New Delhi: While the total debt of the top five Adani Group companies has doubled in the four years ending March 2022, an analysis of the data shows that credit from Indian banks form less than 40 per cent of this debt, brokerage firm CLSA said in a report. This would indicate that the Indian banking system is relatively insulated from any potential downside risks.
According to the CLSA report, “Bank debt (term loans, working capital and other facilities) forms just 38 per cent of the total debt, while bonds/commercial papers constitute 37 per cent, 11 per cent is borrowing from financial institutions and the remaining 12-13 per cent is inter-group lending.”
On an absolute basis, the CLSA estimates that the Adani Group’s bank debt is Rs 70,000-80,000 crore of the Rs 2 lakh crore debt in FY22.
The Adani Group has faced intense scrutiny over the past few days following a report by Hindenburg Research, an investment research firm, alleging corporate malpractice, stock price manipulation, and very high levels of debt.
Following the release of the report Tuesday, shares in seven listed group companies of Adani lost $10.73 billion in market capitalisation in India Wednesday and extended their fall Friday following the market holiday on the previous day on account of Republic Day.
At the same time, the Adani Group has responded to the allegations made by Hindenburg Research saying that the “malicious allegations” were timed to scupper the chances of the Rs 20,000-crore Follow-on Public Offer (FPO) of Adani Enterprises Friday.
The company has threatened legal action against Hindenburg, something the research agency has welcomed, saying it stands by its research and that a legal process would lead to the discovery of key documents that would prove their case.
“We aggregate the consolidated debt of the top-5 Adani group companies: Adani Enterprises, Adani Ports, Adani Power, Adani Green and Adani Transmission,” CLSA said in a report. “While there may be some element of double counting in group debt, we calculate consolidated debt of Rs 2.1 trillion (lakh crore) for these companies; excluding inter-group lending, the debt is Rs 1.9 trillion (lakh crore).
Meanwhile, the Congress party has also entered the fray, with party leader Jairam Ramesh issuing a statement.
“State-owned banks have lent twice as much to the Adani group as private banks, with 40 per cent of their lending being done by SBI,” Ramesh said. “This irresponsibility has exposed the crores of Indians who have poured their savings into LIC and SBI to financial risk. If, as alleged, the Adani Group has artificially inflated the value of its stock through manipulation, and then raised funds by pledging those shares, banks such as SBI could face heavy losses in the event of a fall in those share prices.”
A day after the release of Hindenburg’s report, billionaire investor Bill Ackman, said that he found the research report “highly credible and extremely well researched”.
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Low risk to Indian banks
CLSA data shows the share of Indian bank debt in the overall debt of the group has fallen over the past three years.
“We estimate that incrementally banks have only lent Rs 150 billion, or 15 per cent of the Rs 1 trillion the group companies have borrowed over the past three years,” CLSA said, and added that large acquisitions, such as cement, have been fully-funded by foreign banks.
About 25-30 per cent of the Adani Group’s debt comes from public sector banks, and less than 10 per cent from private banks.
Brokerage firm Jefferies also makes a similar assessment, saying that Indian banks are relatively insulated from risks due to any possible over-leveraging by the Adani companies.
“Following recent concerns, Adani Group has shared details of debit & leverage levels,” Jefferies said in a note, reported by the media. “Consolidated debt is at ₹1.6 trillion (ex-shareholder sub-debt) & Debt/Ebitda is down from 4.3x in FY16 to 3.2x in FY22.”
In other words, Jefferies is saying that the Adani Group’s debt from sources outside of its own companies is Rs 1.6 lakh crore, but that its debt has fallen as a proportion of its earnings, from a 4.3-times its earnings in 2015-16 to 3.2 times its earnings in 2021-22.
The brokerage did say that the acquisition of the cement business could add Rs 60,000 crore to debt, but that this new business would also improve the group’s cash flow.
“Diversification of borrowing-mix has cut share of Indian banks to 33 per cent of debt & 0.5 per cent of sector loans; rest with bonds/foreign banks,” Jefferies added. “We watch for progress, but see low risks for banks.”
Variation across companies
The discourse surrounding the Adani Group has mostly looked at the financials of the conglomerate as a whole, whereas a more detailed analysis of the individual companies, wherever possible, reveals that their debt positions are quite different from each other.
For example, data provided by CLSA shows that, of the top five Adani Group companies, only three — Adani Power (67.6 per cent), Adani Green (43.3 per cent), and Adani Enterprises (43.7 per cent) — had a relatively high share of bank debt.
The other two companies analysed — Adani Ports and Adani Transmission — had only 11.6 per cent and 17.2 per cent of their debt coming from banks. Instead, these companies have relied on bonds to raise funds.
Adani Ports raised 88 per cent of its outstanding debt from bonds, the overwhelming bulk of which are denominated in foreign currencies. Similarly, 66.7 per cent of Adani Transmission’s debt is in the form of bonds, most of which are in foreign currencies.
Adani’s response to original report
“We are shocked that Hindenburg Research has published a report on 24 January 2023 without making any attempt to contact us or verify the factual matrix,” Adani Group Chief Financial Officer Jugeshinder Singh said in a statement Wednesday, soon after Hindenburg’s report went public.
“The report is a malicious combination of selective misinformation and stale, baseless and discredited allegations that have been tested and rejected by India’s highest courts,” Singh added.
He said that the timing of the report’s publication “clearly betrays a brazen, mala fide intention to undermine the Adani Group’s reputation” with the main aim being damaging the FPO by Adani Enterprises.
“We are evaluating the relevant provisions under U.S. and Indian laws for remedial and punitive action against Hindenburg Research,” Jatin Jalundhwala, Group Head – Legal, Adani Group said in the statement.
Hindenburg stands its ground
“In the 36 hours since we released our report, Adani hasn’t addressed a single substantive issue we raised,” Hindenburg Research said in its statement Thursday. “At the conclusion of our report, we asked 88 straightforward questions that we believe give the company a chance to be transparent. Thus far, Adani has answered none of these questions.”
“In a statement to media today, Adani referred to our 106-page, 32,000-word report, with over 720 citations and prepared over the course of 2 years, as ‘unresearched’ and said it is ‘evaluating the relevant provisions under US and Indian laws for remedial and punitive action against us’”.
The research company added that it would “welcome” legal action by Adani and that it fully stands by the findings of its report and believes any legal action taken against it would be meritless.
“If Adani is serious, it should also file suit in the US where we operate,” Hindenburg added. “We have a long list of documents we would demand in a legal discovery process.”
(Edited by Zinnia Ray Chaudhuri)
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