Debt hurdle for Adani's buying spree

Aerial view of Carmichael coal mining project
The Adani group has ended 2015-16 with record debt and its increased finance cost could come in the way of acquisitions and an ambitious coal mining project in Australia, according to analysts.

Adani Power leads the group with Rs 49,129 crore debt, followed by Adani Ports and Adani Enterprises at Rs 19,000 crore each. Adani Power's net debt increased to a record high despite raising Rs 1,140 crore equity in the March quarter. Its net debt is 6.5 times of equity. "By Western standards that is financial distress territory," said Tim Buckley, director of Energy Finance Studies, IEEFA, Sydney, in an e-mail.

The debt to equity ratio of JSW Energy in March 2016 was 1.66 in comparison. Tata Power's ratio in September 2015 was 2.33 and Reliance Power's 1.47.

About 90 per cent of Adani Power's earnings before interest and tax (Ebit) went to fund its interest expense of Rs 5,964 crore.

"If Adani Power does not eventually win a rate adjustment court case, the group's Ebit would be required to be retrospectively adjusted down to a level below its interest expense in 2015-16," said Buckley.

During a post-results analysts' meet, Adani Power's chief financial officer, Vinod Bhandawat, said finance costs in the March quarter were high because of a one-time charge on account of option premium and fair valuation of interest swap derivatives.

"On a consolidated basis, the company's external debt was Rs 39,000 crore and ICD debt of Rs 6,000 crore," he said. The promoters plan to infuse an additional Rs 1,700 crore in the next one year, which will improve Adani Power's financial metrics.

The group went on a massive expansion drive in the past two years, buying distressed power plants and ports across India. Adani took over the Dhamra Port from L&T and Tata Steel, snapped up the Udupi power plant in Karnataka from Lanco and took over the Avantha group's power plant in Korba. The acquisitions resulted in the group's debt touching a new high as it took over the debt of the target companies.

Last year, group flagship Adani Enterprises de-merged its power, ports and electricity transmission businesses into separate companies, making the holding structure clearer for investors.

Analysts at Nomura said though the improving operational performance was encouraging, Adani Power's bottom line was propped up by recognising litigated tariff relief in power purchase agreements.

"If we were to exclude the entire compensatory tariff, the company's March quarter's normalised Ebitda/net loss would be broadly in line with our forecasts," the Nomura analysts said.

The good news for the group has come from the port business. Adani Ports is targeting 10-15 per cent volume growth in 2016-17 with its flagship Mundra Port planning to surpass JNPT off Mumbai in container handling. New ports at Kattupalli, Ennor, Hazira and Dhamra are expected to fuel the growth.

But this will come at a cost. Adani Ports' overall net debt in March had increased to Rs 20,200 crore, including current maturity of long-term debt.

Analysts said Adani Enterprises remained relatively heavily geared, with a net debt of Rs 19,298 crore, representing 1.3 times the book value of shareholders equity. Ebit relative to net interest is a relatively small 1.8.

"The group is part way into a new $5-10 billion solar investment programme and it leaves Adani Enterprises with no financial capacity to concurrently undertake the high-risk $10 billion Carmichael coal proposal in Australia," said Buckley.

Ameet Desai, executive director and chief financial officer of Adani Enterprises, said the company's long-term debt was about Rs 8,300 crore and net of cash this figure went down to Rs 6,280 crore. The balance Rs 12,000 crore was working capital and the net long-term debt to equity ratio was 0.5 per cent, he said.

On the Carmichael coal project, Desai said, "I do not think we are going to take any decision in a hurry."

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