Adani targets debt cuts, income boost

In recent meetings with creditors, Adani officials outlined plans to lower the group’s leverage ratio from 4.2 times now to 3.1 by the end of FY24, chiefly by increasing earnings rather than reducing debt, two people with direct knowledge of Adani’s strategy said on the condition of anonymity.

Adani’s new strategy is noteworthy, coming on the heels of short-seller Hindenburg Research terming the group as over-leveraged and raising allegations about corporate governance in a scathing report on 24 January that set off a steep decline in the share prices of group companies.

According to the latest plan, the group is targeting to accelerate earnings growth.

“The group’s overall debt may be brought down slightly by 5-10% from $23 billion during FY2024. Instead, Adani Group plans to grow its EBITDA (earnings before interest, depreciation, tax and amortization) by 20-22% year-on-year to further reduce the leverage ratio,” said one of the two people, adding that the group plans to bring in higher efficiency across its eight key businesses.

The group’s net debt-to-EBITDA ratio in 2013 was 7.6 times, declining to 3.2 in March 2022 but later increasing to around 4.2 again during FY23, the people cited above said. The group debt stands at ₹2.27 trillion as on 31 March 2023.

Thirty-nine percent of debts are through bonds, 29% from international banks and 32% from domestic banks and NBFCs, according to a presentation made by the group to its investors.

The group will bring in higher efficiency in business and bring down the debt, said the group in the presentation.

“We expect 20% growth (in EBITDA),” the group told investors in the presentation.

Once the revenue increases, the debt-earnings ratio will come down.

Analysts said that increasing the overall profitability of the group is the only other option apart from paring debt to bring down the net debt to EBITDA ratio in the wake of the Hindenburg report. “The group will have to strengthen its balance sheet, which will be a challenge given the rising cost of money and its impact on growth,” said Rajesh Palviya, vice president (technical and derivatives research) at Axis Securities.

“Profitability can be raised in areas like ports and cement to increase the EBITDA with debt remaining more or less constant.”

The group’s current EBIDTA stands at ₹61,200 crore, while current debt stands at $23 billion.

Much of the growth will come from ports, cement, renewables, solar panel and roads business during FY24-25,” the first person said.

Around 81% of the group’s income comes from utility and infrastructure businesses, and these are the areas where the group is planning to enhance its EBITDA.

According to the people cited above the group has told its creditors that during FY2024, to bring down the leverage, the group plans to increase the annual EBITDA growth rate of Adani Ports, Adani Green, Adani Power, Adani Total Gas and Adani Transmission by 20-22%.

This essentially means the group’s EBITDA may grow from ₹61,500 crore now to at least ₹75,000 crore in FY24 and ₹91,500 crore in FY25.

“The group may use some of the cash flows to reduce debts to around $21 billion by FY2024 end. This will bring down the group’s leverage ratio (net debt/EBITDA) to around three times from the current four times,” the first person said.

“APSEZ is likely to focus on sweating the acquired assets, which will sustain strong cash flows in the coming years as well,” said equities research group JM Financial in a 27 January report on Adani Ports while estimating the company’s operating cash flow to grow at 32% CAGR over FY23-25.

This cash is likely to be used to fund capex or reduce debt.

The company’s logistics arm Adani Logistics Ltd is planning to double its train capacity, increase the multi-level logistics park count to 15 from nine currently, increase grain silos capacity by 2.5 times to 2.5 million tonnes, and increase warehousing capacity by 40 times from 1.5 mn sq ft currently.

“Adani Logistics is likely to be one of the key, next growth drivers,” said JM Financial, adding that Adani Ports’ net profit is expected to grow at over 13% CAGR during FY23-25.

Adani Total Gas Ltd has installed a rooftop solar capacity of 870 kW in 36 sites and an additional 330 kW capacity has been completed this March. ATGL is increasing EV charging stations from 32 to 500, with a plan to increase it to 1,500 in the next two years; the company’s second biogas plant will be commissioned by January 2024.

In Adani Green, energy sales increased by 59% to 10,235 million units during the April-December period.

Adani’s increased earnings growth target will, however, be primarily driven by the ports business. “We estimate APSEZ to generate cumulative operating cash flow Rs.26,100 crore in FY24-25,” said JM Financial.