Adani Group adopts strategy to manage, diversify borrowings in wake of Hindenburg crisis

The controversy-hit Adani Group’s market capitalization was decimated by a US short-seller’s damning report in early 2023. Since then, the group appears to have been working on fortifying its balance sheet by reducing promoter share pledges. Promoter entities are also reportedly considering selling stakes in certain group companies to pare debt and enhance financial flexibility. This comes on the heels of earlier efforts by the promoters to increase stakes in some cases. Going ahead, the group is set to resume its ambitious expansion plans—though that could again increase debt, calling for a more cautious approach.

Balance debt, diversify risk

In response to the crisis after the Hindenburg report flagged high debt levels, the Adani Group has implemented a strategy to manage and diversify its borrowings. Debt grew much slower (6%) in 2023-24 than in the two preceding years. The group reduced its exposure to domestic public and private banks in debt to just 15%, from 86% in 2015-16, while bond exposure jumped to 31% from 14%.

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Comfortable metrics

The group’s financial health is evident from the improving liquidity position: the cash balance relative to gross debt increased to 24.8% in 2023-24 from 10.6% in 2018-19, indicating a comfortable cash cushion to meet debt obligations. 

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The net debt-to-operating profit ratio eased from 3.81 times to 2.19 times, reflecting enhanced capacity to manage debt with operating income.

Fewer stakes as collateral

After the short-seller's report, the group significantly lowered pledges in a bid to restore investor confidence. Over the past year, the promoters have decreased pledge positions in six key companies. But they have also raised stakes in several key companies, with almost 75% ownership in two cases, a concern raised by the Hindenburg report (a minimum 25% non-promoter float is seen as essential to mitigate manipulation and insider trading). Only now is the group reportedly mulling promoter stake sales.

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“To reduce its debt leverage, the Adani Group has been proceeding smoothly with its capex plan. Moreover, with high promoter holdings, they are well-positioned to offload stakes if needed, further bolstering their financial flexibility,” said Kranthi Bathini, director of equity strategy at Mumbai-based WealthMills Securities.

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Ambitious retake

The group went on an aggressive expansion spree earlier in this decade, with capital expenditure surging by 114% in 2020-21, followed by 20%-plus growth for two more years. But the momentum slowed in 2023-24. Now, it could be gearing up for another exhilarating ascent, with Jefferies estimating a planned investment of $90 billion over the next decade. While a more measured approach may be warranted, experts said that despite the long gestation period of infrastructure investments, better earnings visibility would support growth.

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“The initial aggressive capex surge put pressure on cash flow, necessitating careful management to sustain operations and service debt. The planned $90-billion capex over the next decade could increase debt… Managing this balance between growth ambitions and financial stability will be critical, and requires access to cost-effective financing and strong returns on investment,” noted Anirudh Garg, partner and fund manager at Invasset.

Meanwhile, a reality check: the investment mood remains dull, private sector investments have dried up, and the group's share in new projects has dwindled.

A sustainable turnaround?

Once beleaguered by controversy, there has been a significant recovery of the Adani Group’s market capitalization, buoyed by strategic reduction in its pledged shares. The group’s combined market capitalization currently stands at ₹16.9 trillion, up from a low of ₹6.8 trillion post the release of the report in 2023. However, while the group seems to be overcoming controversy and regaining market trust, can this recent resurgence be sustained?