The Adani Group made headlines recently, but not for reasons that would make any company proud. According to reports, a unit of Fitch Group, labeled the Adani Group as “deeply overleveraged.” In simpler terms, this means that Adani has taken on too much debt, and there are serious concerns that the company could fall into a debt trap because of its growth strategy, which relies heavily on borrowed money.
If we look at the current scenario, the answer might be yes. The Adani Group, under the leadership of billionaire Gautam Adani, has been expanding rapidly into various sectors, taking on massive amounts of debt to fund this growth. For instance, in June 2022, Adani raised ₹6,071 crores from a group of banks led by the State Bank of India (SBI) to start a new copper business. Additionally, the group secured a loan of ₹12,770 crores for a new international airport in Navi Mumbai and borrowed more than ₹41,000 crores to buy a stake in Ambuja Cement.
Adani’s aggressive expansion has put the group at the top in industries like green energy, ports, cement, and airports. Gautam Adani has even become the world’s fourth richest man, and the Adani Group has overtaken Reliance Industries as the second-largest group in India by market capitalization, just behind Tata Group. While it has taken decades for the Tatas and Ambanis to reach this level, Adani has done it in just a few years.
Adani’s rapid growth can be attributed to several business strategies. One major factor is its close ties with the government. After India’s privatization reforms, many businesses were managed under a public-private partnership (PPP) model, where private companies manage businesses and share profits with the government. In 2019, the government decided to lease out eight airports under this model. Adani won the contracts for seven of these airports, often at prices much lower than their actual value. For example, the government leased three airports to Adani for ₹500 crores, while their estimated value was ₹1,300 crores. Adani has consistently been the winner whenever the government has privatized sectors like ports and airports.
Another factor is Adani’s easy access to debt. Despite having a huge debt pile, the Adani Group continues to secure loans easily, largely because of the strong “Adani” brand and the impressive performance of Adani stocks on the stock market. As of FY22, the group’s debt stood at ₹2.2 trillion, a 42% increase in just one year. Yet, banks and financial institutions are still willing to lend to the group, even though its cash reserves are only ₹26,989 crores.
Finally, Adani stocks trade at extremely high valuations compared to their peers. For instance, Adani Green is trading at a price-to-earnings (P/E) ratio of 769, while Tata Power, a similar company, trades at a P/E of 34. This means investors are betting heavily on Adani’s future growth, rather than its current financial performance. One reason for these high valuations could be the concentrated shareholding in Adani companies, which makes it easier to manipulate stock prices.
While Adani’s bets have made him one of the richest men in the world, they come with significant risks. If the infrastructure sector, where most of Adani’s companies operate, experiences even a slight slowdown, the group could face serious financial trouble. With six out of seven of its listed companies in the infrastructure sector, any downturn could have a major impact. Only time will tell whether Adani will continue to rise and possibly surpass Ambani in all sectors or if these massive debts will bring the empire down.