A decade in the past Gautam Adani outlined the technique behind the speedy rise of his enterprise empire: leverage one firm to fund one other’s growth. “Both you sit on the pile of money otherwise you proceed to develop,” he informed the Monetary Occasions. “There isn’t a different means you are able to do it.”
It’s a technique that has served the Indian entrepreneur properly as his Adani Group scaled up and diversified in industries from ports to energy. He has grow to be one of many world’s richest individuals within the course of, with a fortune of greater than $100bn by the beginning of this yr.
The tempo of borrowing has solely elevated as Adani laid out ever extra formidable pushes into areas corresponding to 5G and inexperienced hydrogen, with the group’s debt doubling to about $30bn up to now 4 years.
However the 60-year-old is beneath unprecedented scrutiny following share worth plunges in his listed companies after US brief vendor Hindenburg Analysis final week accused the group of years of inventory manipulation and accounting fraud — whereas criticising what it mentioned was “excessive leverage”.
Adani Group fiercely denies Hindenburg’s allegations and the characterisation of its debt, and says it’s deleveraging, lowering group debt ratios whilst complete liabilities rise. On Wednesday, nevertheless, the group referred to as off a $2.4bn fairness fundraising citing “unprecedented” market volatility.
Analysts and traders say the group’s billions of {dollars} in deliberate spending could imply it should borrow much more.
“By conventional metrics they’re positively overleveraged,” mentioned Brian Freitas, founding father of Auckland-based Periscope Analytics. “The query is whether or not their underlying companies can develop quick sufficient to service the debt.”
A sprawling conglomerate with seven listed firms and extra unlisted ones, lots of Adani’s most formidable plans are concentrated in Adani Enterprises.
The division serves as an incubator for younger Adani companies corresponding to airports, through which the group had no expertise earlier than shopping for six in 2019, or creating what it says will likely be “the world’s largest inexperienced hydrogen ecosystem”.
Adani Enterprises had a web debt-to-ebitda ratio of 10 occasions as of the monetary yr ended March 2022, in response to calculations by Fitch firm CreditSights, one of many highest within the conglomerate. However it requires additional spending to satisfy its targets, with plans to greater than double annual capital expenditure to Rs400bn ($4.88bn) each this yr and subsequent.
Nevertheless, no firm captures the dimensions of the group’s ambition greater than Adani Inexperienced Power, which was based in 2015 with the purpose of changing into one of many world’s largest suppliers of renewable power.
After early losses, Adani Inexperienced broke even and turned a revenue of Rs4.9bn within the 2022 monetary yr. However its web debt has risen fivefold over a gradual fairness base, rising from Rs108bn in 2019 to Rs513bn final yr, with web debt at 14.9 occasions ebitda, in response to CreditSights.
To allay considerations about its debt, the Adani group has turned to international traders to try to pump fairness into its firms, together with with this week’s aborted share sale.
France’s TotalEnergies has since 2019 invested greater than $7bn into Adani’s gasoline, renewables and inexperienced hydrogen companies, whereas the United Arab Emirates’ Worldwide Holding Firm final yr invested $2bn throughout Adani Enterprises, Adani Inexperienced and Adani Transmission.
But Adani will want more cash than it will probably supply by means of fairness alone whether it is to finance its formidable plans, leaving restricted scope for deleveraging, in response to CreditSights.
Whereas Adani historically borrowed from state-owned banks and different lenders in India, CreditSights mentioned it had more and more tapped international banks and bondholders attracted by its quick progress and the dependable money flows generated by its established infrastructure companies.
Adani Inexperienced raised $750mn in inexperienced bonds final yr and in December introduced a $200mn yen-denominated refinancing facility with MUFG Financial institution and Sumitomo Mitsui Banking Company performing as principal lenders.
Adani Enterprises additionally borrowed about $1bn from worldwide lenders together with Apollo, Barclays and Customary Chartered to broaden its airport enterprise.
Brokerage CLSA mentioned debt at Adani’s 5 largest firms had doubled to Rs2.1tn since 2019. Adani Group’s chief monetary officer Jugeshinder Singh mentioned on Monday that complete debt throughout the conglomerate was $30bn.
However the debt accumulation has attracted scrutiny from some analysts and traders who say the tempo of progress has little parallel in India. Rival conglomerate Reliance Industries, for instance, launched a deleveraging drive in 2020 to get rid of all its web debt of greater than $20bn by elevating fairness from international traders together with Fb, KKR and Mubadala.
“It’s a priority to shareholders when a conglomerate leverages itself into different areas the place the experience shouldn’t be there,” mentioned Sharmila Gopinath, specialist adviser to the Asian Company Governance Affiliation. “How lengthy is it going to take to return up to the mark with a enterprise like that?”
Adani disputes that it’s overleveraged, saying in a response to Hindenburg on Sunday that “leverage ratios of Adani Portfolio firms proceed to be wholesome and are in step with the trade benchmarks of the respective sectors”.
It additionally disputes CreditSights’ calculations of its web debt-to-ebitda ratio, placing Adani Enterprises at 4.9 occasions and Adani Inexperienced at 10.3 occasions. It says group-level web leverage has halved since 2013, whereas the proportion of pledged shares held by Adani or his associates within the group’s listed firms has additionally fallen as share costs surged.
Adani has a confirmed capacity at scaling up new ventures and executing formidable initiatives.
However Nitin Mangal, an impartial analyst, estimates that the group might want to increase about Rs1tn in fairness over the following two years to finance its capex plans and proceed tapping debt markets.
Adani told the Financial Times in December that he anticipated additional investments from “many sovereigns”.
“They’ve a variety of formidable progress plans going ahead,” Mangal mentioned. “They gained’t have the ability to survive solely on debt. They need to hold extra fairness to maintain issues occurring.”
