InvestorQ : Is it true that after Fitch, even S&P has sounded a warning about the Adani group debt?
Sam Eswaran made post

Is it true that after Fitch, even S&P has sounded a warning about the Adani group debt?

Moii Chavate answered.
2 months ago

That is absolutely correct. Of course, this is no rating downgrade. It is just that on the lines of Fitch, even S&P has sounded a warning that the high leverage was the weak link for the Adani group. S&P Global has specifically highlighted the high levels of leverage in the Adani group. The worry is on the huge loans taken to bankroll acquisitions. In the last one year, the total debt of the Adani group has risen from Rs1.57 trillion to Rs2.20 trillion. S&P is only worried about the idea of bankrolling mega acquisitions with massive debt.

On the positive side, the group has some solid business models. The ports business is generating solid cash flows and most of the other group companies are in profits. It has the biggest power franchise in the green energy space and spans key infrastructure segments like thermal energy, green energy, power transmission and city gas distribution (CGD). Its latest FMCG listing of Adani Wilmar has also been a resounding success. What S&P has done is to sound a warning bell that such aggressive debt funding could impact future ratings.

As S&P has pointed out, their acquisitions are simply mindboggling. For example, Adani is paying Rs84,000 crore or $10.5 billion to get control of Ambuja and ACC. Out of this $6.4 billion has been paid to Holcim and the balance $4.1 billion will be by way of open offer to shareholders of ACC and Ambuja. It is also looking to spend another Rs58,000 crore to set up a bauxite refining and iron ore beneficiation plant in the state of Odisha. This and scores of other such inorganic growth strategies will be bankrolled with deb, which is a worry.

The Fitch unit, CreditSights, which had originally let the cat among the pigeons with its red flags on the Adani group leverage, almost has similar concerns. They had even called the Adani group deeply overleveraged, since most of their expansion plans had been or would be funded with debt only. Unlike, the Reliance group, the Adani group had not done any equity infusion. While the group had easy access to bank funding, promoter infusions would have added more confidence to the markets. However, that has not been done.

Among the various groups, Adani has relatively higher debt/equity ratio. That is because its aggressive inorganic strategy had been largely funded with debt. Th median debt equity ratio of the Adani group is about 2-3 times, although some of the companies like Adani Green have much higher debt exposure levels. The biggest strain would be felt if the cash flows from the new projects don’t match up to the debt servicing costs. That has been the problem with many Indian business groups, although this group has got its bets on target.

However, all these concerns expressed by Fitch and S&P gloss over a very important aspect. Any growth plan has to choose between equity and debt and debt should be the obvious option since the cost of debt is lower than the cost of equity. Let us also not forget that the market cap of the Adani group is about Rs19.5 trillion and it is the second largest group in value terms after the Tata group. Adani is making a massive bet on the Indian economy and the new order. Today, it looks more like a business bet than about too much leverage.