Adani Debt Trap: What should you do with Adani Stocks?

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Adani Group debt trap

Adani Group stocks have been in the news of late as the shares have seen a breakneck rally in the year so far. A lot of factors such as  Adani Group’s foray into the telecom spectrum, the stake buy in NDTV have boosted sentiments. Green energy push, infra capex announcement, fundraisers and rising commodity prices have also driven sentiments for the group stocks. 

Adani Group stocks: A look at the rise in share price

  • The mega rally in Adani group share price has helped Gautam Adani to become the third richest man in the world with a networth of $143 billion. Gautam Adani is the first Asian to break into the top three, according to Bloomberg. 
  • The massive rally in Adani Group shares have also supported the Indian stock market. Nearly 80% of India’s total market-cap gain in 2022 was contributed by the seven listed firms of the Adani Group.
  • However, in August this year foreign research firms including ‘CreditSights’ and S&P have warned of excess debt in the Adani Group. 

Adani Group: IND Quiz

Whom did Gautam Adani overtake to become third richest in the world last week?

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Adani Group in a debt trap?

  • According to CreditSights (a Fitch Group company), Adani Group companies are heavily over leveraged as the company is using debt to invest aggressively across existing and new businesses.
  • CreditSights estimates that, in the worst-case scenario, the debt-funded growth plans may eventually spiral into a huge debt trap for Adani Group. It can possibly result in a distressed situation or default by one or more Adani Group companies.
  • The Adani Group has six listed companies. As at the end of FY22, these six companies have a gross debt of Rs 2.3 lakh crore. Net debt after accounting for cash in hand was still very high at Rs 1.73 lakh crore.
  • The CreditSights report said that excessive debt and overleveraging by the group may have a cascading negative effect on the credit quality of the bond issuing entities within the group and heightens contagion risk in case any of the Adani Group entities fall into a problem. 
  • The note says that despite elevated leverage levels and poor interest coverage ratio, virtually all Adani Group companies have large expansion plans on the horizon too, having adopted aggressive growth targets; which is not a financially prudent strategy.
  • S&P has also raised concerns around the Adani Group’s excess debt. S&P Global Ratings said the growth ambitions for most of the group entities are fairly high. In case this goes unmanaged, the group could spiral into a problem. 

Adani Group: Company wise debt

Adani Group shares future outlook: What should you do with Adani Group stocks?

On the whole Adani Group stocks have limited coverage with the analyst fraternity. However, here’s what analysts are saying about specific Adani group shares. 

Adani Enterprises: It is the flagship company of Adani Group, and all other businesses fall under Adani Enterprises. The company is all set to enter the Nifty 50 index from September 30th, replacing Shree Cement. According to earlier estimates by Edelweiss Alternative and Quantitative Research, Adani Enterprises' inclusion into the Nifty 50 will lead to inflows of around $183 million into the stock. DAM Capital Advisors has a ‘Neutral’ rating on the stock with a target price of Rs 2,381. 

Adani Ports: Global brokerage firm Nomura said that Adani Port & SEZ is transforming into an integrated logistic play.  According to its estimates, the company may be requiring Rs 23,000 crore in capex over FY23-25, leading to a capex-intensive phase. However, the research firm said that concerns on Group leverage are overdone. Further, Nomura believes that Adani Ports is adequately de-linked from Group companies’ operational and stock performance due to the company’s improved governance. Nomura has maintained a 'buy' rating on Adani Ports with a target of Rs 1,025. 

Adani Wilmar: Adani Wilmar reported a decent set of numbers in the Apr-Jun 22 period. The company saw a decent quarter with volume growth of 6% from the year-ago quarter and 53% in edible oils and Food and FMCG, noted ICICI Securities, adding that inflation-led consumer slowdown has not hurt the performance. Strong competitive advantages (price-laddering, oil segments, scale, market intelligence (courtesy Wilmar)) in edible oil provide Adani Wilmar with an edge over competition, said the research firm. However, ICICI Securities has downgraded Adani Wilmar shares' rating to reduce (from hold). The target price has been increased to Rs 595.

Adani Transmission:  It is one of the largest power transmission companies with 23000+ transformation capacity and 14000+ power transmission length. DAM Capital Advisors has a ‘Buy’ rating on the stock with a target price of Rs 2,656. 

Rest of the Adani group stocks do not have coverage among the analysts’ fraternity.

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