Last time it was the ‘Foreign Shortseller’ and this time it is the ‘Foreign Court.’ Can the Adani Group weather the storm this time?

To begin with it is important to understand that charges under US Federal Law - Foreign Corrupt Practices Act (FCPA) are not business breaking. Quite a few companies have managed to comfortably deal with it by paying some hefty penalties. But difference here though is that many of these companies like Cognizant Technology Solutions, Walmart, SAP amongst others were not frequently in the markets for capital raise. This is one area where, the Adani Group is likely to face speed bumps. Moody’s made a comment that the bribery allegations is credit negative event. Precisely the kind of events that stonewall the group’s insatiable appetite to expand fast by borrow large.

To be sure, the leverage metrics of most companies in the group are relatively better today than where they were when Hindenburg allegations created a lot of uncertainty. While leverage metrics have worsened a bit since March 23 for Adani Enterprises, for other companies in the group like Adani Power, Adani Ports and SEZ, Adani Energy Solutions and Adani Green, all have seen improvement – whether it is net debt/EBITDA or Net Debt/ Equity. For companies like Adani Total Gas leverage was never a problem. At a group level, net debt/eEquity ratio has improved from 1.62 times in March 2023 to 1.26 times now.

Yet, one cannot say with confidence that things will be back to normal like it happened in the second half of CY2023 for few reasons. For one, leverage metrics are not yet in the comfort zone for companies like Adani Green, Adani Energy Solutions and Adani Enterprises. Further it needs to be noted that many of the group business are cyclical businesses and in a downcycle leverage metrics like Net Debt/EBITDA can worsen further (when EBITDA declines). While it may vary from sector to sector, as a rule of thumb when Net Debt/EBITDA increases above 3 times, it may be time to take a serious look at the risks to business.

Two, last time while ‘Foreign Shortseller’ attacked, a foreign portfolio investor in the form of GQG Partners extended a helping hand by investing big, that revived investor confidence. To the contrary a filing by GQG Partners in the Australian Stock Exchange on November 21 states that it is ‘reviewing emerging details and determining what, if any, actions for our portfolios are appropriate.’ Any decision by GQG to exit its holdings in the Adani Group companies can be a massive blow to investor confidence which is already getting exhausted with multiple attacks on the group impacting stock performance at frequent intervals.

So unless there is quick resolution to the latest allegations (unlikely) concerns on leverage for the Adani Group will take center stage for a while. In fact, the stocks of Adani Group companies with weaker leverage metrics fell more sharply in reaction to the charges. There could be further pressure on share prices (many of which are still at highly elevated valuations) and possible scaling back of some ambitious growth plans.

‘This too shall pass’ for the Adani Group, but the growth path will not be what many expected as of a few days back.