for an entity of such size (₹5trn ($67bn) in market cap). NPAs or not, the debt machinery of Adani Group is escalating at a distressing pace, sometimes even underscoring its growth.

How is it that the Group has still managed to stay profitable and investment-worthy? And more importantly, how risky could its debt-fuelled expansion spree turn out to be for the Indian markets?

The Adani Fortune

What was once limited to port operation and related businesses soon expanded to other areas like coal mining and imports, gas distribution, power production, power transmission, edible oil imports, airports operation, urban water management, small and medium scale lending, data centres, aerospace and even defence.

The sheer scale of this expansion is so huge that many have likened Adani’s rise to the growth of the Indian nation-building exercise.

The Adani playbook on finance tells us that the trick is to invest in each other. The Group companies have had a history of buying into each other and borrowing on behalf of each other even if they are in unrelated businesses.

Money from some of the step-down subsidiaries (like Adani Transmission) is funnelled into other holding companies (like Adani Enterprises). Struggling subsidiaries (like Adani Power) are propped up by others through vicarious loans that other sister companies acquired.

Basically, it appears that they lend to each other, buy equity from each other and absorb each other’s risks as part of an elaborate debt-servicing cycle.

Fault in the Finances

Let’s get one thing clear. The Adanis aren’t cash-rich like the Tatas or Ambanis. Their growth is supplemented through external financing or debts to a great extent. The aggregate debt of the Adani Group has scaled by 63% in the last six years alone. Today, it stands at ₹1,56,115cr ($21bn), a 12.6% rise from the last financial year.

The Group’s free cash flows (cash flow from operations after subtracting interest expense, capital expense and dividends) continue to be negative as well. This is all the more surprising when one considers the fact that in FY21 alone the Group paid zero dividends.

This has further intensified in light of a recent report which states that the Group has been inflating its EBITDA for at least two years now by almost 10%.

Another discrepancy is with regard to spiralling interest rates. The Adanis have been big on issuing perpetual securities (hybrid capital securities that are a blend of both debt and equity). These are issued to repay debts. But while interest rates around the world have been on a decline, the interest rates on Adani’s perpetual securities have somehow risen from 10% to over 11% since FY20.

And the debt cycle seems likely to continue. After acquiring the Mumbai airports from GVK last year, Adani has piled on ₹8,000cr ($1bn) more in debt. Adani Power, at one point, became one of the most financially leveraged stocks with total debts standing at ₹6,526.3cr ($874m) while its net worth stood at ₹497cr ($66.5m) giving a debt-to-equity ratio of 131. This led to the company opting for voluntary delisting.

Debts Paid No Heed

That’s right. None of the above make a dent in firming up the conglomerate’s credit image before the financiers.

• Barclays and JP Morgan Chase are already contemplating the refinancing of Mumbai Airports debt.
• Adani Green has raised $1.35bn from a group of 12 banks.
• Adani Ports raised $750m via long-term bonds pushing its debt exposure to overseas investors from 69% to 73%.
• Just last week, Adani Transmission raised $700m via a senior debt facility from a consortium of eight international banks.

So, essentially, a spiralling growth cycle continues to foment a spiralling debt cycle with no visible escapade in sight.

Couple of facts on Adani’s bond financing programme. The Group has now combinedly raised over $9bn in bond issuances in the last five years from foreign investors. Plus, most of these bonds are reportedly long-dated (20 years) which is usually granted to state-owned enterprises. Basically, the growth metrics of Adani Enterprises and its entry into capital-intensive sectors have bolstered its credit profile at par with public sector enterprises.

At this point, one may ask two questions. One, will the Adani Group be able to sustain these capital-heavy businesses it has gotten itself into and pay off its debts? Two, if it’s true that the Group is being looked at with a similar credit profile to state-owned enterprises by foreign financiers, does this mean the Group’s default has rather sovereign implications?!

Wealth Creators or Deluders?

Gautam Adani says that his family members are

"…inter-generational holders of equity."

And he’s right, to some extent. The promoter stake in the six listed Adani entities ranges between 56% to 75%. Besides this, FPIs take up 11–22% and domestic financial institutions hold a little under 2.5% in the group companies. Retail investors hold less than 6% of the ownership.

So, what does this mean? For one thing, it means that retaining such a high majority stake empowers the Adani family to ensure minimal shareholder activism.

Translation: An uninterrupted high-risk expansion strategy inflamed with rising debts and unsupported cash flows with zero scrutiny, making Adani headquarters a true promoters’ paradise.

But the winds of favour are possibly beginning to turn, or so it seemed in mid-June this year when all the Group stocks took a plunge due to regulatory action. The bloated stock market rally that has pumped up Adani stocks (Adani Total Gas — 492.8%, Adani Transmission — 434.2%) is due for a correction as well, if many analysts are to be believed.

Despite having colossal ambitions when it comes to hitting infrastructure targets and giving rivals like Reliance Industries a run for their money, the Adanis seem to forget that one can only launch themselves so far with a straw arrow.

(Originally published November 3rd 2021 in transfin.in)