Will Adani’s US indictment derail India’s infrastructure push?

Spread across an area five times the city of Paris is India’s largest single-location renewable energy (RE) plant located in Khavda, a small town in Gujarat, near the India-Pakistan border. Once operational, the Khavda RE park will generate 30GW of solar and wind power and can light up about 16mn homes each year.Within 12 months of breaking ground in FY24, Adani Group has installed over 2GW of capacity in Khavda and the company plans to raise this to 6GW by 2025. But this staggering pace of growth needs capital and Gautam Adani secured this last year in the form of a $1.36bn syndicate loan from eight global banks.This is the same syndicate loan mentioned in the investigations of the US department of justice in the Gautam Adani indictment. These lenders are yet to declare any action in response to the bribery charges made against the Adani Group founder, but other investment partners have been more vocal.On November 25, Adani Group’s strategic partner, French energy giant TotalEnergies, said it will not make any further “contributions as part of its investments in the Adani Group of companies” until the “accusations against the Adani Group individuals and their consequences have been clarified”. The French multinational is a big investor in Adani Green Energy and Adani Total Gas.Just two months ago, TotalEnergies said it will provide an equity investment of $444mn for an equal joint venture with Adani Green for the development of 1.5GW in Khavda.The stock markets were quick to react. Since November 22, the stock prices of Adani Group companies are down at a time when the Sensex is up 1.1%. Shares of Adani Enterprises, the flagship company, are down 3.5%, Adani Total Gas and Adani Power are down 5% each. The Adani Energy Solutions stock has slipped 7%, while Adani Green has fallen 14%.As some long-term fundamental investors are getting worked up, it is traders who are making the most of the fall in Adani stocks.The ‘put’ options of Adani Enterprises are experiencing extreme volatility. On November 19, they were trading at an annualised volatility of 55.6%. Five days later, the annualised volatility increased to 65%. This is unusually high when compared to Nifty 50 ‘put’ options, which trade at an annualised volatility of 16%.While many believe nothing can really go wrong with Adani Group, this is the first time we see that long-term fundamental investors like GQG Partners are having some doubts. There is also a general feeling that the case can have some effect on the ability of other Indian corporates to raise debt in the international market. medium nocaptionhttps://youtu.be/pFX6ZS-IFr0?si=Mneegoc5OEEQUK3kA big price to payInfrastructure is a capital-intensive business. Big projects get funded through access to international funding at lower interest costs. Today, India is at a critical phase where the country is desperate to build infrastructure and Adani Group is its poster boy. If this company can’t get access to capital at relatively lower costs, then it will have to look inwards at Indian banks.But now, the Reserve Bank of India (RBI) is already proposing more restrictions on project financing that will not allow banks to overexpose themselves to infrastructure loans.That is a path already explored by Adani Group. Till about March 2019, Adani had more debt from domestic lenders with 42% from PSU banks and 33% from private banks. However, with the IL&FS default drying up domestic liquidity for infra lending, Adani started tapping global financing.With the indictment in the US and fewer domestic lenders keen to finance project debt, Adani can look East for financing, but whatever the group does, the cost of capital has likely remained high. Given the scale of Adani’s ambition, it will have an impact on India’s infrastructure development.An Adani slowdown?Even GQG Partners, which started investing in Adani Group after the Hindenburg report, in its latest statement has conceded that the US investigation would “restrict” Adani’s ability to access foreign capital. But it added that there are no signs of domestic banks, especially PSU banks, shutting off credit to Adani Group.Shares of most of Adani Group companies are bleeding and Adani Green Energy is getting closer to its 52-week low prices. Despite this correction, the stock still trades at a trailing 12-month PE (price to earnings) of 129 times and PB (price to book) of nine times. Adani Total Gas trades at a PB of 18x, Adani Enterprises at 6.3x and Adani Energy Solutions at 5.3x, shows data from Trendlyne. These valuations are unheard of for infrastructure companies, but some argue that Adani gets this premium because of his scale of operations and exert dominance across sectors quickly. 115772621“Companies in emerging economies and developed countries work differently. But when companies from emerging economies that raise funds globally become subject to legal actions and lawsuits, the other option is to raise funds domestically for infrastructure development from PSU banks. But then there is a risk of repeating the 2007-13 cycle. The only option is to slow down the pace of infrastructure development,” says a US-based fund manager.For businesses that have more capacity under development than operational, access to capital is key. And that’s the case with many of the Adani Group companies, be it Adani Enterprises, Adani Total Gas, Adani Energy Solutions or Adani Green Energy. With less credit to fuel its aggressive expansion plans, India’s fastest-growing large conglomerate might be left with no option but to slow down.With limited access to capital, Adani may have to slow down. But what does an Adani slowdown mean for India? medium115772645Systemic riskThe Adani Group, through Adani Enterprises, operates eight airports in India with major capacity expansion work underway in most of them. Of these, six airports will together have a capacity to handle 7.8 crore passengers annually by 2030. The group also operates Mumbai airport, one of the busiest airports in India.Adani is the largest private port operator in India and Adani Ports and Special Economic Zone handled 420mn tonnes of cargo in FY24, almost 50% as much as the 819mn tonnes handled by 12 major ports in India. Adani Green represents about 11% of India’s installed utility-scale solar and wind capacity and by 2030 the company will own and operate 10% of India’s renewable energy capacity.In the energy transmission and distribution sector, the company owns 41.5% of the private operational transmission capacity as of FY24. Its piped gas and CNG business have contracts across 13 states, and once completed, Adani’s network will cater to 14% of India’s population covering more than 200mn people.Suffice to say that if Adani Group slows down, India’s infrastructure development also loses pace. Questions can be raised as to why Indian infrastructure is overexposed to one business group.“Most of the biggest business groups in India are investing in consumer-facing businesses, even those that already have some exposure to infrastructure or project financing business,” says Anil Sood, professor of finance at the Institute for Advanced Studies in Complex Choices (IASCC).The Tata Group recently conceded the top spot of being the largest private-sector steel producer to JSW Steel. Reliance Industries, which earns its cash from the energy business, is expanding in consumer-facing businesses like retail. L&T, the largest infrastructure player, has long abandoned asset-ownership models. The Aditya Birla Group is focusing on maintaining its leadership in cement through investments in Ultratech.“There are no large business houses deploying capital in long-gestation businesses like infrastructure. The wealth of many big business houses in India is based on the equity value of their holdings. If the market corrects even 20%, the equity capital available for long-term investment shrinks,” says Sood.It is of little wonder that Adani Group, with its grand ambitions and uncontested leadership in infrastructure development and operations, has been the fastest-growing conglomerate in the past five years, outpacing the Tatas, Mukesh Ambani’s Reliance and Aditya Birla Group. medium115772656The troubling big pictureOne reason why many companies shy away from infrastructure projects, especially the ones that involve asset ownership, is due to the lack of domestic funding options and rampant execution risks that lead to project delays followed by long-drawn arbitration processes.“We have a planning system which is neither capitalist nor state-owned (like China) economy, so we must build infrastructure with limited resources. Since domestic funding is limited, ultimately India will need access to multilateral funding, which can be made available for a long duration for infrastructure projects if we want to grow fast,” says a managing director of a South India-based infrastructure company, whose business suffered overleverage and fought arbitration during the past decade.His company is slowly recovering from the issues of the last capex cycle, but he says he doesn’t intend to grow too fast and take more risks. “It is important to cut your coat according to your cloth,” he says.Adding insult to injury, the RBI has proposed guidelines that require lenders to set aside 5% of their standard assets or loans to cover losses during the construction phase of a project.The draft norms proposed a three-year glide path towards 5% wherein it directed banks to provide 2% in fiscal 2025, 3.5% in fiscal 2026 and 5% by fiscal 2027. It substantially increased provisions from the flat 0.4% standard asset provisions on project loans currently.While stakeholders have raised concern over the proposed norms, there is little expectation that the central bank might back down.“There can only be a resolution of India’s project financing woes if there is a market for tradable paper where issuers with funding needs and investors with risk appetite can sign off on long-term debt. But for the yields to be decent the inflation must be below 5-6%,” says the managing director quoted above.Look West, look East, or look insideThis is the second time in two years that Gautam Adani has returned the funds he successfully raised from investors. Last week, Adani Green Energy scrapped its $600mn bond sale after Adani’s indictment by the US department of justice.Similarly, in January 2023, Adani Enterprises, the group’s flagship company, cancelled its ₹21,000 crore FPO as the stock price of group companies tanked following Hindenburg’s report.While the authorities determine the validity of the recent charges against Gautam Adani, there is a growing rumble about how these attacks are aimed at slowing down India’s growth story.From George Soros to the US deep state, and sometimes even Chinese conspiracy, all have been blamed for the misfortunes of Adani Group and the impact it will have on India’s infrastructure development. But perhaps the problem lies in India’s vision of aiming for infrastructure development like China without having comparable domestic funding abilities.