Adani in consolidation drive after M&A spree

Despite being heavily leveraged (indebted) and debt levels rising 14 per cent year-on-year, an "aggressive" $10-billion revenue conglomerate Adani Group continues to find favour with bankers, due to its debt servicing and diversification of business.

As on March, the combined debt of the group's three companies, Adani Enterprises Limited (AEL), Adani Power Limited (APL) and Adani Ports and Special Economic Zone Ltd (APSEZ), stood at Rs 87,928 crore, up from Rs 84,000 crore in 2014-15.

Adani Power's debt grew 18.7 per cent from Rs 41,385 crore in FY15 to Rs 49,130 crore, while the interest cost grew 11 per cent from Rs 5,369 crore to Rs 5,964 crore for the said period. In fact, 90 per cent of Adani Power's Ebit (earnings before interest and tax) went to fund its interest expense in FY16.

Adani Ports raised its debt 28.67 per cent, up from Rs 15,155 crore in FY15 to Rs 19,500 crore in FY16. However, its interest cost dipped 6.47 per cent to Rs 1,099 crore in FY16, down from Rs 1,175 crore in the previous financial year. Adani Enterprises saw its debt rise to Rs 19,298 crore in 2015-16, from Rs 18,360 crore in 2014-15. The flagship company's interest cost grew from Rs 512 crore in FY15 to Rs 1,500 crore in FY16.

Going by Credit Suisse (CS)'s House of Debt report on the debt of corporate houses, while most other groups have been looking to deleverage, Adani Group saw its debt levels in FY15 rise 16 per cent to Rs 84,000 crore, led by acquisition of port assets in FY15 and two power plants in FY16. With the acquisition of two power projects in FY16, the group now has another Rs 10,000 crore of commitments.

However, going by the CS report, within the group, Adani Ports is well placed operationally and has healthy debt-servicing ratios. However, it is the group's power business that has been creating worry lines. For instance, Adani Power's debt is a whopping 6.5 times that of its equity. Commodity sectors, especially steel and coal, are as such under significant pressure, resulting in deteriorating debt-servicing ability, the CS report reveals.

In case of Adani, the group has 22 per cent or Rs 20,000 crore of debt exposure to coal mining. An emailed query to Adani Group remained unanswered.

Analysts express concerns over the group's power business, which accounts for more than 50 per cent of the group debt and has been incurring losses for the past four years. Continual acquisition of assets and rising debts with no signs of de-leveraging has raised concerns among experts.

On a massive expansion spree for the past two years, Adani Group has been lapping up distressed power plants and ports across the country, right from Dhamra Port from L&T (Larsen & Toubro) and Tata Steel to Udupi and Korba power plants from Lanco and Avantha groups.

Though bankers are growing a bit wary lately, some have held on to the hope that the group may soon consolidate its financial standing. "Financial discipline is coming in the group after rapid expansion. It is time now to consolidate (activity) to ensure a prudent financial profile," said a senior executive at the State Bank of India (SBI).

Others do point out the unusual rapid pace with which the group is diversifying and expanding. "Adani Group has grown too fast in a short span and that makes lenders wary about them. Also, much of the funding support to this group has come from public sector banks," an executive with a foreign bank looking after corporate banking said, on the condition of anonymity.

According to Tim Buckley, director of Energy Finance Studies, IEEFA, Sydney, historically globally, conglomerates that continue to diversify both geographically and by industry using ever-increasing financial leverage tend to underperform their more-focused less-financially leveraged peers who build specific areas of unique expertise and competitive advantage. "One would have to ask what specific expertise does Adani have in methanol, defence or contract manufacturing sectors? Or in Australian coal mining? Wasting corporate time on ever more business arms means a dilution of focus and a loss of competitive advantage, in my view," Buckley said in an emailed response.

While there are some who believe the aggressive asset acquisition spree by the group has worked well for the corporate house for now, others feel it has also put Adani Group in a "precarious situation".

"It is a very large risk they are carrying. They are acquiring assets at a time when other corporate houses are de-leveraging. Many of these projects are either half-completed or yet to be executed. One misstep could actually lead to a contagion, a problem which could be significant. While good assets like Mundra Ports are cash-generating, all other businesses such as power or Australian coal are cash-guzzling," says Rajeev Shah, managing director of RBSA, a capital and valuation advisory firm.

Some bankers disagree. They claim that not all power projects of the group are doing badly. "In cases where banks have raised alarm leading to the sale of assets for de-leveraging, it is due to the type of sector the corporate house is into, such as steel. In such cases, the entire corporate house which is into steel has seen de-leveraging. But if the projects are into sunrise industries and as long as they are doing well, de-leveraging may not be required. Only when such projects enter into a cyclical downturn and see certain moderation would the banks suggest some de-leveraging," says Vikramaditya Singh Khichi, convenor, state level banker's committee, and general manager, Dena Bank.

"Adani Group is still continuing to diversify and projects are coming up. I don't think there are any warning signals as long as the business is doing fine and new projects are coming up," Khichi adds.

Meanwhile, given the fact that Adani Group is in no mood to sell assets, Shah suggests steps like diluting promoter stake to raise further equity to de-leverage, while Buckley's advise is for Adani group to focus and consolidate its strong business arms.

"Diversification is usually a business strategy pursued by companies that are faced with a lack of expansion opportunities in the existing core businesses. With the excellent growth prospects of the Indian economy, Adani doesn't need to diversify to find growth, it needs to capitalise on the best opportunities already evident, and cut its losses on project proposals that no longer make commercial sense," Buckley says.

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