Explained: Why Has The Adani Group’s Debt-Fueled Growth Raised Eyebrows

CreditSights, a unit of the rating group Fitch, recently grabbed eyeballs after it said that the Adani Group is "deeply overleveraged" and that it could possibly default in the worst-case scenario.

The report's contents caused the stocks of the Adani Group's listed companies to decline during Wednesday's trading session. It led to a wipe-out of Rs 94,000 crores ($10 billion) in the group's stocks during the first half of the trading day.

Adani Group stocks have been some of the best value creators in the Indian stock market over the last few years. Despite the noise, this isn't the first time the group's significant debt has come under scrutiny. Not only has the debt been a concern for Adani group's investors, but the debt issue has also been politicised on several occasions.

The Hunger for Growth

The Adani Group has been on a growth spree over the last few years, and its favourite mode of growth has been acquisitions for the last few years. Apart from the recent mega-deal in the cement space, all of its arms in the port, airport, and energy businesses have grown through bold acquisitions.

Adani Ports acquired the Dhamra, Abott, Krishnapatnam, and Gangavaram ports, though the original Mundhra port remains the company's crown jewel. It then went on to acquire a controlling stake in Mumbai International Airport Limited, which runs the Mumbai Airport and acquired its entire debt as well. The group has managed to secure financing for the planned Navi Mumbai Airport from the State bank of India, with SBI underwriting the Rs 12,770 crore loan.

Adani Green Energy, the renewables arm, has acquired SB Energy Limited, India's largest renewables player for $ 3.5 billion in an all-cash deal.

The hunger for growth has resulted in an increase in gross debt from around Rs 1 lakh crore in FY16 to 2.2 lakh crore in FY22, a growth of 12 per cent each year over the period. But, the group's hunger hasn't been satiated yet.

Over the last year, there have been a series of announcements about the group planning to enter multiple businesses like aluminium refining, green hydrogen, copper refining, data centres, petrochemical refining, enterprise telecom, and media, among others. These plans are in addition to its announced expansion plans in the existing businesses.

The group's existing and new businesses it plans to enter are highly capital intensive and would undoubtedly have to be financed by external capital (mainly debt). Since the group already has significant leverage, using additional leverage to enter unrelated businesses could prove to be detrimental for the group.

Putting the Debt in Perspective

The listed entities of the Adani group together had a gross debt of around Rs 2.2 lakh crores at the end of the financial year 2022 (FY22). While the number on an absolute basis does sound quite high, it should be looked at in perspective.

The Adani Group can be compared with Reliance Industries Limited in terms of size and the focus on asset-heavy businesses. Further, both businesses are entering similar lines of business.

Reliance's gross debt stood at around Rs 3 lakh crores at the end of FY22, according to data provided by screener.in. While Reliance's absolute debt is higher, its ability to repay loans appears to be higher as well. It posted operating profits of Rs 1.1 lakh crore, which can be used as a rough estimate of cash flows generated by the business. Hence, the gross debt to operating income ratio stands at a comfortable 2.7 times.

In contrast, the same ratio for the Adani Group at the end of FY22 stood at 6.6 times, with an operating income of around Rs 33,000 crores in FY22.

Reliance scores significantly better in terms of its ability to cover interest payments as well – its operating income to interest expense ratio stands at 7.58 times, while Adani group's ratio stands at 2.2 times.

The only other business conglomerate that is comparable to Adani Group and Reliance in terms of market capitalisation is the Tata Group, where financial conservatism has resulted in extremely comfortable debt gearing.

Even if one is to consider the fact that Adani Group is putting in Capex for future growth, the gross debt to operating income ratio remains quite high. The same ratio for Reliance peaked in FY17 at 4.69 times, even as it spent heavily on capital expenditure for the new Jio Platforms business.

Is the Debt Sustainable?

Over the years, the Adani group has grown rapidly without facing any significant financial issues and has never defaulted on its debt. Further, it owns highly-valued infrastructure assets that generate strong and stable cash flows, protecting the company from volatility in cash flow generation.

The loan amounts have been used to finance new projects and acquisitions. Hence, the profitability of the asset after completion/acquisition and the gestation period of new assets would be two key determinants of the group's solvency. The group must be able to raise capital to roll over loans until the new Greenfield assets become completely operational.

The group's strong relationships with banks and good standing in the capital markets have allowed it to raise capital without any hiccups. In addition, the group has managed to execute well despite facing adverse situations. For instance, the Australian Carmichael coal mine project, which faced severe opposition from several quarters, is operating successfully today – despite several banks publicly stating that they wouldn't fund the project.

The group's gross debt stands at Rs 2.2 lakh crore, but if adjusted for liquid assets on books, it falls to Rs 1.72 lakh crore. Though even at these levels, the gearing ratios still remain significantly higher. Though high, it does reduce the gearing ratios significantly. If the group can continue to recreate its past magic, the debt burden would be an insignificant concern.