For Pawan Dharnidharka, a stock investor in Adani Enterprises (AEL), the year 2013 has not been a good one. The company's stock has lost 35 per cent of its value since January, making investors jittery.
The reasons are obvious - rising finance cost and declining profits. AEL, holding company of the group, had net debt as on March of Rs 54,496 crore, down from Rs 63,155 crore a year before, by Bloomberg data. The company managed to bring its debt down by selling its Australian asset to its own promoter family.
What is worrying is that the consolidated interest cost rose from Rs 1,825.6 crore in 2011-12 to Rs 3,493 crore for 2012-13, as its power business continued to drag it down. "Our power business went through trying times, overcoming structural bottlenecks of coal availability, increased prices and constraints on power evacuation. With focused efforts, we expect an early resolution on these matters," said Devang Desai, chief financial officer, Adani Group and executive director of AE. (Click here for chart)
During the early years, the Gautam Adani-owned company focused on trading. But with the opening of the economy, it saw a big opportunity in infrastructure development. Soon, it had interests in ports across India, coal mine development, power generation, city gas distribution and real estate. It made an audacious move to buy a massive coal mine in Australia - which soon faced environmental opposition, led by Greenpeace.
Soon after its Australian acquisition, the group realised it had to manage its debt as priority. Early this year, a subsidiary company, Adani Ports and SEZ, announced the sale of the Abbott Point asset to the Adani family at the book value. On a consolidated level, ADSEZ invested $2.2bn in the Abbott Point asset. If ADSEZ gets its full investment back, AE's net profit would go up by five to seven per cent from FY14-15 onwards, reflecting the removal of the Abbott Point losses, say analysts.
The group also decided to freeze its investments in Australia. Till now, the company has made a total investment of $675 mn in mining projects there and is waiting for environmental clearance for the coal mine and a railway line. These are expected in the next six months and till then it has not planned any major capital expenditure in Australia.
One of the biggest drags for the Adani group is its power business. Adani Power made a massive loss of Rs 1,952 crore in 2012-13. The weak performance was driven by high fuel cost, due to lower consumption of cheaper coal from its mines abroad and from Coal India, apart from higher interest expense.
The power company is hoping to be able to renegotiate its power purchase agreement with various state governments. It was to use coal from Indonesia and the argument is that the government there had changed policies on coal export midway. However, state power distribution companies are planning to challenge this argument in court.
The good news for the group is that the traffic of Adani Port & SEZ went up in 2012-13, though its margins were disappointing. The company attributed this to a higher cargo mix and also higher container traffic from the Mundra (Kutch) terminal. On the balance sheet of Adani Port, consolidated debt has come down to Rs 11,000 crore from the earlier Rs 21,000 crore, with the Australian asset sale.
So far, the Adanis have managed to stay out of a debt trap. The question is whether they'd be able to manage their rising debt and finance cost. There is no guarantee that the power business will start adding to the group's profitability in the near future. The group's hope is that falling interest rates in India and low cost loans from abroad will help it refinance its earlier expensive loans and reduce the rising finance cost. Bankers say the falling rupee against the dollar is a big worry for the group as its forex loans are close to $5 billion and it could jeopardise the entire debt recast plan.
Till the company comes out of the woods, Dharnidharka will have to wait, as will other Adani investors. "I am worried, as I have lost a lot of money in the company's stock this year," he says. "I hope the group will be able to manage its debt soon."