Ashwath Damodaran Says Gautam Adani's Companies Have Way Too Much Debt

Business valuation expert Ashwath Damodaran has stated that his analysis shows that Adani Group collectively carries about three times more debt than it should, “confirming that the group is over-levered.”

What Happened? In a fresh blog post discussing debt, Damodaran cited his study of Adani Group’s financials which shows that even though the conglomerate collectively has more debt than it should, that’s just ‘bad business practice’ and ‘not a con’.

“…there is little, if any, benefit in terms of value added to Adani from using debt, and significant downside risk, unless the debt is being subsidized by someone (government, sloppy bankers, green bondholders),” Damodaran reasons.

Per the valuation guru’s calculations, Adani Enterprise’s actual debt of $413,443 million (₹34,19,395 crore) is more than double its optimal debt of $185,309 million (₹15,32,490 crore), and “reducing its debt load will not just lower its risk of failure, but also lower its cost of capital.”

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A Family Control Dilema: Adani Enterprises Ltd. is part of a family group, where higher debt at one of the Adani companies may be offset by less debt at another, notes Damodaran.

Damodaran believes that the contractual claim that comes with debt can create truncation risk because failing to make interest or principal payments can result in bankruptcy and an effective loss of equity.

Per the Professor of Finance at the Stern School of Business, borrowing money at a lower rate, by itself, cannot alter the overall cost of funding, since that cost is determined by the risk of assets.

“When control becomes the dominant prerogative for those running the firm, they may choose to borrow money, even if it pushes up the cost of funding and increases truncation risk, rather than issue shares to the public (and risk dilution of their control of the firm),” concludes Damodaran.

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