S&P Global upgrades Adani Ports, Adani Electricity credit outlook to ‘stable’
Brokerage firm S&P Global, on Monday, upgraded its outlook for Adani Ports and Special Economic Zone Ltd. (APSEZ) and Adani Electricity Mumbai Ltd. (AEML) from negative to stable after thorough investigations found no wrongdoings into Adani stocks.
Regulatory investigations have mostly concluded without proving wrongdoing on alleged governance matters raised in a short-seller report released in January 2023. Adani Group entities came under significant media and regulatory scrutiny over the past year after the release of a short-seller report alleging significant governance issues for the Adani Group (mainly at the shareholder level). Investigations have not uncovered any specific wrongdoing related to allegations in the report of non-compliance of minimum public shareholding, non-disclosures of related party transactions, or stock price manipulation.
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In early January 2024, the Supreme Court of India issued a judgement confirming that India’s capital markets regulator, Securities and Exchange Board of India (SEBI), had completed its investigation of 22 of the 24 allegations against the Adani portfolio entities. SEBI will complete its investigation of the two remaining allegations, relating to Foreign Portfolio Investors (FPI), within the next three months.
“The stable outlook reflects our expectation that APSEZ will have stable operations, and that management will adjust its growth aspirations, shareholder distributions, and investments. This should help it achieve a ratio of adjusted net debt to EBITDA of about 3x-4x over the next two years. In addition, we assume that APSEZ will not undertake significant related-party transactions outside the normal course of business,” S&P Global said in its report.
The brokerage firm further expressed confidence that the resolution of the majority of regulatory investigations into the Adani Group, coupled with the absence of evidence of misconduct, has mitigated potential downward risks. However, the agency noted that the conglomerate, being a sizable family-owned entity with ambitious expansion goals and engaging in transactions with related parties, still faces certain governance risks.
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It further said that APSEZ’s ratio of FFO to debt is likely to stay below 15%. This could happen if the company maintains aggressive growth without adequate funding access and its operating performance deteriorates sharply from the expectations.
Meanwhile, the agency said for AEML, “ The stable outlook reflects our expectation that AEML’s ratio of OCF to debt will improve to above 10% over fiscals 2024 and 2025. A rebound in power demand, stable tariff collections, and recovery of lower revenue collected during fiscals 2021 and 2022 under the regulatory mechanism would drive this recovery. At the same time, we expect its FFO-to-debt ratio will recover to about 7%-8% in fiscal 2024. The stable outlook also assumes the parent, Adani Energy Solutions Ltd. (AESL) manages its growth spending and leverage, such that its FFO-to-debt ratio remains above 9% on a sustainable basis.”
It further forecasts the consolidated AESL’s FFO-to-debt ratio remains below 9% for a sustained period. This could happen if AESL’s credit quality deteriorates due to: a more aggressive growth strategy and funding mix than we now expect, a weakening balance sheet or material project execution delays that result in significantly weaker cash flows.
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Published: 22 Jan 2024, 11:04 PM IST
