As India votes for its next government, how is the Adani Group placed?
Among the tailwinds working in the group’s favour is the perception that it is close to the Bharatiya Janata Party. But this has also resulted in chatter about political risk for the conglomerate.
This perception is disputed by the company. “Our journey spanning 30 years clearly shows that the group is not a favourite of any one party or government,” averred the group’s statement. “Government policies impact all infrastructure projects hence the group works closely with all Governments to align our projects to their development objectives.”
Another set of risks lies in whether the assumptions the group has made about its investments are realistic. An instance is city gas bids. As the first part of this series said, the government has awarded contracts for last-mile distribution of gas even though the networks for transporting gas to these cities are still not in place.
As a consequence, bidders are unsure when gas will reach these cities – and at what price. “If it is too high, car-owners might not switch from petrol or diesel to gas, or their cooking gas to LNG,” said a senior executive of Swan Energy, a company in the natural gas sector.
With the Adani Group winning the largest number of bids, this has raised questions about whether its projected cash flows from city gas projects will materialise. Said the senior executive at Swan Energy: “I am not sure these bids will fructify.”
The company spokesperson was sanguine: “AGL [Adani Gas] has been in the business of city gas distribution for the last 14 years, with a large customer base and significant volume in four geographical areas. Given our experience in the business, the bids were prepared based on a thorough evaluation of the economic case of each GA [geographical area] per our internal evaluation parameters & available state government data, future demand potential, development of CNG corridors and leveraging economies of scale”.
The question about adequate cash flows, however, runs across the new businesses the group is entering. This is especially significant since some of the cash from the new businesses is going into propping up other parts of the group.
The group has two factors working in its favour. The first is its perceived proximity to political power. It has enabled the group to take bets its peers could not. This is seen in the operations of Adani’s power plant in Mundra. Even as other debt-strapped power companies put their power projects on sale, the Adani group doubled down and kept infusing cash into Mundra.
In tandem, as Scroll.in reported in March, the group obtained approvals to pass on higher coal prices to end customers after the Bharatiya Janata Party governments in Gujarat and the Centre stepped in.
The second factor is scale. Not only is it able to cross-subsidise its units, in the last five years, it has emerged as the biggest player in Indian infrastructure’s public utility sector.
For many experts, the potential consequences of having a financially overleveraged monolith dominate India’s public utility infrastructure are worrying.