Key ratios of Adani group in dangerous territory

Last week saw a shift in market capitalisation within the Adani Group. Adani Green Energy (AGEL) overtook Adani Ports (APSEZ) to become the most valuable company. In the past month, AGEL’s share price is up 75 per cent while the Nifty is up 15 per cent.

AGEL aims to be the biggest renewable energy company by 2025. It has 15 GigaWatt (15 GW) of renewable capacity in various stages of operation, construction and contracting. About 11,500 MW (11.5 GW) is under construction. By 2025, AGEL targets ramping up capacity to 25 GW. It’s looking to raise US $5-6 billion in normal overseas bonds, and a whopping $12 billion in green bonds over five years.

AGEL had consolidated 2019-20 income from operations of Rs 2,548 crore with profits before tax of Rs 74 crore and a net loss of Rs 61 crore, after finance costs of Rs 995 crore. Adjusting for exceptional items, depreciation and amortisation, finance costs, and others, the operating profits (Ebitda) would have been around Rs 1,580 crore for an impressive operating margin of 62 per cent.

The problem is debt. AGEL has an equity base of Rs 2,356 crore. It has debt (current and long-term) of just over Rs 14,000 crore. This replicates a pattern in every other listed Adani company. They all have high debt: equity ratios. 

Professor Aswath Damodaran of Stern School of Business, New York University says that the valuation of investments are based on narrative or on numbers. The narrative about the Adani Group is compelling.

It is a major infrastructure player, which has grown at great speed as it moved into sector after sector. It is India’s largest private port operator. It is a power producer and transmission player. It is a big player in city gas distribution. It has interests in coal. 
It has successfully bid for multiple airports and would be the biggest private airport operator, once the civil aviation sector gets going post-pandemic. It is a major renewables player. It has an agricultural joint venture. It’s looking at a huge data centre operation. It is looking at water management.

The group has delivered roughly 20x growth in the past 15 years. The strategic “structure” is fascinating. There is an “incubator” in the holding company, Adani Enterprises. Once a business looks to have matured, it is spun off and listed. Managing the regulatory environment is crucial for infrastructure plays and the group’s closeness to the current government helps in this respect.

Like most group that have grown quickly, this one has also made its share of bad bets. It ran into problems with Indonesian coal imports. The legal issues there are still live. It has faced environmental backlash while developing coal operations in Australia. Mundra Port has been accused of many environmental violations. Reports suggest serious investor resistance to the current attempts to delist Adani Power.

The numbers indicate the group has massive debt distributed across the balance sheets of many sister-companies. How much debt there is, is hard to ascertain, given the many unlisted subsidiaries and SPVs (Special Purpose Vehicle) which take care of projects.

Various group companies including listed and unlisted ones have borrowed from each other, and invested in each other, and also borrowed from banks, floated bonds, tapped overseas funding, pledged shares etc. It’s hard to get a complete picture. The complex chain of financial relationships implies a problem in one business could spiral to impact apparently unrelated businesses.

The listed companies all have high debt:equity ratios. Other key ratios like interest cover and debt: Ebitda are also in what may be considered dangerous territory. Sovereign downgrades have meant downgrades of overseas borrowings, and a falling rupee represents another danger.

Most Adani businesses like ports, gas, power, airports, are in regulated areas with set tariffs. These are difficult times. Port traffic is down; power demand is down; aviation traffic is down. Hence, top-line growth is hard to generate.

But the group has not defaulted. It has met its debt commitments. Given easy money regimes from central banks, it may be possible for the group to lower the interest burden and extend debt-tenure. Marrying the narrative to the numbers, the group has to keep scaling up since that allows it to raise more money. Can debt be reduced to reasonable levels? The answer to that question is critical.

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