Shares of various companies in the Gautam Adani-led ports-to-power conglomerate fell on Tuesday after CreditSights, a Fitch group credit research firm, expressed concern over the high levels of debt at various companies in the Adani group.
The report said any default by a group entity could impact other companies within the group and it "as well as many clients and other investors" are becoming "increasingly concerned" about the group’s rapid pace of growth and high leverage levels.
“Excessive debt and overleveraging by the group heightens the contagion risk in case any entity falls into distress,” the CreditSight report said, adding that it remains “cautiously watchful” of the Adani Group.
The Adani Group is currently the third-largest conglomerate in the country, after Reliance Industries Ltd and the Tata Group, with a total market capitalisation of over $200 billion as on Aug 18.
CreditSights said the group is venturing into new and at times unrelated businesses, which are highly capital-intensive and raise concerns about spreading execution supervision too thin.
It termed the entrepreneurial vision of Gautam Adani, 60, as impressive, but highlighted that it came with "high key-man risk", and that the senior management capability in the group companies may prove to be inadequate in his absence.
However, its biggest concern was that the promoter may not be able to support any group company that may require a large infusion of cash due to unforeseen circumstances.
It pointed out that group promoter and chairman Gautam Adani has a net worth in excess of $100 billion, but this is directly tied to the value of his holdings in Adani Group stocks.
Hence, the firm said, it was difficult to gauge the family’s ability to inject funds in a scenario where any of the group companies require equity injections by the promoter.
In case of any liquidity or solvency issues in one entity, the stock prices of other entities, too, could be affected, reducing the amount of money the promoter can raise from stake sales "drastically".
The report also pointed out that group companies have very low shareholding from domestic institutional investors, and that some of the foreign institutional shareholders of the companies are "quite opaque". This, it said, is "quite unusual" for such large-cap stocks.
Another possible risk highlighted by the firm was the hotting up of competition between the Adani Group and Reliance Industries led by Mukesh Ambani.
However, on a positive note, the report said that since the family’s fortune and reputation were tied to the Adani Group companies, it was likely to pull out all stops to avoid default in any of the entities.
“The group has strong access to diverse funding channels, relatively stable recurring-revenue generating infrastructure assets, and presence in key sectors of the economy,” the report said, nothing Adani's strong association with Prime Minister Narendra Modi’s government.
