Over the past five years, the Adani Group has expanded its presence across India. Not only is it the country’s largest private port operator, coal importer, coal miner, private power producer, city gas distributor and importer of edible oils, it has also expanded into airports, urban water management, small and medium sector lending, power transmission and distribution, data centres, aerospace and defence.
Other behemoths of the Indian economy such as the Mukesh Ambani-led Reliance Group and the Tata group of companies have firms like Reliance Industries and Tata Consultancy Services that generate large revenues, which helps them fund their expansion plans. But the Adani group lacks a similar cash engine.
The Adani Group’s six listed companies, which account for almost all of its Rs 77,000 crore turnover, had operating profits of Rs 20,141 crore in 2017-’18. After accounting for interest payments, tax, depreciation and other charges, their combined net profit stands at Rs 3,455.34 crore. Despite this relatively small amount, the Adani group has expanded aggressively – buying projects from other companies, starting new businesses and investing in existing ones.
Said a professional with an intimate understanding of the Adani Group’s finances, who did not want to be identified: “All listed companies are growing at their own pace. Ports is a big business. So is [power] transmission.”
Asked how is it funding this growth, an Adani spokesperson said in an emailed response: “These are funded from internal accruals in the businesses as well as external borrowings from traditional financing markets as well as capital markets.”
To understand better how the conglomerate has funded its expansion, Scroll.in examined the financial statements of several Adani Group companies.
Scroll.in started with the group’s six listed companies: Adani Enterprises, Adani Ports and SEZ, Adani Power, Adani Transmission, Adani Green Energy and Adani Gas. The financials of the unlisted group companies – filed with the Registrar of Companies – that transacted with them between 2013 and 2018 were also scrutinised.
These documents offer several insights into the group. The group is increasingly raising money from overseas. It also raises a lot of money within India – in the form of bank loans, borrowing against shares and pledging assets.
Notably, this money circulates within the group through a high-density of “related party transactions” or transactions between companies that are connected.
For instance, Adani Group subsidiaries borrow money by offering the shares they hold in listed group companies as security. Sometimes, they use these borrowings to purchase equity in sister companies – even those in unrelated businesses. They also lend this money to group companies. Step-down subsidiaries – or the subsidiaries of group companies – pledge assets and raise money, which is then loaned or invested in group companies.
Taken together, these transactions present the image of a group that has taken larger bets on growth than other companies could have, seeking to capitalise on a set of favourable factors – including perceived proximity to political power, access to capital and a dip in fortunes of rival companies in the infrastructure space.
Here are six ways in which the group raises money – and what financial sector experts and Adani Group officials have to say about them.
1. Companies buy shares in other group firms, even if they are in unrelated businesses
One example of Adani Group companies investing in other group companies can be seen in the financial statements of Adani Transmission, one of the six listed companies of the group. Incorporated in 2013, it is in the power transmission business.
In 2015-’16, Adani Properties, a subsidiary of Adani Enterprises, bought a 9.05% stake in Adani Transmission, even though the two firms are in very different businesses. The financial statement of Adani Properties for 2015-’16 states that “the main object of the company is to let-out and/or lease immovable properties”.
The next year, another group company, Parsa Kente Rail Infra, bought another 9.05% stake in Adani Transmission. Parsa Kente, incidentally, is the name of a coal block Adani is mining in Chhattisgarh. In 2017-’18, Adani Properties exited Adani Transmission but Parsa Kente Rail Infra, now renamed as Adani Tradeline, continued to hold a stake.
The person familiar with group financials traced these transactions back to a group overhaul. Five years ago, the group had one listed company, Adani Enterprises, which counted all group companies as its subsidiaries. It now has six listed companies: Adani Transmission, Adani Power, Adani Ports and SEZ, Adani Enterprises, Adani Green Energy and Adani Gas. All six are controlled by the Shantilal Adani Family Trust.
“Adani Enterprises now deals mostly with coal but also functions as an incubator for the group’s ventures,” he said. According to him, while the group’s other listed companies invest only in their subsidiaries, subsidiaries of Adani Enterprises invest across the group. “The companies you mentioned – Adani Tradeline, Parsa Kente Rail Infra, etc – are all subsidiaries of Adani Enterprises,” he said.
Investments through these companies, he said, facilitated Adani Transmission’s acquisition of Reliance Transmission. “Adani Transmission got perpetual equities [a form of equity that promoters can buy back whenever they want] from the promoter,” said the person familiar with Adani’s finances. “[The promoters] will get the money if and only if equity is raised.”
2. Companies use borrowed funds to buy equity in other group firms
The website of Adani Infra describes it as the group’s in-house EPC or engineering, procurement and construction arm. The company is also notable for two other reasons.
A subsidiary of Adani Enterprises, it raises a high quantity of funds for the group. In 2017-’18, it raised debt worth Rs 15,048 crore. These loans were raised by offering shares in group companies as security cover.
A part of this money was used to pay back earlier loans. The rest was given to group companies – as loans, equity (shares) or quasi-equity (preference shares). Referring to money raised by the firm, an analyst report dated January 30, 2019 by Brickwork Rating said: “The same is raised for providing loans and advances to Group companies, or investing in their equity or instruments.”
According to a former board member of Union Bank of India, who spoke on the condition of anonymity, there are two concerns here. First, Adani Infra is able to borrow despite being highly indebted. In 2014-’15, Adani Infra had equity of Rs 57.64 crore but almost Rs 2,185.18 crore of borrowings, which means just 1/38th of the money in the company came from its promoters – the rest was all borrowings. Despite that, the company has kept borrowing. In 2017-’18, for instance, it had Rs 84.87 crore in equity but Rs 9,008.5 crore of total borrowings.
In most companies, the ratio between debt and equity is 1:3 or 1:4. If a sector is low risk, companies might be able to raise debt which is 10-12 times equity, said the former board member. But in the case of Adani Infra, it is 1:107.
Brickwork rated the company’s non-convertible debentures (bonds issued by firms to investors promising a fixed return, which cannot be converted into shares) as AA-, close to the second-highest rating, even while acknowledging the firm’s high leverages, its “reliance on promoter funds, refinance or, alternatively, liquidation of the securities” to meet the payment. (The firm has a total of eight rating scales for debt instruments like NCDS, AA is the second highest).
Why do banks continue to lend despite high indebtedness numbers? A senior official at SBI-CAPS said: “A previous boss of mine had told us to look at the promoter, project and results before deciding to lend. If the promoter is good and the project is bad, even then we might get our money back. That is what you have here.”
Countered the former board member of Union Bank: “Borrowing for equity investments is a no-no. When even the equity is money borrowed from banks, the promoters have no skin in the game.”
The person familiar with the Adani Group’s finances defended these deals. According to him, the Adani family is pledging its personal shareholdings to raise money for the group through companies like Adani Infra.
3. Group companies lend to each other
Between 2014 and 2018, Adani Transmission, Adani Enterprises, Adani Infra and Adani Agrifresh saw multiple transfers of money between themselves in the form of loans and repayments.
These transactions start with Adani Transmission getting money as loans and equity from Adani Enterprises and two of its subsidiaries in 2014.
Adani Transmission repaid a part of these loans in the same year but also bought shares in other group companies and set up two subsidiaries.
In subsequent years, this pattern repeated itself. Adani Transmission repaid old loans but also borrowed afresh from group companies – not only subsidiaries of Adani Enterprises but also from Adani Ports and SEZ. Adani Transmission also made loans to its subsidiaries and collected money it had lent to other group companies.
4. Some of the money from step-down subsidiaries goes to other holding companies
Adani Transmission India is a subsidiary of Adani Transmission, one of the six listed companies of the group. Its financial statements for 2014-’15 show that it borrowed Rs 2,794.24 crore by pledging all immovable and movable assets of two transmission lines – Mundra-Mohindergarh-Dehgam and Tiroda-Warora. The largest part of this loan – Rs 1,882.3 crore – was payable over five years at interest rates ranging between 12.25% to 13.5%.
Almost half this money it borrowed, Rs 1,222.97 crore, went as a loan to another listed company, Adani Enterprises. This loan was made at a time when Adani Enterprises was infusing cash into Adani Power.
5. Group companies prop up struggling firms
Between 2013 and 2018, Adani Power was struggling, largely due to its power project in Mundra which was predicated on the supply of cheap coal from Indonesia. When the country raised the price of its exported coal, Adani Power Mundra claimed its cost of coal had risen so much that it could no longer supply power at original rates.
During this period, related party transactions in the company’s annual reports show several instances where Adani Enterprises made loans to Adani Power directly or indirectly through subsidiaries like Adani Infra (India) or Kutchh Power Generation.
This matrix of deals explains an old puzzle. In 2018, after being called an “NPA trapeze artist” by BJP leader Subramaniam Swamy, the Adani Group countered him saying it is regularly servicing all its debts. At a time other power companies were defaulting on loans, Adani Power, despite slipping into losses, never defaulted on loan repayments.
The company did not respond to Scroll.in’s question about these transactions. The person familiar with group financials, however, denied that these transactions suggest an evergreening of loans, or the extension of fresh loans to help debt-laden companies repay old loans. “Adani Enterprises, which lists Adani Power amongst its important clients for coal, extended working capital loans,” he said.
Asked why Kutchh Power Generation also lent money to Adani Power, he said Kutchh Power is also a subsidiary of Adani Enterprises. “If a company 100% owned by promoters is putting money into Adani Power, other investors [of Adani Power] should welcome it,” he said. “Also, if you ask lenders of Adani Power Mundra who benefited due to these transactions – given the orderly repayment of loans – they will say thank you very much.”
6. The Adani Group raises debt and equity from overseas
On July 1, 2018, the group said it would raise Rs 5,000 crore-Rs 6,000 crore by selling equity in companies like Adani Ports. Among those who bought shares were international investment management companies like America’s Capital Group and Singapore’s Temasek Holdings.
Apart from these, the group is raising equity investments from offshore funds like Universal Trade and Investments, which is based in Mauritius and has invested in Adani Green Energy. The 2017-’18 annual report of Adani Enterprises counts offshore funds called Albula, Cresta Fund, APMS Investment Fund and Asia Investment Corporation among its shareholders.
All four funds are registered at the same building in Mauritius and feature in the Paradise Papers, as leaked documents from two leading offshore finance firms came to be called.
For debt, said the person familiar with Adani’s finances, the group is turning increasingly towards the global bond market. “Between March 2016 and March 2018, the share of bonds in [the group’s] long-term debt has increased from 18% to 32%,” he said.
Some of this is a necessity. Bank funding has been quite constrained the last three years, said the person familiar with group finances. The group is diversifying its sources of funding to keep growing. “A big part of this is the bond market in India and overseas,” said the person familiar with Adani’s finances. “ATL [Adani Transmission] and APSEZ [Adani Ports and SEZ] have raised 2.1 billion USD. [The Group] will be looking to do more of these”.
For the next five-10 years, he said, the global bond market will be the most important market for the group.
In its email statement, the group concurred. “Global capital market is among the largest sources of funding for the group which has been part of a focused effort to reduce reliance on the banking sector,” the company’s spokesperson said in a statement to Scroll.in.
Overseas borrowings come with both advantages and disadvantages. “If the rate of commercial borrowing in India is 14%-15%, foreign loans are much cheaper,” said a financial markets expert in Mumbai. “One per cent from Japan, 3%-4% from the European Union, 2.5% from USA.” What makes such loans possible for the group, he said, is the group has a higher global profile than before.
That said, these loans carry the risk of currency fluctuations – if the rupee weakens, the value of the company’s borrowings will swell dramatically.
That is not much of a concern for the ports business, said the person familiar with Adani’s finances. “Much of our revenues is dollar denominated or dollar linked.” However, Adani Transmission’s revenues are in rupees and so, he said, the group tries to protect itself by hedging or making investments to reduce the risk of adverse price movements like the dollar strengthening or the rupee weakening.
Taken together, these transactions present a broad picture of how the Adani group has funded its expansion.
Even though in its emailed response, the group said its overall debt-EBITDA ratio – or the ratio between borrowings and operating profits – is less than 4.5 times, “which is the midpoint of global averages for fully contracted businesses”, it is highly leveraged.
Not only does the Adani group borrow directly from banks, it also uses a part of that money to buy equity in subsidiaries – and then pledges those shares to raise further borrowings.
An instance here is Adani Properties. Of the 99,491,719 shares it bought in Adani Transmission in 2015-’16, it pledged 2,16,09,865 as security for loans in the same year. As this report has described above, the group also raises money by pledging some of its hard assets like Adani Transmission India’s power transmission lines.
As a consequence, said the former director at Union Bank, the group’s promoters have monetised a large chunk of their investments, leaving them with little skin in the game.
The person familiar with group financials defended its arrangement of loans against shares saying: “In these deals, promoters are borrowing against their personal shareholdings to support listed companies.”
The group’s cash flows are weak. Most companies generate the cash they use to maintain or grow their operations in three ways: revenues from core operations, through returns on investments, and interest payments and repayments from financial transactions like lending. In the case of Adani group, in three of its six listed companies, cash flows from financing activities like lending and borrowing are larger than those from investing or operations.
These charts – and the group’s pledging of shares, issues of short-term non-convertible debentures and the annual cycles of borrowing and repayment amongst group companies – show the group is not generating enough money to support its growth. Instead, it is trying to maximise its gains from a favourable environment – what an infrastructure consultant in Delhi described as a perceived proximity to power, expertise in its sectors and access to capital – to grow as big as possible, while hoping that cash flows from the new businesses will kick in soon.
A senior executive at the credit rating firm Credit Suisse, on the condition of anonymity, said Adani Group “is willing to leverage its balance sheet much more than others”.
Finally, expansion helps the group stay afloat. Cash from new businesses, as we saw in the case of Adani Transmission India, also flows back to holding companies. “Adani subsidiaries with better debt/equity numbers are borrowing from banks and investing in their stressed sister companies – as debt or equity,” said the Credit Suisse manager.
This means the group is funding its expansion by constantly expanding.
The age of Adani
As India votes for its next government, how is the Adani Group placed?
Among the tailwinds working in the group’s favour is the perception that it is close to the Bharatiya Janata Party. But this has also resulted in chatter about political risk for the conglomerate.
This perception is disputed by the company. “Our journey spanning 30 years clearly shows that the group is not a favourite of any one party or government,” averred the group’s statement. “Government policies impact all infrastructure projects hence the group works closely with all Governments to align our projects to their development objectives.”
Another set of risks lies in whether the assumptions the group has made about its investments are realistic. An instance is city gas bids. As the first part of this series said, the government has awarded contracts for last-mile distribution of gas even though the networks for transporting gas to these cities are still not in place.
As a consequence, bidders are unsure when gas will reach these cities – and at what price. “If it is too high, car-owners might not switch from petrol or diesel to gas, or their cooking gas to LNG,” said a senior executive of Swan Energy, a company in the natural gas sector.
With the Adani Group winning the largest number of bids, this has raised questions about whether its projected cash flows from city gas projects will materialise. Said the senior executive at Swan Energy: “I am not sure these bids will fructify.”
The company spokesperson was sanguine: “AGL [Adani Gas] has been in the business of city gas distribution for the last 14 years, with a large customer base and significant volume in four geographical areas. Given our experience in the business, the bids were prepared based on a thorough evaluation of the economic case of each GA [geographical area] per our internal evaluation parameters & available state government data, future demand potential, development of CNG corridors and leveraging economies of scale”.
The question about adequate cash flows, however, runs across the new businesses the group is entering. This is especially significant since some of the cash from the new businesses is going into propping up other parts of the group.
The group has two factors working in its favour. The first is its perceived proximity to political power. It has enabled the group to take bets its peers could not. This is seen in the operations of Adani’s power plant in Mundra. Even as other debt-strapped power companies put their power projects on sale, the Adani group doubled down and kept infusing cash into Mundra.
In tandem, as Scroll.in reported in March, the group obtained approvals to pass on higher coal prices to end customers after the Bharatiya Janata Party governments in Gujarat and the Centre stepped in.
The second factor is scale. Not only is it able to cross-subsidise its units, in the last five years, it has emerged as the biggest player in Indian infrastructure’s public utility sector.
For many experts, the potential consequences of having a financially overleveraged monolith dominate India’s public utility infrastructure are worrying.
Read the first part of this series: