In Hindenburg vs Adani clash, will banks emerge as biggest casualty?

Among the several allegations made by Nathan Anderson’s Hindenburg Research against billionaire Gautam Adani’s group, one risk that raised Dalal Street’s eyebrows was the swelling balance sheet of some of the companies.

The concerns surrounding the high debt aren’t completely unknown to the Street, but it still gave traders a reason to dump and run away from the highly-valued stocks.

Last year CreditSights, a fixed-income research firm owned by the Fitch Group had in its report called the group “deeply over-leveraged” and suggested it could “unravel Adani’s vast business empire”.

Besides a high debt at the group level, the US research firm highlighted that many of the group’s firms aren’t also generating free cash flows that can be used to repay loans.

According to the American research firm, 4 of the group companies – Adani Green Energy, Adani Total Gas, Adani Transmission, and Adani Enterprises have negative free cash flows.

The negative free cash flow is the highest in Adani Green and Adani Enterprises at Rs 14,685 crore and Rs 12,042 crore, respectively.

Amid the noise around debt, CLSA Asia ran an analysis to gauge the potential risk that the Indian banking sector is running for its exposure to the group.

The group has a consolidated gross debt of Rs 2.1 lakh crore, and excluding inter-group lending, the debt would be Rs 1.9 lakh crore, according to CLSA.

The top-three companies by net debt levels are Adani Green Energy, Adani Power, and Adani Ports and SEZ with Rs 30,000-40,000 crore in net debt each.

CLSA analysis showed that private banks aren’t much in trouble given their low exposure. However, public sector banks have material exposure to the group.

The exposure of private banks is 0.3% of FY24 loans and 1.5% of FY24 networth, according to CLSA’s analysis. However, for PSU banks, the exposure is 0.7% of FY24 loans and 6% of FY24 networth.

Over the past 5-6 years, the group has diversified its borrowing mix and reduced the share of Indian banks in their borrowings from 86% in FY16 to 33% in FY22, said Jefferies in its report.

Therefore, both Jefferies and CLSA believe that there are no material risks to the Indian banking sector.

But will the can of worms opened by the American whistleblower turn regulators and the apex bank vigilant?

“Any group with such a meteoric ride based on borrowings, acquisitions, and an elevated stock price deserves scrutiny. That said, he [Gautam Adani] also has an amazing ability to buy assets on the cheap. That may mitigate credit risk, but worth examining why,” Hindenburg quoted a former official of the Reserve Bank of India (RBI) as saying in its 32,000-word report.

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