India’s opposition parties want an investigation into the allegations against the conglomerate
India’s Adani Group’s market value plummeted after a US investment firm raised allegations of fraud against it. Can his ambitious growth plans survive?
How did the market crisis develop?
As of two weeks ago, the Ports-to-Energy conglomerate, which operates seven publicly traded companies, had a combined valuation of $220 billion.
But since short seller Hindenburg Research accused the group of “brazen” stock manipulation and accounting fraud on Jan. 24, its valuations have nearly halved. The group’s founder, Gautam Adani, has seen billions of dollars in his personal wealth wiped out and has been removed from the list of the world’s 20 richest people.
The Adani Group has denied the allegations, calling them “malicious” and “baseless” and saying plans have not changed. But investors are obviously still nervous.
Gautam Adani has seen billions wiped out from his personal wealth
On Monday, the group said in a statement that it would prepay $1.1 billion in loans raised with stocks as collateral ahead of their due date next year. This was partly due to “continued market volatility” and to reassure investors that the group’s promoters would “prepay all equity-backed financings”.
Last week, the group also called off its secondary sale of shares. The 2.5 billion (£2bn) raised should pay down debt and fund projects including airport renovations, highway construction and an ambitious green hydrogen ecosystem.
Why are falling stock prices important?
They indicate that investors are losing confidence in a company.
Analysts are now watching how the stock price slide is affecting the company’s operations, cash flow and expansion plans.
“Most of their ambitious projects will have to be severely scaled back in ambition and timeline as they will have next to no capacity to raise funds right now,” says Tim Buckley, director at Climate Energy Finance, a think tank involved in the working on financial issues related to the transition from fossil fuels to clean energy.
The opposition Congress party has held protests as the crisis grips India
It could borrow money to fund projects and acquisitions — a common strategy for infrastructure companies that’s fueling the Adani Group’s rapid growth.
But the group’s debt has been growing faster than sales and profitability, prompting some fears of default risk — a concern voiced by both the Hindenburg report and some analysts.
Can the Adani companies simply borrow more money?
The group already has total debt of almost two trillion rupees (US$24bn; £20bn) – they have almost doubled over the past three years as Mr Adani’s ambitions spread to areas such as 5G and green hydrogen.
Almost two-thirds of Adani’s debt comes from foreign sources such as bonds or foreign banks, according to a report by global brokerage firm Jefferies.
To date, the group has mainly raised funds using its infrastructure assets or shares as collateral. But as share prices plummeted, so did the value of that collateral. The private wealth units of two major banks, Credit Suisse and Citigroup, have stopped accepting Adani bonds as collateral, Bloomberg reported.
Many Indian banks have also lent billions of dollars to companies associated with the group, and the state-owned Life Insurance Corporation of India has invested in it.
Market watchers say the Hindenburg report and the response to it will make lenders cautious – meaning borrowing could become more expensive.
“The credibility of the company is under pressure. It is becoming extremely difficult to get new loans, especially in the overseas market,” said an Indian corporate banker on condition of anonymity as he did not wish to be seen commenting on the Adani Group.
Another observer, a former banker at an international wealth fund, said the group may be forced to postpone some projects until the problem is resolved. He didn’t want to be named either.
The BBC sent a list of questions to the Adani group. A spokesman replied: “All of our ongoing projects are proceeding as planned. The core fundamentals of the Adani Group remain unchanged.”
Which Adani projects could be at risk?
Group control has now increased. Investors and rating agencies scrutinize its ability to raise money and repay loans.
S&P Global Ratings has downgraded its outlook on two Adani companies to negative.
“New research and negative market sentiment may result in increased costs of capital and limit access to financing for rated companies,” it said.
In a video statement following the cancellation of the group’s share sale, Mr Adani said its balance sheet was “sound and assets robust”. He added that the group has an “impeccable track record of meeting our debt obligations.”
Some analysts say the company has to scale back ambitious projects
But rating agency ICRA said in a statement last week that the group’s large, debt-financed investment program remains a key challenge.
Most of the group’s capital-guzzling new businesses such as green energy, airports and roads are housed under flagship Adani Enterprises Ltd (AEL) and depend on it for funding. AEL has plenty of cash but could be under pressure if it also has to pay interest on its subsidiaries.
Some of the group’s companies will be insulated from the current volatility because they own and operate strong physical assets such as ports, airports and factories.
“Adani Ports and Adani Power are the strongest and best capitalized [firms], meaning their assets are backed by long-term government contracts. Most of the loans these companies take out are against these revenues and profitable assets,” says the corporate banker quoted above.
However, this is not the case with some of the group’s newer companies.
Companies like Adani Gas and Adani Green, a renewable energy arm, already have huge debts on their books and are still building up their cash flows. This could make them more vulnerable to market shocks and lower their creditworthiness.
The banker points out that the prices of the bonds issued by Adani Ports and Special Economic Zone Ltd fell only slightly, while the bonds issued by Adani Green lost more than a quarter of their value in three days.
What options does Adani have?
Delaying new projects and selling some assets to raise money could be a way out.
ICRA has said some of the planned investments are discretionary in nature and may be deferred depending on how much liquidity it has.
“The company has built assets that are valuable for a developing country like India and there will be many strategic investors interested in it,” said a management consultant who asked not to be named.
Opposition leaders raised the Adani issue in parliament, which adjourned amid turmoil on Monday
Some analysts remain optimistic.
“I saw different operations [Adani] Projects from Ports, Airports, Cement to Renewable Energy that are solid, stable and generate healthy cash flow. You are completely safe from the ups and downs of stock market events,” said Vinayak Chatterjee, an infrastructure professional, founder and executive trustee of the Infravision Foundation.
Analysts are also watching whether there will be a regulatory probe into the group’s corporate governance. The matter has also sparked a political row over Mr Adani’s perceived closeness to Prime Minister Narendra Modi, both of which deny it.
On Monday, the main opposition party in Congress staged nationwide protests and called for an investigation into the allegations.
Mr Buckley says as the pressure mounts, the Adani Group’s ability to easily win government contracts to boost revenue is being called into question. It will also be difficult to restore its creditworthiness.
With the group having to repay a significant amount, it must conduct a strategic sale of assets, he says.
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