Adani responds to leverage allegations levelled by Fitch

Over the last 2 weeks, Adani has been in the news over a number of issues. While the acquisition bid for NDTV by Adani group has been in the news, the other big news was the leverage concerns raised by CreditSights, the research arm of Fitch. Just a day after CreditSights had red-flagged the high levels of leverage of the Adani group, S&P also had joined the chorus. In fact, CreditSights had highlighted that most of the recent acquisitions of the Adani group had been funded by debt, resulting in too much leverage at group level.

While Adani had not offered any comment on the report, it has now come back with a 15-page response to the allegations made by CreditSights red-flagging the rising leverage of the Adani group. In response to the allegation that the Adani group was overleveraged, it has underlined that the Adani group had been consistently de-leveraging. In fact, the proof of the pudding lay in the eating and that was evident in the (Net debt to EBITDA) ratio falling from 7.6X to just 3.2X over the last 9 years. This is a clear sign of comparative deleveraging. 

While highlighting that most of the projects undertaken by the Adani group were of national importance and high gestation in nature, it has dismissed allegations of high leverage levels. According to the Adani response note, the group had gross debt of Rs1.88 trillion as of March 2022. At the same time, the net debt (net of cash) stood at Rs1.61 trillion. On the specific allegations made about Adani Enterprises (AEL), the note has clarified that for AEL, the ratio of EBITDA to gross interest was 1.98 and not 1.60 as stated by CreditSights. 

The note has spoken in detail about how the group has been consistently reducing its indebtedness to the banking system. For example, in FY16, loans from PSU banks accounted for 55% of the group debt. By FY22, that ratio had fallen to 21%. Even in the case of private bank loans, the share in the total debt of Adani group had fallen from 31% to 11%. However, the note has also admitted that the funds raised through bonds had jumped from 14% of all loans to 50% of all loans as of the latest financial year. 

One of the major contentions of the CreditSights report had been that the recent acquisitions had been bankrolled with debt. For instance, the $10.5 billion bid for ACC an Ambuja Cements was being funded largely by debt. That is why, the CreditSights report had suggested that the overly ambitious debt-funded growth plans could eventually spiral into a massive debt trap. In fact, CreditSights had even painted a worse case scenario of defaults by group companies. That is the result of very aggressive expansion in last few years.

The Adani group is a conglomerate that spans coal, ports, airports, data centres, cement, aluminium and city gas apart from ambitions of being the world’s largest renewable power producer. Adani has pointed out in its response that it had matched its expansion with calculated deleveraging, which resulted in the net debt to EBITDA ratio coming down from 7.6x to 3.2x. The profit story is a lot more convincing. For instance, EBITDA has grown 22% CAGR in the last 9 years while the debt has only grown by 11% CAGR during that period.

In its point-by-point response to the report, Adani has underlined that expanding the equity franchise is work in progress. Adani group has raised $16 billion via "comprehensive equity" under a systemic capital management plan for 6 group firms in the last 3 years. Equity has come from some marquee global names like Total Energies, IHC, Abu Dhabi, Qatar Investment Authority and Warburg Pincus. Adani also highlighted that the pledged promoter stake had also been sharply reduced, cutting down vulnerability risk.