Fitch Group subsidiary CreditSights on Tuesday said it remains cautiously watchful of the Adani group's growing expansion appetite, which is largely debt-funded.
Over the past few years, the Adani Group has pursued an aggressive expansion plan that has pressurised its credit metrics and cash flows, the rating agency says in its report titled "Adani Group: Deeply Overleveraged."
"The Adani Group is increasingly venturing into new and/or unrelated businesses, which are highly capital intensive and raises concerns regarding spreading execution oversight too thin," it warns.
This comes at a time when the ports-to-power conglomerate has been investing aggressively across both existing and new businesses, predominantly funded with debt, resulting in elevated leverage and solvency ratios.
"This has understandably caused concerns about the group as a whole, and what implications it could have on the group companies that are bond issuers. In the worst-case scenario, overly ambitious debt-funded growth plans could eventually spiral into a massive debt trap, and possibly culminate into a distressed situation or default of one or more group companies," says Creditsights.
Over the past few years, the Adani group has aggressively expanded across virtually all its businesses. This includes both rapidly growing operations of its existing businesses (for example, Adani Green is aiming at growing its operational renewable capacity almost five-fold by FY25), and entering into new sectors, in which it has no prior experience in (including copper refining, petrochemicals, data centres and most recently, telecom and alumina/aluminium production among others).
In order to meet the ambitious growth plans it has set for itself, the Adani group is also active in expanding through the inorganic route. The Gautam Adani-led conglomerate acquired Holcim's controlling stake in Ambuja Cement and ACC Limited for $10.5 billion, thereby becoming the country's second largest cement maker virtually overnight.
A majority of these businesses are capital intensive, and require large investments and constant funding in the initial years, considering these projects have long gestation periods, notes CreditSights.
Most of the projects are majority funded by borrowings. In India, typical borrowing costs for infrastructure projects are as high as around 9-11% p.a. (depending on domestic benchmark rates), which adds a large interest burden on the entities, the rating agency points out.
"Despite elevated leverage levels and poor interest cover (due to past expansion and the capital intensive nature of the projects, funded largely with debt), virtually all Adani Group companies have large expansion plans on the horizon too, having adopted aggressive growth targets; which is not a financially prudent strategy," says CreditSights.
The rating agency says it is becoming increasingly concerned about the group's rapid pace of growth and its high leverage levels. "Excessive debt and overleveraging by the group could have a cascading negative effect on the credit quality of the bond issuing entities within the group and heightens contagion risk in case any entity falls into distress," it says.
CreditSights says it sees little evidence of promoter equity capital injections into the group companies, which is needed to reduce leverage in their stressed balance sheets.
Gautam Adani recently overtook Bill Gates to become the fourth richest person in the world. But, as per the rating agency, this is paper wealth, and largely tied to the value of his holdings in the Adani Group stocks, which have risen significantly in recent years.
"It is difficult to gauge the family's ability to inject their own funds in a scenario where any of the Group companies require equity injections by the promoter," says CreditSights.
The Adani Group is also exposed to moderate levels of governance and ESG risks, the rating agency warns.
On the competition between the Adani group and Mukesh Ambani-led Reliance Industries, the rating agency says as the two mega conglomerates in the Indian corporate sector compete for market share in a few new economy businesses (renewable power and telecom), it could lead to some imprudent financial decisions from both sides, such as higher capex spends, aggressive bidding, and overleveraging.
The rating agency, however, retained its existing Market perform recommendations on the two Adani entities under its coverage, Adani Green Energy (AGEL) and Adani Ports and Special Economic Zone (APSEZ).
