Adani Group has remained in the spotlight in the recent past due to its high debt on the group. This debt is generally for the aggressive expansion strategy of the group, but this debt should be compared to the cash flow from operations (CFO) to know whether this kind of debt level of the group is worrisome or not. Taking the example of Reliance Industries which is having CFO of Rs. 1 Lakh Cr., Tata Consultancy Services is having CFO of Rs. 40,000 Cr., while Adani Ports is having CFO of only Rs. 9,800 Cr. whereas the CFO of the whole Adani Group s around Rs. 30,000 Cr. So, let’s discuss this topic in detail in this article as we move ahead.
Expansion of Adani Group:
- Firstly, the expansion of any company depends upon the following basis:
o Internal Accrual
o External Borrowings
o Capital Market
Debt-Funding from Banks, bond market, etc.
- Here, the Adani Group is having a mixture of the above methods of raising funds. Primarily, the Adani Group can expand so much as the group companies lend to each other. As per the FY22 Annual Report of Adani Enterprise and Adani Transmission, the companies disclosed in their related party transaction, that they are involved in lending and borrowing funds from the other group companies.
- For instance, Adani Enterprise in FY22 borrowed around Rs. 13,000 Cr. from their related parties, whereas Adani Transmission disbursed a loan of around Rs. 2,800 to their related parties. Here, Related parties are the listed or unlisted businesses of the Adani Group.
- Comparing the related party transaction of other biggies like Reliance Industries and TCS with the Adani Group then we come to know that in FY22, Reliance Industries disbursed a loan to its related parties of just Rs. 77 Cr. while the same is Rs. 9 Cr. for TCS. So, we can see that Adani Group has more loans disbursed/taken with their related parties as compared to other big business houses in India.
- Raising Debt and Equity from Overseas:
- Adani Group not only raises funds domestically but also from overseas investors.
- For instance: Universal Trade and Investments Limited has a stake of over 16% in Adani Green. While, Apms Investment Fund Limited (1.86%), Albula Investments Fund Limited, and Asia Investment Corporation (Mauritius) Limited are some common investors in Adani Transmission.
Are Adani Group’s debts favorable or unfavorable?
- Adani Group is having gross debt of around Rs. 2.60 Lakh Cr. as of FY22. But the key thing to notice here is that debt of Adani Group is not significantly sponsored by Public Sector Banks but comes from various sources.
- PSU Banks only account for 25% of Adani Group’s debt, while Debt Capital Market (DCM) (Bonds) accounts for the largest pie of 37%. International Banks account for 18% of the overall debt pie.
- How Debt of Adani Group spiral so much?
- The prime reason behind the substantial rise in the debt of the group is primarily its ambitious expansion plans.
- Also, Adani Group took a different path of expanding themselves where they considered collateral property for funding and to expand into various sectors.
However, the debts of Adani Group are somehow favorable for some of their businesses as the ports and cement businesses are cash-churning businesses, but the business possesses a high revenue possibility in the long term. Whereas the debt becomes unfavorable in the case of power business where the assets do not appreciate much over the longer period and hence less cash flow from operations.
What Should Investors Do?
Generally, the debt of the company should be compared with the cash flows of the company. And in the case of Adani Group, the company is having debt of $28 billion, while the CFO of the group is at a similar level and stands at $30 billion. Hence, from the current viewpoint, the conditions of the group look worrisome as the stocks are also trading at a high valuation. Some of the business promises good earning visibility over the years, but any case of failure in any of the businesses of the group could lead to some uncertainty in the group, if not handled well.