By Nantoo Banerjee
The skyrocketing wealth of Ahmedabad-based business tycoon Gautam Adani in the last three years may be exciting news for shareholders of Adani group companies, but the same can’t be said about lenders to those enterprises as the liabilities don’t match with their real assets. According to the latest Forbes real-time billionaires list, Gautam Adani’s net worth is $148 billion, making him the world’s third richest man after Tesla chief executive Elon Musk ($253 billion) and French business magnate Bernard Arnault ($154.9 billion). Adani entered the global ‘Centibillionaires Club’ — businessmen having a fortune of $100 billion or more — in April, this year.
The gritty Gujarati entrepreneur is well ahead of Reliance Industries chairman Mukesh Ambani, also a Gujarati, the world’s eighth richest and India’s second, whose net worth was stated to be $94 billion. Last year, Gautam Adani added $49 billion to his net worth making him the world’s fifth richest person leaving ace investor Warren Buffet behind. Adani’s net worth in 2020 was $17 Billion. Earlier this year, Adani’s net worth reached around $123 billion. Massive surge in stock prices of his companies made this possible.
How real is Adani’s net worth? The answer is debatable. The net worth of an enterprise can be easily calculated from its balance sheet by using two methods — (1) by simply deducting its total liabilities from its total assets, or (2) by adding its share capital — both equity and preference — to the free reserves and surplus. For calculating individual net worth, the value of assets is based on their current market value rather than original purchase prices. Adani’s massive personal net worth does not need to keep pace with the balance sheet net worth of his group enterprises.
Adani Group’s shares have lately seen an exponential surge — 500-5,000 percent spike just in the last three years. That is exceptional by any standard, especially through the Covid pandemic period. Gautam Adani, 60, has reportedly added $60.9 billion to his fortune in 2022 alone, five times more than anyone else. The unusual share price surge has catapulted Adani Group to become India’s most valued business outfit, last week, displacing the over-a-century old House of Tatas.
A recent research report by Fitch rating’s CreditSight says Adani Group is “deeply over-leveraged.” In other words, Adani Group’s debt is unsustainably high against its equity. The group’s total debt of Rs.2.2 lakh crores as of March 31 2022 is a result of its aggressive expansion which is majorly funded by debt putting enormous pressure on the credit metrics and cash flows of the company. The group seems to be venturing into new and unrelated businesses which are highly capital intensive. Some of these ventures may take a few years to generate noticeable profit. In the worst-case scenario, large borrowings made to set up and run these projects can spiral the group into a debt trap and possibly a default. That will drastically cut Gautam Adani’s personal net worth. Fitch Ratings’ subsidiary CreditSights remains “cautiously watchful” of Adani Group’s growing appetite for largely debt-funded expansion.
”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,” CreditSights warned. The group 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,” warned Creditsights.
Lately, the group acquired Swiss giant Holcim’s controlling stake in Ambuja Cement and ACC for $10.5 billion to become India’s second largest cement producer overnight. The Adanis had far outbid KM Birla-led Ultratech and JSW Group to jumpstart in the cement sector with 70 million tonnes of production capacity annually. JSW Group chairman Sajjan Jindal had offered $7 billion to Holcim for its Ambuja stake which includes $4.5 billion of his own money and $2.5 billion investment from the private equities. The expensive Holcim stake acquisition made it India’s largest ever M&A transaction in the infrastructure and materials space. “Our move into the cement business is yet another validation of our belief in our nation’s growth story,” said Gautam Adani.
Adani Group has underlined that their net debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio has reduced to nearly 3.2x versus 7.6x nine years ago. Its net debt was Rs1.6 lakh crore by the end of the first quarter of this fiscal. Interestingly, the profit-to-earning ratio (P/E) of Adani Enterprises is around 570x (times). Its P/E ratio for fiscal years ending March 2022 to March 2018 averaged 93.39x. P/E ratio indicates the multiple of earnings investors are willing to pay to own one share of the company. Such an extraordinarily high P/E ratio should make equity expansion easy for any company. Adani Group, however, depended more on debt than equity. Half a dozen listed Adani entities have an outstanding of about $7.7 billion worth of bonds in the overseas market with a fair share of long-term tenors – from 10 to 30 years.
Beginning as an international trader in commodities in 1989, Gautam Adani has built a giant business empire over the last few years making a big national presence. The policy changes of the Modi government may have been highly helpful. In 2018, six airports were chosen for privatisation by the Airports Authority of India (AAI) by leasing them out. The Adani group had won all the bids. Controversy followed. The Airport Authority Employees’ Union alleged in a letter to the Prime Minister that while the bidding document says the final bidder should have paid Rs 1,330 crore towards AAI’s existing assets, Adani had to pay only Rs 499.84 crore for the lease in the end. The value of Rs 1,330 crore for the assets was pegged at the time when the Civil Aviation Ministry sought the approval of the Public Private Partnership Appraisal Committee (PPPAC). The Adanis paid only Rs.74.5 crore for the Mangaluru airport assets valued at Rs.363 crore, said the union. The group got the airports on lease for 50 years while the AAI Act recognises lease for a period of 30 years.
The group’s business empire has seven publicly listed companies involved in sectors such as coal, power, real estate, agro products, oil and gas, financial services, port and services, data centres, and green energy. The stock of these companies has skyrocketed in the last two years. Adani Wilmar which is India’s largest branded edible oil importer has given its stock investors 280.31 percent returns till the first quarter of 2022 whereas, from the start of 2022, Adani Power’s shares have given more than 145 percent returns and the majority of the returns have come in March end and April.
Similarly, shares of other companies of the Adani Group like Adani Green Energy and Adani Total Gas have surged more than 1000 percent since last year. The stock price growth of Adani Enterprises and Adani Transmission has been 730 percent and 500 percent respectively. The reports by Fitch and other metrics point out that Adani shares may be overvalued and the worth of many of the group’s entities may not be what their prices reflect. So far, the Adani group has not defaulted in debt servicing. But, that holds no guarantee for the future. The debt to equity ratio remains uncomfortable and well above the industry norm. If the business entities default on debt repayment, it may hit the share prices drastically resulting in loss to many investors and Gautam Adani’s own net worth. (IPA Service)