Thread by @AjayFYSharma

#AdaniFPO #adani #ADANIENT
What next for Adani group?
A very respected entrepreneur once told me:
If I trust you Ajay, you don’t have to explain. But if I don’t trust you, any amount of explanation is useless.

Our world of finance moves on Trust and Trust ONLY and Capital Always Follows Trust.
Trust takes years to build and gets destroyed in seconds.
For leveraged businesses, this matters a lot more than unlevered businesses.

Any emergence of reputation risk, leads to re-financing risk, leads to liquidity risk and then it creates solvency risk.

Currently there is no refinancing risk (corporate bonds are due for refinancing only after 12 or 18 months), neither a liquidity risk with the Adani group, nor is there a solvency risk.

A basic balance sheet analysis which I have borrowed from a very smart friend of mine is given at the end looking at individual businesses. These are very rough numbers. At individual company level, the balance sheet and cash flows are actually ok

But this is no more about cash flows, bond yields etc.
Mr. Adani is at cross-roads here. No Amount of Money is more important that a person’s reputation. He has been building businesses for several decades and he understands this more than anyone else.

Mr. Adani needs large institutions with deep pockets to build his dreams…after all infra projects are capital intensive and need billions of dollars. This money can come from large Institutions ONLY.
But, Institutions don’t want to deal with any “grey” in today’s world.

I think pulling the FPO was the right thing to do, but much more is needed
I think a Goldman-Buffet type deal will be needed now to repair some of the damage.

During 2008 crisis, even a reputed bank like Goldman Sachs had to get Mr. Buffet to bring credibility back. Goldman paid Mr. Buffet 10% assured dividend yield (you read that right, 10%) on his $5bn investment. That was a vote of confidence from the world’s savviest investor.

Mr. Adani may have to bring in one “NAME” on his cap table aka Goldman-Buffet.
For the immediate future, some of the hyper-growth plans will have to be curtailed. He will have to first ring-fence the current projects (re-financing etc.) before taking on any new ambitious ones.

Very rough numbers of underlying businesses (from a smart friend)
Adani ports - ~40k cr debt at face value, ~25k cr at market value .. 100% bonds , zero or close to zero with onshore banks . ~25k cr used to acquire bonafide assets from sellers like Israel , Larsen etc ..

~12,000 cr Ebidta .. so ~2x debt coverage at market value and ~3x at face value . I don’t think Adani Ports debt is at risk.

Adani Transmission : ~30k cr debt , half of it is bonds ( approximating ) .. ~6000 cr ebidta .. backed by regulated power transmission assets and Mumbai electricity supply concession ..

But, not as well covered as Ports in debt to ebidta , but assets are fixed return so again debt should be fine and a bulk of debt is asset level debt escrowed , not corporate level

Adani Power : 45k cr debt , 13k cr ebidta.. very high leverage, but manageable and not life threatening or something to worry about

Adani Green : 50k cr debt.. part of it is corporate level debt including one bond .. rest against solar assets .. 6000 cr Ebidta.. Riskiest Adani Entity from a debt perspective

Indian banks should be fine in general and there is no systemic banking risk here.

The key issue is Debt at the parent Adani Enterprises level which has been used for the cement acquisition. The FPO was needed to reduce leverage at the parent level.
The parent balance sheet is shaky, but the underlying assets are fine. They are real assets as discussed above

The balance sheet can be easily repaired by:
•asset sale to ease the pain at parent
•dividends
•Strategic partners in the assets
A short-term solution to sell partial stake in the cement business, but that is like putting band aid when surgery is needed.

I don’t own any equity or bonds of Adani and I don’t invest in Infrastructure related businesses. Being an Institutional investor, and seen many short sell sagas: e.g. Herbalife in US, Sino-Forest in China to Olam In Singapore, the Adani episode is important for Indian markets

There is an error in the above: It should read: The issue is Debt at the parent Adani level which has been used for the cement acquisition.