Adani group faces rough road ahead over debt cut

Adani Enterprises stock falls 20% in a single day

The Supreme Court order on compensatory power rates could make it difficult for the Adani Group to deleverage its balance sheet. Nearly half of the group’s Rs 1.1-lakh crore combined debt of its listed companies is accounted for by Adani Power.

The Central Electricity Regulatory Commission (CERC) had in April 2013 allowed higher rates for Adani Power’s 1,980 Mw Mundra power project, to compensate for rising coal prices. As a result, Adani Power’s operating profit climbed from Rs 1,174 crore in 2012-13 to Rs 8,754 crore in 2015-16 and it turned profitable (on a net basis) beginning 2013-14, despite a steady rise in interest costs. 

The higher rate also allowed a improvement in Adani Power’s financial ratio with its long-term debt to equity ratio declining to 5.4 in 2015-16 from a record high of 6.12 in 2013-14, according Capitaline.

The combined debt to equity ratio of four listed Adani group companies also declined to 2.9 in 2015-16 from 3.2 in 2014-15 and 3.6 in 2011-12. The group companies’ combined net profit nearly tripled between 2012-13 and 2015-16 mainly due to the gains recorded by Adani Power.

A higher rate for Mundra allowed Adani Power to make acquisitions to become India’s second largest private power producer by revenue, behind Tata Power. In the past three years, the company took over loss-making projects in Korba from the Avantha group and in Udupi from Lanco. All this is now in jeopardy.

Following the Supreme Court order, Adani Power will restate its accounts for the last three years and reverse the gains in revenues and profits it booked from compensatory tariff for Mundra project. Analysts said the company might once again become a loss-making one.

On Wednesday, Adani Enterprises shares lost 20 per cent of their value as investors worried about the company's future earnings. The group lost a combined market value of Rs 5,498 crore in a single day.

Analysts said the losses at Mundra would have affected the capital expenditure and acquisition plans of group companies. According to estimates by the Institute for Energy Economics and Financial Analysis, the group has planned nearly $35 billion (Rs 2.28 lakh crore) of projects in ports, renewable energy, thermal power, power transmission and mining. 

Soon after the Supreme Court verdict, the Adani group had said its preliminary analysis revealed Adani Power would receive benefits in power purchase agreements of 4,764 Mw with Haryana, Maharashtra and Rajasthan. Though the company has received relief over shortage of domestic coal, the judgment does not grant any relief over the rise in coal prices due to changes in Indonesian regulations.