Thursday, February 29, 2024

Is it massive debt which could bring Adani crashing down?

(This article is a counterview to a CreditSights report that recently stated that Gautam Adani‘s ports-to-power-to-cement conglomerate is “deeply over-leveraged”, with the group using debt to invest aggressively across existing as well as new businesses.)

The debt figure of the Adani group at Rs 2.2 lakh crore – which often triggers breaking headlines – looks massive at first sight. But to get a proper view of the real burden of the Ahmedabad-based conglomerate, it is necessary to take a close look at the composition of this figure.

The figures have to be seen in the context of areas where the group companies operate as well as their size and earnings. The areas from which the debt has been raised impact the cost of the debt, and hence, this becomes a factor to consider.

Understanding the Figures

The actual debt figure by itself needs to be clarified, as out of the Rs 2.2-lakh figure, there is Rs 0.35 lakh crore that represents loans from the promoters to various group entities, and Rs 0.21 lakh crore that is short-term debt balanced against receivables.

Now, looking at the nature of these two figures, the remaining debt figure comes down to Rs 1.64 lakh crore. This is a significant number.

The other figure that is important here is the cash and cash equivalents on the books, which stand at around Rs 0.27 lakh crore. This means that the net debt actually stands at Rs 1.37 lakh crore.This figure, when compared to various other companies in the infrastructure space, or even some other bigger companies in the manufacturing sector, is actually reasonable considering that it represents the figure of multiple companies operating across multiple sectors.

The shifting focus of the group in terms of where the debt has come from is also significant. The notion that a large number of borrowings has been powered by banks and that, too, public sector banks, does not represent the actual situation.

The group has shifted to the capital market, with the result that half of the debt, or 50%, is actually in the form of bonds. These are investment-grade foreign bonds, and the impact of this is seen in two areas. One is that the average maturity of the debt has climbed, while the other is that the average rate of interest paid has been coming down over the last five years. Another vital aspect of the debt management plan has been that the moment a project is commissioned, the debt is shifted to capital market borrowings, and, at the same time, the tenure is also more consistent with the life of the asset, which means that it becomes a long-term debt.

Diversified Borrowings

Even more interesting is the break-up of the exposure of the total debt to banks. The share of banks is a total of around 40% in the debt. Within this, around 8% is that of global international banks, and another 11% is that of private sector banks. This leaves just the remaining 21% of the total borrowings, which have come from public sector banks.

Quite clearly, the entire borrowing is diversified not only across different areas but even within the banking space, showing the extent and the depth of the banking relations of the group.

To get an idea about the manner in which the debt can actually be serviced, it can be seen that the net debt/EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) is 3.9x, and if the projects under construction are removed, then this figure actually drops further to 3.3x. This is a figure that is not high and it does not lead to a higher amount of risk.

This ratio has been coming down consistently over the past many years. At the same time, the growth of EBITDA shows that it is rising strongly, which means that there is adequate capacity to service this debt. The rate of rise in EBITDA is actually twice that of the rise in the debt, and this is why the net debt/EBITDA ratio has been coming down.

The Adani Group companies have one of the highest EBITDA margins as compared to their peers within their sectors, and so, there is a strong element of profitability that is present.

No Need to Refinance Borrowings

A feature of long-term planning that is evident in the debt structure is that the long-term debt, which is for completed projects, has been structured such that nearly 47% of this has a fixed rate. This makes it like an annuity, where the exact burden is known and is not going to change. The tenor of this debt is long-term in nature, which is 20 years or higher, and this means that there is not going to be any need to refinance these borrowings.

This brings an element of stability to the entire process. Even for the debt that is for projects under completion, the repayment obligations begin only after the commissioning of the project and the end of the moratorium period. All these points clear the uncertainty and make planning more effective.

(Shantanu Guha Ray, a Wharton-trained journalist, is the Asia Editor of Central European News & Zenger News and an award-winning author. He won the 2018 Crossword award for his book, Target, which probed the NSEL payment crisis.)

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