M. Rajshekhar 
In early February, as the market was absorbing the immediate impact of Hindenburg’s exhaustive report on Adani’s alleged improprieties, cabinet minister R.K. Singh struck a sanguine note. Speaking at a press conference, Singh, India’s minister for New and Renewable Energy, dismissed concerns that the Adani Group’s current crisis might hurt India’s clean energy plans.
“I have the most robust renewable energy capacity in the world and that means that I have at least 15-16 large companies which are at the level of global companies,” he said, adding: “It will not impact us in any way.”
Even at first glance, the minister’s words seem counterintuitive. Scan any part of India’s energy sector – coal, gas, renewable energy or RE, hydrogen or solar – and you will find an oversized imprint of Adani’s presence.
Not only is the group one of the biggest RE developers in the country, it’s one of three firms chosen by the Indian government for the solar module manufacturing PLI. The group is also an early mover into sectors considered critical by India’s NDA government – like pumped storage and hydrogen. For the latter, it aims to be the largest fully integrated green hydrogen player in the world. It’s the only large firm vying with RIL chairman and managing director Mukesh Ambani to create a clean energy ecosystem in India spanning solar, wind, batteries and electrolysers.
For this reason, India needs a more careful answer to the question reporters had asked Singh. Given the short-selling attack, what happens to the group’s clean-energy plans? What does that mean for India’s own low-carbon ambitions?
There are no easy answers to these questions. The Adani Group has grown sizeably in recent years by borrowing against its pledged shares and bonds. What we are seeing right now is a battle over the worth of these instruments – is it in line with the value they intend to secure?
Take the recent price movements of shares of Adani’s crown jewel, Adani Enterprises, for instance. In December 2022, its share’s value stood at Rs 4,165. On February 3, 10 days after Hindenburg’s report, its share slipped below Rs 1,050 before climbing back, by February 8, to Rs 2,200. In the week since, it has once again fallen by 20%, and stands at about Rs 1,750 at the time of publishing. Other group companies have traced similar trajectories. It remains unclear what their real value is. Two economic commentators – veteran business editor T.N. Ninan and academic Aswath Damodaran – found Adani shares over-valued even after falling for two weeks.
A similar battle is underway in bonds as well. Over the past three weeks, Adani bonds shed enough value to enter distressed assets territory. Adani Green Energy dollar bonds due in 2024 slid 13.4 cents on the dollar to 61.6. Adani Ports & Special Economic Zone notes due in 2031 fell 5.2 cents to 63.2. A clutch of large financial institutions, including Credit Suisse, CitiGroup and Standard Chartered, announced they wouldn’t take Adani bonds as collateral. In tandem, however, firms specialising in distressed bonds have picked up $1 billion worth of Adani’s overseas bonds.
Given that this repricing is still underway, it’s hard to surmise how the group’s future borrowings will change and the attendant implications for the group’s plans.
Adani’s climate footprint
Seen through a climate lens, the group has four deeply consequential verticals.
Foremost is the coal-based vertical. This started with power plants before integrating backwards into coal imports, coal mines, coal mining and ships, and integrating forwards into transmission lines and DISCOMs. Today, as CarbonCopy reported two years ago, Adani and NTPC are the only thermal power producers in India that straddle the entire thermal power value chain, from coal mines to DISCOMs.
Next up is the gas-based vertical. Through separate partnerships with Total and IOC, Adani has been picking up city gas distribution contracts to supply CNG to vehicles and piped natural gas to homes and industries. Then there is the renewable energy vertical with substantial capital tied up in wind, solar and pumped storage projects.
And finally, there is ANIL (Adani New Industries Limited). Shortly after Mukesh Ambani announced Reliance’s Rs 75,000 crore clean energy push (four giga-factories to make solar modules, batteries, electrolysers and fuel cells), Adani Group made a matching claim. ANIL would house its equivalent push into renewables (green hydrogen) and renewables manufacturing – wind turbines, solar modules, electrolysers.
The group is not shy of ambition for all four verticals.
In coal-based power, it is developing seven new coal mines, adding two new thermal power plants, trying to add another 11,000 km to its existing 20,000 km by 2030, trying to acquire state-owned DISCOMs plus acquire power distribution licences in large markets like Delhi and Mumbai, and chalking up investment plans for each. In gas, it has picked up 52 city gas distribution bids and aims to cover 15% of India’s population by 2030. In renewables, Adani Green’s operational (and under-construction) assets add up to 20.4 GW. The group wants to amp this up to 45 GW by 2030.
For ANIL, investments have been pegged at $20 billion (Rs 160,000 crore) over the next 10 years. Elsewhere, even larger numbers have been cited. In June 2022, group chairperson Gautam Adani said the group (and Total) will jointly invest $50 billion (Rs400,000 crore) over the next 10 years on green hydrogen alone.
As boggling as these numbers are, they are a part of a larger thrust. Adani has equally ambitious projections for most of its non-energy verticals as well – data centres, ports, airports, cement, road projects, defence, drones manufacturing, electric commercial vehicles, alumina, steel,agricultural logistics and trading. Its ambitions for packaged foods, edible oils and media seem relatively more prosaic.
In all, the group pegged its total investments at about $107 billion (₹856,000 crore) over the next 10 years.
In its cover story last December on Gautam Adani, India Today posited even higher expenditure. Adani Enterprises, it said, plans to spend $10.4 billion (over Rs 86,000 crore) as capital expenditure till 2024. “In the following five years from then on, the capex would be $49 billion (around Rs 4 lakh crore).”
This power and energy complex features heavily in Hindenburg’s report. Chief among a clutch of improprieties alleged by the short seller is the charge that the Adani Group has used a web of obscure investment funds located overseas that it controls to sidestep thresholds of shareholder requirements in order to be eligible for being publicly traded – and project an image of regulatory compliance. The group, as is known, has borrowed heavily to support its growth plans. According to Hindenburg, the group has propped up this debt-heavy model by inflating its share prices while cash flows have remained low relative to the debt eddying around the group.
Shares of Adani Power, Adani Transmission and Adani Green Energy, all heavily implicated in the report, have at the time of writing shed 46%, 61% and 66% of their value since the report was released on 24th January. Adani Power stocks have been on a skid since they hit an all-time high of ₹432 in August 2022, and have lost two-thirds of their value since.
What are the fallouts?
A time to tighten belts
Over the past five or so years, the nature of Adani’s borrowings has changed.
The group has pivoted from bank borrowings to fund-raising through international bonds. “For the next five-10 years,” a senior executive with intimate knowledge of the group’s financials had told this reporter in 2019, “the global bond market will be the most important market for the group”.
That has come to pass. By October 2021, the group had become the biggest issuer of offshore bonds from India. In December 2022, as Gautam Adani told India Today, Indian banks’ share in the group’s total lending had come down to just 32%. “Almost 50% of our borrowing is now through international bonds,” he said.
This model – of raising money through international bonds – is in trouble.
In the immediate wake of the Hindenburg report, Adani bond prices fell steeply, slipping into distressed territory. Take Adani Green. “Bonds worth $750 million issued by Adani Green Energy are currently yielding a whopping 31% in international secondary markets, well past the average 8.4% for global junk bonds,” wrote Bloomberg. With other Adani bonds posting similar slides, Credit Suisse, CitiGroup and Standard Chartered said they would not accept Adani bonds as collateral.
That was followed by a recovery, as investment banks like Goldman Sachs and JP Morgan Chase pointed at the value of the group’s underlying assets. In tandem, distressed asset funds bought close to $1 billion (₹8,000 crore) worth of Adani bonds. To put that number in perspective, however, the group’s debt exposure in bonds stands nearly 14-times higher at ₹110,000 crore.
Put these developments together and you will see the bond market shrinking for the group. Some investors will likely exit and make way for new borrowings, but at a higher cost.
The company’s shares are in trouble as well. They had fallen steeply in the days after Hindenburg’s report came out—and then staged a short-lived recovery. As this article was being written, Moody’s downgraded its outlook for Adani Green and two subsidiaries of Adani Transmission. MSCI (Morgan Stanley Capital Index), a global equity index, which represents large and mid-cap equity performance across all 23 developed markets, cut its weightage for Adani companies. In addition, the group has lost some investors (like Norway’s largest pension company KLP, which dumped all its shares in Adani Green Energy).
As shares lose value again, the group’s capacity to borrow via pledged shares will fall as well. Turning to banks, as The Ken wrote, it’s likely that any future big borrowings from Indian banks will be subject to a higher level of scrutiny.
In addition, the group has cancelled its FPO, which would have brought in another Rs 20,000 crore.
Given this arid landscape, the group says it might rely on promoter equity funding, private placement and internal accruals to fund growth.
That is easier said than done. The first hinges on the repricing that is currently underway. The second might yield high-cost loans. As for the third, the Adani group operates in long-gestation infrastructure projects. Most of these, additionally, generate modest profits.
To that, Adani adds its own complications. “The company’s return on invested capital has steadily declined, even as it has scaled up, hovering just over 3% in 2021-2022,” wrote NYU finance professor Ashwath Damodaran in his widely-read blogpost about Adani and Hindenburg.
This shows in the group’s numbers. After accounting for fresh expansion, taxes, depreciation, etc, Adani Group companies are not left with large profits. Adani Enterprises closed last financial year with a net income of ₹70,432 crore and net profit of ₹475 crore. Other group companies are pretty much the same.
In other words, it’s unclear if internal accruals can keep the group’s expansion plans intact.
That is just the start. Even as the group struggles to raise funds, it is being squeezed for capital. It has to urgently pare debt. It has already faced a margin call – when lenders demanded extra collateral after the pledged equity lost value. To place bonds, the group will have to pay higher rates. If it wants to shore up share prices, in order to avoid domestic margin calls, it will need capital there as well. Buying back its distressed bonds will carry substantial demands for cash too.
A coal company or a green company?
On the whole, it’s hard to see how the group can support all the ambitious expansion plans listed above. Barring dramatic improvements on the borrowing front – or a massive switch to domestic borrowing – the group will have to refocus on a few verticals, and cut capex plans elsewhere. It’s already rethinking plans to participate in the privatisation of Concor. One also wonders if the group will participate in the second round of the solar PLI.
Which is where the climate question comes in. Can the group support its clean energy projects? If not, can these businesses raise funds on their own?
CarbonCopy wrote to the Adani Group asking for an estimate of the investible surplus with the group. We also asked which parts of the business are likely to see capex cuts. This article will be updated when they respond.
In the meantime, it seems safe to assume that, in the short term, the group will have to focus on businesses with high returns. If a ₹100 invested in coal imports nets greater returns than those in Adani Green, the group might well invest more there.
In such a scenario, Adani Green will have to raise its own funds. The company’s financials, however, are strained. In FY22, the company had gross debt of Rs 48,171 crore against total income of Rs 5,577 crore and a net profit of Rs 489 crore. The downgrade from Moody’s won’t help. At a realistic valuation, how much fresh money can this company raise?
ANIL has an even bigger problem. Unlike Adani Green Energy, it’s a moonshot project. The group was hoping to raise some money for it through the FPO – but that was cancelled.
Now comes the news that TotalEnergies has put its investment into ANIL on hold. “This project was announced but nothing has been signed…. and for now it won’t be signed,” TotalEnergies chief executive Patrick Pouyanné told reporters on Wednesday. “It makes no sense to add more [projects] until there is clarity.”
The bigger picture
All of which brings us back to the question reporters asked cabinet minister Singh.
Will Adani’s current crisis hurt India’s clean energy goals? If the group fails to add 45 GW in renewables by 2030, India will indeed lose. And yet, the larger answer is no.
Over the past eight years, the Adani Group has been shoe-horned into an array of sectors instead of encouraging new market participants.
For the most part, this has been an inexplicable decision on the part of the Indian government. If Adani was to be groomed as a national champion as some say – like South Korean chaebols or Japan’s MITI – it has rushed ahead without empirically establishing whether the notion would work in India. According to academician Ashoka Mody, South Korea accompanied the chaebol strategy with large investments in public education. India hasn’t done that. Nor is it clear how or why Adani was chosen, not some other group.
“Adani is now active in solar module, gas, LNG, city gas, thermal, solar, hydrogen, ports and refineries,” an RE industry veteran in Hyderabad had told CarbonCopy last year. “Why are we not supporting new companies in each of these verticals?”
What India has today is a chance to roll that clock back. Take the solar PLI. If Adani doesn’t bid, another firm will bag the incentive. In all, if Adani is forced to shrink its presence in India’s “green growth” plans, it will likely be more of a blip rather than a death knell for the country’s ambitions. If the group is compelled to sell some of its relatively non-core businesses—like cement, steel, defence or road— to focus on a few verticals, what India will have seen is a short-seller driven anti-trust action.
It draws Walter Schneidel’s book on inequality to mind. It falls, he wrote, but only after a cataclysm.
M. Rajshekhar is an independent reporter studying corruption, oligarchy and the political economy of India’s environment. He is also the author of Despite the State: Why India Lets Its People Down and How They Cope.
This article first appeared on CarbonCopy. Read the original here.