Gautam Adani, Chairman of the Adani Group during a press conference at a press conference in Mumbai
Image Courtesy: Abhijit Bhatlekar

Adani Group in a debt trap? CreditSights report

Adani Group, an Ahmedabad-based conglomerate company owned by Gautam Adani, has been making several acquisitions in the last few months in various sectors such as power, ports, energy, telecom etc. The majority of these acquisitions are funded using debt and other similar instruments where shares and scribes owned by Adani Family offices are pledged as securities.

Now, according to a CreditSights report the multinational conglomerate company owned by the richest person in the Asian continent is “deeply over leveraged”.

The report states that as the majority of acquisitions and asset purchases are made through debit instruments, such investment activities increase pressure on the credit metrics of the MNC. Since the huge debts come along with interest payments, the cash flow of the company is also expected to be highly disrupted in the coming future.

Usually, companies infuse capital from shareholders to reduce the pressure on balance sheets. The shareholder capital is then used to make strategic investments and acquisitions. In the case of Adani Group, the Injection of equity capital from promoters and shareholders is very less making the activity of acquisitions and investments a costly affair.

Gautam Adani who started as a small businessman turned his business into a full-fledged business empire with the help of a booming Indian economy and liberalisation.

Acquisitions using debt

Over the last few years, Adani Group with help of its subsidiary companies has increased the depth and impact of the company on the Indian economy by making timely strategic Investments in ports, mineral excavation, transport and now renewable energy. The small but significant performance of an Adani Group subsidiary in the recently ended 5G spectrum auction also raised eyebrows in the industry.

The conglomerate company has also been venturing into new businesses and new industries where it has nearly zero experience in the past. This is seen as a negative trait by credit agencies as any kind of mismanagement and execution in these new industries can even push the entire conglomerate into a debt trap. It is also important to note that majority of these new business ventures of Adani Group are highly capital intensive.

The close relationship between Gautam Adani and Prime Minister of India Narendra Modi is seen as a positive sign in the report. The strong ties between the conglomerate and various large banks in the Indian economy also make a strong point in the report by CreditSights.

With the support of shareholders of the business entity, the group has been able to continue with its expansion plans without much delay. The report also pointed out various fault points in the entire expansion activities like the exposure of the company to governance and ESG risks.

While CreditSights acknowledged the deep role of the Adani Family in all the companies under the conglomerate, the credit watching firm also pointed out the possibility of the family putting an “all stop” to avoid exposure to direct liquidity and valuation crisis. This is taking into consideration the fact that default by any subsidiary company will have a domino effect on other Adani-owned entities.