Adani Group – One of the world’s largest conglomerates is growing at a scorching pace. The company has been in the headlines for many days now.
155 billion Dollars!! This amount is neither the GDP of any country nor any company’s valuation, but rather it is Gautam Adani’s total wealth, which made him the world’s 2nd richest man. It is nearly 5% of Total India’s GDP. He is not only the first Indian but also the first Asian to come on the list of Bloomberg’s Billionaires. Now the question arises – How did Adani become the 2nd richest man? But what is it all about? Why is it predicted that Adani can go into a debt trap and possibly default on the loans anytime?
The Actual Story Behind This
Adani group has its hands in almost all sectors, be it FMCG, oil, gas, power generation etc. 7 of his companies are listed on the stock exchange. The returns of these companies have increased multifold in these two years. Adani Enterprises has grown by 14%, Adani Greens has increased by 12%, Adani Gas by 6% and so on as such. Before 2014, there was only one company listed but later 6 new companies were listed.
The prices of these stocks are overvalued. For Instance, if we look at the P/E Ratio of Adani Enterprises, it is around Rs. 410 per share but the sector’s average is just Rs. 49, which is 10X higher. If we also look at the financials reports of the company for FY 21-22, the gross revenue was around Rs.70500 crore but the Net Profit After Tax comes out to be Rs. 776 crores, which is merely 1%. The Current liability of the company is Rs. 43850 crore and the total long-term debt is Rs. 21320 crores, which is too huge.
All the companies under the enterprise are interconnected. In simple words, every company has some portion of ownership with that of other companies. Like, when Adani Transmission was listed, it was just Rs.27 per share and Adani Realties had a 9% stake in it, a year later when the share price rose to Rs. 127 it was sold again. This is how they work. Many companies do that but only during emergencies. But Adani claims that it is working on some future projects like renewable sources of energy, but for that, they have a separate company known as Adani Green.
Adani group has been actively investing in various businesses from the past many years now. But the catch here is all the investments that are done are not through its fund but rather it is a debt fund which is raised from various sources. In a report published on 23rd August 2022 by CreditSights, part of Fitch Group said that it has found certain calculation errors in its recent debt report. It said that the conglomerate is “deeply overleveraged” and after this many companies of the Adani group plunged.
What does the CreditSights report say?
The report says that the company is deeply overleveraged. A company is said to be overleveraged when it has unsustainably high debt as against its operating cash flows and equity. Such companies also find it difficult to repay their principal amount, and their creditors and manage the operating expense as well. The company has been aggressively investing in their existing businesses as well as in new business across different sectors. The situation can turn worse, maybe the company can fall into a debt trap or maybe default on its loans in future. The company should have more of a promoter’s fund rather than debt to reduce the leverage. The conglomerate has been expanding rapidly. The company pledged to plough for $70 billion in renewable energy projects.
Adani also indirectly acquired major businesses this year, for instance, it acquired Haifa Airport in July for $1.2 billion. The second Acquisition was Holcim’s Indian cement unit Ambuja cement and ACC Cement for $10.5 million in May this year. There have been three dozen big and small acquisitions. The acquisition was done in the sector of Media, healthcare and digital services. A recent acquisition was done in India’s leading news channel NDTV, where it indirectly bought around 29% of its stake of NDTV, whose parent company is Vishva Pradhan Commercial Private Limited (VPCL), founded in 2008 for Rs. 404 crores and now it opens offer for another 26% stake in the company for total consideration up to $62 million.
Errors in CreditSights Report
Later CreditSights found that there was an error in their report itself. The company has consistently de-leveraged with the net debt to EBITDA (Earnings Before Interest Tax and Depreciation) ratio declining to 3.2X from 7.6X, EBITDA has grown 22% CAGR in the last 9 years and debt has grown only 11% CAGR during the same period. The group had around Rs.1.88 lakh crore loans with a net loan of Rs. 1.61 lakh crore as of March ‘22.
The loans of the company have almost halved since 2015-16, and loans from Public Sector banks almost accounted for 55% of its total debt which is now reduced to 21%. Similarly, loans from the Private sector accounted for 31% which is now just 11%. Money raised through bonds has jumped from 14% to nearly 50% in recent years.
Conclusion and Writer’s Opinion
Adani, being India’s biggest port operator, Coal Miner, City gas distributor, and Airport operator, now also wants to expand in renewable sources of energy,5G network and many other projects in the coming years. Due to the success of these businesses the investors also have confidence in the company’s performance in coming years. Also, at the same time due to high debts taken from different sources in different forms to fund its over-ambitious projects and overvaluation of assets, it is feared that the company may go into a debt trap which in turn will affect the economy as a whole since a lot of money is required to bail out these loans, which in turn is tax payers’ money.
But the majority of the stocks are in the hands of the company’s founders. So, whatever happens with the company directly affects its founders.
Written by Irfan Ali
Edited by Akanksha Choudhary