‘Extreme leverage’? Adani’s debt-driven expansion under scrutiny

A decade ago Gautam Adani outlined the strategy behind the rapid rise of his business empire: leverage one company to fund another’s expansion. “Either you sit on the pile of cash or you continue to grow,” he told the Financial Times. “There is no other way you can do it.”

It is a method that has served the Indian entrepreneur well as his Adani Group scaled up and diversified in industries from ports to power. He has become one of the world’s richest people in the process, with a fortune of more than $100bn by the start of this year.

The pace of borrowing has only increased as Adani laid out ever more ambitious pushes into areas such as 5G and green hydrogen, with the group’s debt doubling to about $30bn in the past four years.

But the 60-year-old is under unprecedented scrutiny following share price plunges in his listed businesses after US short seller Hindenburg Research last week accused the group of years of stock manipulation and accounting fraud — while criticising what it said was “extreme leverage”.

Adani Group fiercely denies Hindenburg’s allegations and the characterisation of its debt, and says it is deleveraging, reducing group debt ratios even as total liabilities rise. On Tuesday it passed an important test of investor faith as flagship business Adani Enterprises succeeded with a $2.4bn equity sale.

Yet analysts and investors say the group’s billions of dollars in planned spending may mean it will have to borrow even more.

“By traditional metrics they are definitely overleveraged,” said Brian Freitas, founder of Auckland-based Periscope Analytics. “The question is whether their underlying businesses can grow fast enough to service the debt.”

A sprawling conglomerate with seven listed companies and more unlisted ones, many of Adani’s most ambitious plans are concentrated in Adani Enterprises.

The division serves as an incubator for young Adani businesses such as airports, in which the group had no experience before buying six in 2019, or creating what it says will be “the world’s largest green hydrogen ecosystem”.

Adani Enterprises had a net debt-to-ebitda ratio of 10 times as of the financial year ended March 2022, according to calculations by Fitch company CreditSights, one of the highest in the conglomerate. But it requires further spending to meet its targets, with plans to more than double annual capital expenditure to Rs400bn ($5bn) both this year and next.

However, no company captures the scale of the group’s ambition more than Adani Green Energy, which was founded in 2015 with the aim of becoming one of the world’s largest providers of renewable energy.

After early losses, Adani Green broke even and turned a profit of Rs4.9bn in the 2022 financial year. But its net debt has risen fivefold over a steady equity base, rising from Rs108bn in 2019 to Rs513bn last year, with net debt at 14.9 times ebitda, according to CreditSights.

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To allay concern about its debt, the Adani group has turned to global investors to pump equity into its companies, including with this week’s share sale.

France’s TotalEnergies has since 2019 invested more than $7bn into Adani’s gas, renewables and green hydrogen businesses, while the United Arab Emirates’ International Holding Company last year invested $2bn across Adani Enterprises, Adani Green and Adani Transmission.

Yet Adani will need more money than it can source through equity alone if it is to finance its ambitious plans, leaving limited scope for deleveraging, according to CreditSights.

While Adani traditionally borrowed from state-owned banks and other lenders in India, it said Adani had tapped global banks and bondholders attracted by its fast growth and the reliable cash flows generated by its established infrastructure businesses.

Adani Green raised $750mn in green bonds last year and in December announced a $200mn yen-denominated refinancing facility with MUFG Bank and Sumitomo Mitsui Banking Corporation acting as principal lenders.

Adani Enterprises also borrowed about $1bn from international lenders including Apollo, Barclays and Standard Chartered to expand its airport business.

Brokerage CLSA said debt at Adani’s five largest companies had doubled to Rs2.1tn ($26bn) since 2019. Adani Group’s chief financial officer, Jugeshinder Singh, said on Monday total debt across the conglomerate was $30bn.

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But the debt accumulation has attracted scrutiny from some analysts and investors who say the pace of growth has little parallel in India. Rival conglomerate Reliance Industries, for example, launched a deleveraging drive in 2020 to eliminate all its net debt of more than $20bn by raising equity from global investors including Facebook, KKR and Mubadala.

“It’s a concern to shareholders when a conglomerate leverages itself into other areas where the expertise is not there,” said Sharmila Gopinath, specialist adviser to the Asian Corporate Governance Association. “How long is it going to take to come up to speed with a business like that?”

Adani disputes that it is overleveraged, saying in a response to Hindenburg on Sunday that “leverage ratios of Adani Portfolio companies continue to be healthy and are in line with the industry benchmarks of the respective sectors”.

It also disputes CreditSights’ calculations of its net debt-to-ebitda ratio, putting Adani Enterprises at 4.9 times and Adani Green at 10.3 times. It says group-level net leverage has halved since 2013, while the percentage of pledged shares held by Adani or his associates in the group’s listed companies have also fallen as share prices surged.

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Adani has a proven ability at scaling up new ventures and executing ambitious projects.

But Nitin Mangal, an independent analyst, estimates that the group will need to raise about Rs1tn in equity over the next two years to finance its capex plans and continue tapping debt markets.

Adani told the Financial Times in December that he expected further investments from “many sovereigns”. Following Adani Enterprises’ share sale, Mangal said that the group would need to keep up the momentum to match its widening aspirations.

“They have a lot of ambitious growth plans going forward,” Mangal said. “They won’t be able to survive only on debt. They have to keep more equity to keep things going on.”