Gautam Adani’s overly ambitious growth plans can spiral into a massive debt trap: CreditSights report

• Adani group’s debt-funded growth plans could spiral into a massive debt trap, says a CreditSights report.
• Most of the group’s expansion is reliant on bank loans, internal accruals and debt capital market funding.
• Most of Gautam Adani’s wealth is on ‘paper’ and is tied to the value of his holdings in the Adani group stocks, says Fitch.
• Adani group competes with Mukesh Ambani’s Reliance Industries across sectors, but the latter is on a deleveraging trend while the former is over leveraged, CreditSights says.
• Mr Adani and Indian Prime Minister Mr. Narendra Modi know each other well, and at the least it will ensure no impediments to the former’s growth agenda, as per the report.

Billionaire Gautam Adani, the world’s fourth richest man, has entered several new businesses in the last few years from cement to airports to data centers. The group’s aggressive plans, most of which have been fuelled by debt, is making CreditSights, a Fitch Ratings’ company, ‘cautiously watchful’.

In a report released, named ‘Adani Group: Deeply Overleveraged’, Fitch has said that most of its expansion appetite is debt funded across existing and new businesses. “In the worst-case scenario, overly ambitious debt-funded growth plans could eventually spiral into a massive debt trap, and possibly culminate into a distressed situation or default of one or more group companies,” the report said.

It has, however, retained the ‘Market perform’ recommendations on the two Adani Group companies under their coverage Adani Green Energy and Adani Ports and SEZ.

Gautam Adani’s ‘paper wealth’
In the last few months, the Adani group acquired Holcim’s cement companies for $10.5 billion, to become the second largest cement operator overnight. Recently, it also purchased Israel’s Haifa port for $1.18 billion.

Adani group also has plans to grow its renewable portfolio five-fold, in addition to investing in green hydrogen, airports, roads, alumina, copper refining, data centers and also expand its coal and PVC businesses.

There is little evidence of equity capital injections and reliant on bank loans, internal accruals (i.e. operating cash flows) and debt capital market funding. There are a ‘few’ instances where it drew equity infusions from other strategic or financial investors like for example TotalEnergies' 20% stake in Adani Green Energy and 25% stake in Adani New Industries.

But, “these pale in comparison to the total capex needs of the concerned entity”, the report says. The agency also does not draw any comfort from the personal wealth that the group chairman holds.

Gautam Adani has displaced Bill Gates as the fourth richest man in the world. “However, we note that this is paper wealth, and largely tied to the value of his holdings in the Adani Group

stocks, which have risen significantly in recent years. It is difficult to gauge the family’s ability to inject their own funds in a scenario where any of the Group companies require equity injections by the promoter,” the report said.

The Ambani effect
Even after Adani displaced Mukesh Ambani as the richest Indian, his group is competing with Anbani in many sectors – be it green energy, green hydrogen and even telecom. Even though the Adani group has purchased 5G spectrum only for its private network, the report does not rule out his foray into consumer telecom business.

“As the two mega conglomerates in the Indian corporate sector compete for market share in a few new economy businesses, it could lead to some imprudent financial decisions from both sides, such as higher capex spends, aggressive bidding, and overleveraging,” the report says.

Ambani’s Reliance Industries, unlike Adanis, has been on a deleveraging trend for the last few years. “Adani has elevated leverage and poor interest cover and cash outflows across virtually all its entities, and is at greater financial risk,” CreditSights says.

Healthy relations with Modi administration
In spite of all the downsides, there are some bright spots in the group too. The group enjoys healthy relations with the national ruling party.

“Mr Adani and Indian Prime Minister Mr. Narendra Modi know each other well, going back to the latter’s days as the Chief Minister of Gujarat state. At the minimum, this ensures no impediments to the Adani Group growth agenda,” the report says.

There are also policy tailwinds that support its infrastructure business. The Indian government increased its infrastructure spending in FY23 by over 35% – in railways, roads, power, telecoms and affordable housing. The Adani group has a presence across all these and will lead to better growth opportunities.

Apart from the stellar performance of all its group stocks which now makes it the most valuable group after Reliance and Tatas, the Adani group has also demonstrated its ability to raise funds within and outside India.

“We do take comfort in the Group’s strong access to diverse funding channels (onshore and offshore banks and capital markets), relatively stable recurring-revenue generating infrastructure assets, presence in key sectors of the economy and the positive infrastructure-favoured macro backdrop in the country,” the report said. There is the risk of the group hitting the ‘single borrower limits’ across banks, the report said.

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