'Calculation errors' in Adani debt report; no change in investment advice: CreditSights

CreditSights, a part of Fitch Group, which recently raised concerns about the Adani group's overall debt levels, has said in a new report that it “has discovered calculation errors” in its recent debt report on two Adani Group companies, following a conversation with the management. The agency, however, maintained that the latest “corrections” did not change its investment recommendations.

The debt research firm in a fresh report on Thursday said it has found calculation errors in Adani Transmission’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) estimates and Adani Power’s gross debt projection. The estimates were reconciled after the management explained their calculations of some of Adani’s key financial figures and ratios, and highlighted other factors that should be taken into consideration when analysing Adani’s credit profile (such as cash waterfall structures for infrastructure borrowings, run-rate EBITDA, and sponsor affiliate debt), it said.

“We have also spoken with Adani Group’s CFO (Jugeshinder (Robbie) Singh), Head of Corporate Finance (Anupam Misra) and Head of Ratings (Rahul Kumar) during the week of 22 August,” CreditSights says in its new report.

“As part of this discussion, 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 ₹4,200 crore to ₹5,200 crore. For Adani Power, we have corrected our gross debt estimate from ₹58,200 crore to ₹48,900 crore. These corrections did not change our investment recommendations,” it adds.

The agency, in its previous report, had raised red flags about the capital structure of Adani Group, controlled by the world’s third richest person, Gautam Adani, saying that the conglomerate is “over-leveraged”. The report claimed that the Adani group’s rapid business expansion was largely debt-funded, which could eventually spiral into a massive debt trap, and possibly culminate into a distressed situation or default of one or more group companies.

The report, which was released on August 23, mentioned that the Adani Group had pursued an aggressive expansion plan that pressurised its credit metrics and cash flows. Over the past few years, the energy-to-FMCG conglomerate expanded aggressively. This includes both rapidly growing operations of its existing businesses (for example, Adani Green is aiming at growing its operational renewable capacity almost five-fold by FY25), and entering into new sectors, in which it has no prior experience (including cement, copper refining, petrochemicals, data centres and most recently, media, telecom and alumina/aluminium production among others).

The majority of these businesses, which are capital intensive and require large investments and constant funding in the initial years, are mostly funded by borrowings. The report highlighted there is little evidence of promoter equity capital injections into the group companies, which is needed to reduce leverage in their stressed balance sheets.

However, Adani Group refuted claims, saying the firm’s leverage was at manageable levels, and that its expansion plans had not been mainly debt funded. The management also claimed that the Adani Group as a whole was on a deleveraging path and the entities benefited from ample equity contributions from domestic and international JV partners.

In the latest report, CreditSights maintained the group’s leverage ratios are elevated and capital structures are skewed towards debt, which is still a matter of concern even post the equity investments by the international JV partners.

The report also highlighted Adani’s management views that a cash flow waterfall mechanism was in place to safeguard the liquidity management of all the Adani entities. “We view cash flow waterfall mechanisms as meaningful credit supports in Adani’s entities, as it allows for stronger liquidity and financial management. We also do note that such waterfall structures are fairly common for infrastructure companies. We noted that Adani Green Energy and Adani Transmission have disclosed cash waterfall mechanisms, while APSEZ has not disclosed the same in their respective $ bond offering circulars,” the report quoted Adani’s management as saying.