Why Rating Agencies Are Trimming Outlook In Adani Firms? The Elephant In The Room Is..

On Friday, Adani Enterprises stock dropped by nearly 3%, while Adani Wilmar tumbled by at least 4.5%. Adani Ports closed on a flat note. Also, in cement stocks, Ambuja Cements dipped by 2%, and ACC shed nearly a percent. Media stock NDTV was also down by nearly 5%.

Among the positives would be Adani Transmission, Adani Total Gas, and Adani Green Energy as they touched 5% upper circuit. Adani Power also gained by nearly 5% on BSE.

India Ratings and CARE Edge Ratings are the latest to give their stance on Adani firms.

Ind-Ra has trimmed its outlook on Adani Enterprises and Adani Green Energy this week to Negative from Stable. While the rating agency affirmed the long-term issuer rating on both firms at ‘IND A+’.

However, both Ind-Ra and CARE believe that the latest fundraising of ₹15,446 crore from GQG Partners alleviates the risk to some extent in these companies and could aid in liquidity to a certain degree.

Adani Enterprises:

In regards to Adani Enterprises, Ind-Ra's negative outlook on the company is due to the uncertainty on the cash flow mismatches resulting from the revised capex plans and the possible sources of funding available which may keep the equity cover lower than 2x.

In its rationale, Ind-Ra said, "AEL, being an incubator, has large, although reduced, capital commitments across different businesses including ANIL, airports, and roads As per Ind-Ra’s previous assessment, the total capex to be undertaken by the company over FY24-FY25 was estimated around ₹1,172 billion which as per the management, is being reevaluated. AEL has a committed capex of ₹450 billion where financial closure has been achieved."

Earlier, Ind-Ra had said that the Adani Group's financial flexibility to access the capital markets, venture into strategic partnerships, monetisation of some of the assets, and liquidity availability at the promoter level.

However, now, Ind-Ra said, there exist risks associated with capital raise as investments by the strategic partnerships have been put on hold, the promoters have committed to reduce loans against shares to nil by March 2023 which cumulatively reduces equity cover visibility.

CARE Edge who also trimmed its outlook to Negative on Adani Enterprises attributed the "expected moderation in financial flexibility of the Adani group" as the reason. CARE also reaffirmed its rating on the company's long-term and short-term bank facilities, market-linked debentures, non-convertible debentures, and commercial papers.

As per CARE, the outlook assigned to the long-term instruments and bank facilities of Adani Enterprises Ltd (AEL) has been revised due to the expected moderation in the financial flexibility of the Adani group in case of any adverse outcome or observations from the ongoing regulatory and legal scrutiny directed by the Honourable Supreme Court of India in connection with various allegations against the Adani group of companies.

Market regulator Sebi is expected to complete the examination pertaining to the lapses in reporting mechanisms, disclosure adequacies, and manipulation of stock prices amidst other aspects of investigation in a time-bound manner.

In CARE's view, any adverse outcome or observation on corporate governance practices shall impair the Adani group’s access to capital both debt and equity at envisaged rates or quantum and are viewed as potential downside risks and thus continue to be key rating monitorable.

CARE said, while moderating market capitalisation of listed entities of Adani group constraints resourcefulness of promoters and consequently impacts the financial flexibility of AEL which has historically relied on need-based support from the promoter for funding its various incubating initiatives.

Since March 2020, the quantum of the pledge of promoter shareholding in all Adani-listed entities has steadily reduced.

Adani Green:

Coming to Adani Green, Ind-Ra's said, "the Negative Outlook reflects the risks regarding the terms of refinancing the upcoming debt maturities, interest rate risks, access to capital markets for raising equity, a tie-up of debt to support take-out of construction facility ($1.64 billion), and leveraging up the existing unleveraged assets through fresh borrowings."

Also, the ability of the group to churn assets for equity release to fund new projects through either platformisation of part of the capacity or outright sale would continue to be monitored.

Adani Total Gas, and Adani Ports:

Last week, ICRA revised its outlook in two Adani firms namely Adani Total Gas and Adani Ports.

ICRA revised its outlook on Adani's port arm to 'Negative' from stable, while reaffirming ratings on the company's long-term fund-based and non-fund-based loans, non-convertible debentures, and commercial papers. A similar action was done for the group's joint venture Adani Total Gas as well. The reason behind both of the 'Negative' outlooks is also the same --- deterioration in the group's financial flexibility.

Adani Group's financial flexibility has deteriorated after Hindenburg's report on January 24. The short seller's critical report led to steep declines in share prices and an increase in the yield of international bonds raised by the group's entities.