For India, the Adani Group is becoming too big to fail | Daily News Byte

Indian companies belonging to Gautam Adani, the third richest man in the world, have grown in value at breakneck speed. Some of Adani’s companies – such as Adani Green Energy, Adani Enterprises and Adani Transmission – have seen their shares rise over 1,000% in the past five years.

One significant engine of this growth Adani’s closeness with the prime minister Narendra Modi, who leveled allegations of cronyism. Adani has won a number of government contracts in the field of energy and infrastructure. His companies mine coal, generate electricity and transmit it. They manage ports and airports. They are setting up huge solar farms. In each of these sectors, Adani’s firms are among the biggest players, if not the biggest.

However, apart from the contracts, huge amounts of taxpayers’ money, both as debt and investments, also fueled Adani’s rise. So much so, in fact, that it begs the question: Has Adani become so big that its companies cannot be allowed to fail, lest they send shockwaves through the wider economy?

India’s LIC invests heavily in Adani’s companies

Despite the expansion of Adani’s companies, private investors have been relatively cautious about putting their money into Adani’s shares. The government, however, had no such reluctance: specifically, the 66-year-old Life Insurance Corporation (LIC), which is majority owned by the government and manages more than $500 billion (Rs 41 lakh) in assets. Over 50 million customers pay premiums for LIC’s insurance products. In Indian public life, few brands are trusted more than LIC.

Over the last two years, LIC’s investments in five of the seven listed Adani Group companies — Adani Enterprises, Adani Green Energy, Adani Ports, Adani Total Gas and Adani Transmission — have grown to $9.5 billion. These holdings make up 4.6% of the total market capitalization of these five companies as of September 30. This is almost five times more than mutual funds have invested in the same stocks.

As of September 2020, LIC’s exposure to these five Adani companies was $889 million, or 1.24% of LIC’s equity assets under management. But a surge in stock prices and an increase in equity stakes have multiplied that value – to $3.9 billion in 2021, and now to $9.5 billion, or nearly 8% of LIC’s total equity assets.

“Stake [held by LIC] is quite high, given that many Adani Group companies are not very cash-flow rich. Some of them are not even profitable,” Amit Kumar Gupta, founder of equity research firm Fintrekk Capital, told Quartz.. “Some of the companies like Adani Green Energy are futuristic and big capital deals… It’s a bit of a risk to have so much from one group of companies because it can have a domino effect if there’s a negative development in any kind of debt position.”

How Adani group affects LIC fortunes

Of course, LIC’s holdings in Reliance and Tata group companies are larger. But these are older, time-tested conglomerates. The rise of the Adani Group was much more recent. Perhaps for this reason, LIC stands to gain the most⁠—and also lose a lot⁠—from the swings in Adani shares.

Shares of Adani Enterprises, the group’s flagship entity, have risen over 2,500% in five years. In the last five months, it has acquired controlling stakes in companies in several sectors, including IT, airportsand the media. But if these debt-driven ventures fail to materialize, LIC’s stakes would shrink in value, potentially making it harder to meet policyholders’ insurance claims.

LIC has already suffered a major blow citing a 3.5% stake in itself in May This year. Unfavorable market conditions and high inflation have swept away $17 billion off its market value, making LIC one of Asia’s biggest wealth losers.

India’s state-owned banks are heavily exposed to the Adani group

The Adani Group’s growing appetite for expansion also increases the risks for India’s already existing banks struggling with bad credit.

In fiscal 2022, Adani Group had total net debt of almost 20 billion dollars. This includes loans from state banks 21%including Bank of Baroda and Punjab National Bank, down from 55% in 2015-16.. Almost 40% of loans from public sector banks⁠⁠ — a share of $2.3 billion — originates from the State Bank of India. Private bank loans account for 11%, down from 31% in 2015-16. (The rest of the debt is in the form of corporate bonds and Adani bonds share capital program.)

Although the share of public bank loans to the Adani Group has declined over the years, this does not dispel the cloud of concern over the banks’ balance sheets. India’s overall “bad credit” ratio, which measures the extent of loan defaults, is one of the highest among comparable countries, at 5.9% from March 2022. Part of the problem with bad credit, critics claimoriginates from easy borrowing from friendswho run businesses that are often less than creditworthy.

“Despite the worries around me [the Adani group] because the banks are overstretched, the banks are favoring Adani,” Sonam Chandwani, managing partner at KS Legal & Associates, told Quartz. “They should be careful, because if the group ever goes into a default cycle … it could wreak havoc.”

The collapse of the Adani Group will hurt the man in the street

Such a collapse is not uncommon. Rating agencies and financial experts have already flagged the risk factors and how the group can spiraling into a debt trap. CreditSights, a subsidiary of Fitch Ratings, noted in August that Adani Group “deeply exaggerated” and may lead to “the default state of one or more group companies”. The group also suffers from “high key man risk”: the absence of robust managers below Adani itself.

“The the risk is so high that Indian banks, as well as some international investors in the capital bond market, are looking at lending limits to one group, which may become a challenge for the conglomerate,” said Abhishek Dangra, senior director at S&P Global. August 2022 report.

In a A 15-page memo response In a CreditSights report, Adani Group claimed its net debt to EBITDA ratio – a metric that measures a company’s total liabilities, including debt and other liabilities – has fallen to 3.2 from 7.6 over the past nine years. A net debt to EBITDA ratio of less than 3 is considered healthy. The lower the ratio, the higher the probability that the company will successfully repay the debt.

“The general concern is about the speed at which Adani’s companies are growing and along with acquisitions in multiple sectors, the question on everyone’s mind is whether the group will be able to digest the same,” said Amit Tandon, founder of Institutional Investor Advisory Services, a firm based in Mumbai.

Tandon believes the picture around Adani Group’s growth will become clearer “in three to four years.” But Chandwani is worried: “If the Adani Group bubble bursts, the Indian equity market may experience a ripple effect.

A massive default by one or more of Adana’s companies will shake not only stock markets but the Indian economy as a whole, given how deeply and widely embedded the companies are in the country’s infrastructure. The taxpayer will be affected, additionally, by its indirect exposure to the group, through LIC and state banks. A rescue would limit the damage. That too would be financed from the public purse, but would be inevitable if the government decided that the Adani group had indeed become too big to fail.