CreditSights dials down language on Adani's leverage

CreditSights has dialed back on its language on debt levels at richest Indian Gautam Adani's group but has maintained that the group's leverage is elevated.

In a new note published after discussions with the group's management, CreditSights, a Fitch group firm, said it "has discovered calculation errors" in its recent debt report on two Adani Group companies but these did not change its investment recommendations.

On August 23, CreditSights stated that the Adani group was "deeply over-leveraged" and may "in the worst-case scenario" spiral into a debt trap and possibly a default.

The ports-to-energy Adani group countered that assessment citing an improved net debt to operating profit ratio.

The companies in the group have consistently de-levered, with the net debt to Ebitda ratio declining to 3.2 times from 7.6 times in the last nine years.

CreditSights said in a follow-up to its report outlining credit concerns with Adani group companies, it is presenting a piece to reconcile calculations.

"As part of this discussion (with Adani group management), we discovered calculation errors we had made in two of the Adani Group companies, Adani Transmission and Adani Power.

"For Adani Transmission, we have corrected our EBITDA estimate from Rs 4,200 crore to Rs 5,200 crore.

"For Adani Power, we have corrected our gross debt estimate from Rs 58,200 crore to Rs 48,900 crore.

"These corrections did not change our investment recommendations," it said.

Notwithstanding these calculation changes, "on an overall basis, we still stand by our original financial calculations and credit ratios, which leads us to remain concerned over the Adani Group's leverage," it said.

CreditSights, however, made no mention of the group being "deeply overleveraged".

"CreditSights' views have not changed from its original report and we still maintain that the Group's leverage is elevated," it said.

The August 23 report, it said, highlighted that the Adani Group has pursued an aggressive expansion plan that has pressurized its credit metrics and cash flows, and it is increasingly venturing into new and/or unrelated businesses, which are highly capital intensive, raising concerns that execution oversight may be spread too thin.

"Shareholder support has not come in the form of equity, but in the form of shareholder loans, which we do not consider as equity," it said.

In discussions with the research firm, Adani group management opined that the group's new ventures were not wholly unrelated and that it only faced reasonable levels of governance and ESG risks.

"Though we have taken cognizance of management's viewpoints, we have a different opinion on (it)," CreditSights said.

Also, the management was of the opinion that the Adani group has to be viewed as a portfolio of assets and not a conglomerate.

This is because the various companies are listed on the stock exchanges separately. And the expansion plans were pursued by individual companies and not by the group as a whole.

Management stated that the various Adani entities benefit from ample equity contributions/injections from domestic and international joint venture partners.

"However, we find the leverage ratios (which we believe are elevated) and capital structures (which we think are skewed towards debt) still a matter of concern even post the equity investments by the international JV partners," CreditSights said.

Adani, 60, has in the last few years expanded his coal-to-ports conglomerate into airports, data centres, cement, aluminium, city gas and telecom.

CreditSights said the discrepancy in relation to calculations of two Adani group companies arose due ot its own more conservative approach in evaluating the conglomerate's leverage.

"Take, for example, our point on the inclusion of 'interest income' in the calculation of EBITDA.

"The differences between Adani management's and CreditSights' EBITDA calculation stem from management's inclusion of interest income.

"Adani opined that interest income generated on various cash reserves should be added to the total EBITDA of the various Adani entities.

"CreditSights' intent in calculating EBITDA is to understand the earnings-generating ability of operating assets, independent of how those assets are financed.

"We do not add interest income to the EBITDA in those calculations as they are not income from core operations.

"We apply such a standardized approach to all other companies under our coverage.

"Also, EBITDA is, by definition, earnings before interest... both interest income and interest expense," it added.