Adani’s juggernaut and its debt fuel

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When Gautam Adani, ranked 24th on the global billionaire list, addressed investors at Adani Enterprises’ annual general meeting in July, he likely made a Freudian slip.

“We are intergenerational stockholders,” said Adani, perhaps intending to put the group in the same mold as the Tata group, which claims to be a repository of wealth that benefits the community in the sense large.

But the majority owners of the Ports-to-Energy Adani group are Gautam Adani and his family. They are intergenerational equity holders in the true sense of the term; The family’s current net worth of $ 74.8 billion has increased twenty-fold since March 2016.

What prompted Adani’s remark was the increased regulatory scrutiny of the ownership structure of its listed companies.

In May 2021, the National Securities Depository Limited (NSDL) froze the accounts of three Mauritius-based funds – Albula Investment Fund, Cresta Fund and APMS Investment Fund – which together held around 43,500 crore ($ 6.2 billion) in actions of the Adani group. – due to their insufficient disclosure of property under the Law on the Prevention of Money Laundering.

There were also reports of another investment vehicle, the $ 4 billion Elara India Opportunities Fund, of which 97 percent of the assets were invested in Adani group companies.

While the Adani Group has called media reports “patently flawed” and deliberately misleading for investors, the share prices of listed companies in Adani have fallen by 23%. A month later, on July 20, Minister of State for Finance Pankaj Chaudhary told parliament that the Tax Intelligence Directorate had launched an investigation into the Mauritius-based funds.

Gautam Adani’s personal participation in the six listed entities of the Adani group varies from 56 to 75%. Stakes held by foreign portfolio investors (REITs), including those under investigation, range from 11 to 22% (see chart). National financial institutions hold less than 2.5% of the capital of companies in the Adani group, with the exception of the group’s cash cow, Adani Ports and Special Economic Zone (APSEZ), in which they hold 15% of the capital. The holdings of retail investors are negligible at less than 6 percent.

By retaining a controlling stake and raising capital through opaque REITs, Adani effectively ensured that activist shareholders could not question the group’s inaccurate information and its high-risk expansion strategy that was primarily fueled through debt without a proportional increase in cash flow.

For at least two years – FY20 and FY21 – the conglomerate has overestimated its earnings before interest, taxes, depreciation, amortization (EBITDA), a measure of operating profit, by nearly 10%. EBITDAs reported by the six listed companies were 24,169 crore in 2020 and ₹ 29,539 crore in FY 21. However, according to the ‘Adani Listed Portfolio Results Compendium FY21, available at www.adanienterprises.com, the conglomerate’s EBITDA was 26,474 crore yen in 2020 and 32,337 crore yen ($ 4.3 billion) in fiscal year 21.

The difference between the EBITDAs of APSEZ and Adani Transmission according to their annual reports, and the compendium of the results of the conglomerate explains the difference (see graph).

Although strong project execution capacities and consummate political connections have helped raise huge sums of debt, glaring weaknesses in the financial profile of the Adani Group persist.

After the conglomerate was identified as one of the most indebted companies in India in the three editions of Credit Suisse’s House of Debt reports published between 2012 and 2015, the total debt of listed entities of the group increased by 63% to reach around 156,115 crores ($ 21 billion) in the six years to March 2021.

Three listed entities, Adani Power, Adani Transmission and Adani Green Energy, issued 16,784 crore in perpetual securities, apparently to repay debt at interest rates of up to 11.8%. Perpetual securities are hybrid securities that incorporate both debt and equity characteristics and are redeemable at the discretion of the issuer.

These perpetual capital securities appear to have been fully subscribed by unlisted entities of the Adani group. While this may at first glance indicate Adani’s commitment to his businesses, there are concerns.

First, while Adani Power and Adani Transmission’s debt, in rupees, declined in fiscal 2021, the conglomerate’s overall debt rose 12.6% to 156,115 crore. It appears that unlisted Adani entities may have financed at least part of the perpetual debt subscription.

Second, as interest rates have fallen globally, in India the interest rate on Adani Power perpetual securities has fallen from 10% to 11% since FY20.

This is because unlisted Adani entities may have borrowed at lower interest rates to invest in high-cost perpetual securities, making a tidy sum in the process.

Analysts typically add half of perpetual securities outstanding to debt to reflect their hybrid nature. The lack of disclosure regarding the identity of perpetual securities investors and their source of funding supports the view that the criteria for categorizing 50% of Adani Group perpetual securities as equity are met in the letter and not in the letter. ‘spirit.

The conglomerate also owes creditors 4,613 crore for capital expenditures, as of March 31, 2021. The sum of declared debt plus 50 percent of perpetual securities and creditors for capital expenditures less modest cash of 10,439 crore, is equivalent to 5.23. times EBITDA.

Free cash flow – operating cash flow minus interest expense, capital expenditure, and dividends – remains negative, implying that the conglomerate would either have to refinance maturing debt or convert it to high-cost perpetual securities. This despite the payment of nil dividends in FY2021. Capital and acquisition expenses for listed entities more than doubled to 38,765 crore in FY21 and are likely to remain high as of today. future, the indebtedness of the conglomerate is expected to increase further. The Adani Group has also assumed the debt of 8,000 crore of the recently acquired Mumbai International Airport. Investments in predominantly unlisted associates and joint ventures and third party investments, with book values ​​of 4,721 crore and 4,399 crore, respectively, paid negligible dividends of 7 crore in fiscal year 2021. No stranger to controversy, the Adani group appear to be in a tight spot right now. Regulatory inquiries into its property, ambitious growth plans for its thermal power plants and weak financial performance cloud its outlook. Given the limited holdings held by institutional and retail investors, it is now incumbent on lenders to ensure that the Adani Group improves the quality of its disclosures and prioritizes strengthening its finances against growth. Lenders may be in the best position to ensure that these overdue improvements in the management of the Adani Group are made. After all, debt is the fuel that powers the behemoth Adani.


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