Bengaluru: Deloitte’s decision last week to resign as auditors of Adani Ports and Special Economic Zone Limited (APSEZ) citing concerns raised by Hindenburg Research has refocused global attention on the Adani group and its business practices. The global auditing firm has said it wanted an independent external examination of the allegations made by the US-based short seller, a request Adani rejected by claiming Hindenburg’s accusations had no impact on any of its financial statements.
Over the past six months, in response to Hindenburg’s allegations of “brazen stock manipulation”, the Adani Group has repeatedly emphasised the health of its underlying assets, most of which were acquired over the past decade.
In 2017-18, the Adani Group’s six listed companies, which account for almost all of its turnover, earned a net profit (EBIDTA) of Rs 3,455 crore. But the acquisition of assets from other companies has helped propel Adani to a higher level. By FY2023, “the conglomerate recorded its highest ever EBITDA at the group portfolio level (combined all group companies) of Rs 57,219 crore.”
In its annual report for FY23, the flagship Adani company APSEZ recently described its strategy in the ports sector as an “inorganic approach”. It said it plans to extend this approach to “the acquisition of companies and services in the transport utility space,” with a “sustained focus on acquisitions at a deep discount value.”
Since the acquisition by the Adani group of assets like ports and airports has been crucial to its phenomenal growth, the process of some of these acquisitions is undoubtedly a matter of public interest.
This is also because allegations have been made – in a PIL before the Andhra Pradesh high court over Gangavaram port and by the Opposition – that the state has shown little interest in maximising its own future revenue share from some highly profitable companies or concessions Adani has acquired, or has even batted for the group in its quest for acquisitions in India and elsewhere, like Sri Lanka and Bangladesh. What one corporate governance analyst has described as an “almost lock step between the government and Adani” has been decried as ‘cronyism’ by the Congress – which has alleged, in the case of Mumbai international airport, for example, that the promoter was virtually strong-armed into selling his asset to the Adanis. The seller, GVK and the Adanis, have denied the charge but questions about the pace and range of acquisitions continue to be asked in the wake of Hindenburg, and not just by politicians. As the noted economist Arun Kumar asked recently, “How did Adani get hold of so many businesses so quickly”?
The answer is complicated because of the range of sectors and businesses the Adani group spans but a closer look at a key sector – ports – and specific acquisitions can give us some insight into the company’s nose for business opportunities and the evolving nature of India’s political economy.
The sale of Gangavaram port
In September 2021, the Adani group announced it had completed the acquisition of Gangavaram port in the Visakhapatnam district of Andhra Pradesh for a total of Rs 6,200 crore.
A press statement by Adani Ports & SEZ (APSEZ) said that it had purchased the Andhra Pradesh government’s entire stake – 10.4% – in the port for Rs 645 crore. The statement noted that the Adani group had earlier – in April 2021 – acquired 31.5% of Gangavaram’s shares from private equity firm Warburg Pincus and had signed an agreement for the controlling stake of 58.1% which was held by the port’s promoter, DVS Raju and family.
Warburg sold its shares to the Adani group for Rs 1,954 crore ($268 million at the prevailing exchange rate). In a parallel move, the private equity firm acquired a 0.49% stake in Adani Ports for Rs 800 crore. The deal with Raju, the promoter, which happened right after the Warburg purchase, involved the Adanis taking control of his stake in exchange for him and his family receiving Rs 3,604 crore worth of APSEZ shares – amounting to 2.2% of the acquiring company at the time.
Gangavaram was a port the Adanis had been interested in for some time. In 2015, when Warburg Pincus had tried to sell some of its shares, it was reported to have variously valued the port at between $1,050 million (Rs 7,000 crore) and $2 billion (Rs 13,000 crore). “Around the same time, Adani emerged as a potential buyer to acquire Warburg’s entire stake [i.e. 31.5%] and even hired investment bank Macquarie Capital to advise on the stake acquisition,” Capital Quest had reported. “However, the deal fell through owing to a valuation mismatch.” Nevertheless, six years later, Adani was able to acquire 100% of Gangavaram for Rs 6,200 crore. This despite the fact that the port’s capacity, which was 30 million tonnes in 2015, had doubled to 60 million tonnes by 2019.
Though the COVID-19 pandemic and its dampening effect on the economy might have played a role, it is not clear why Warburg settled on a lower valuation, setting a benchmark price that Raju and – more controversially – the AP state government subsequently went by. The Wire sent a questionnaire to the equity firm on June 29, 2023, and will update this story if and when their answer is received.
A good deal for buyer
Gangavaram port had posted an EBITDA of Rs 634 crore in FY20. The sale price of a company is a multiple of EBIDTA – a measure of how much it earns every year – with the multiple a measure of the number of years the buyer needs to recoup his purchase price. With Adani paying Rs 6,200 crore, the deal’s enterprise value/EBITDA multiple stood, by Adani’s own calculations, at a relatively low 8.8 – a measure of how good a deal this was for the buyer.
This relatively low multiple is now the subject of a public interest litigation petition in the Andhra Pradesh high court, with the petitioner claiming it was well below global benchmarks for port acquisitions. “In May 2019, when PSA, Polish Development Fund and IFM Global Infrastructure Fund acquired 100% of DCT Gdansk from Macquarie Infrastructure and Real Assets, they paid an enterprise value/EBIDTA multiple of 16,” says the petition filed in 2021 by Satya Bhupal Reddy Vaiza, the executive director of an NGO called REEDS. “Similarly, when Orient Overseas International sold its container terminal to Macquarie Infrastructure and Real Assets, it did so at a multiple of over 20,” said the PIL, which is challenging the state government’s decision to sell its own stake of 10% in Gangavaram to Adani without inviting bids.
Even within India, the deal’s enterprise value/EBITDA multiple stood on the lower side. Just the previous year, Adani had acquired Andhra’s private sector Krishnapatnam Port at Rs 13,572 crore – a multiple of 10.2 – despite it carrying debt of Rs 6,212 crore and, at 64 million tons, having similar capacity as Gangavaram.
In contrast, Gangavaram was debt-free and had a cash balance of Rs 570 crore at the time of acquisition. The PIL, which is still before the court, also alleged that the state government did not follow prescribed norms for valuing its share, nor the value of the land that Adani would now get effective control over. The port concession also included 1,800 acres of nearby land, given by Chandrababu Naidu when he was chief minister. Going by market rates, the PIL claimed, that land was now worth at least Rs 3,000 crore.
Lengthy counter affidavits were filed by the state government (the Adani group was not named as a respondent) between September 2021 and January 2022 disputing the petitioner’s claims on the value of the land and the port as a whole. The last time the court took up the matter was, however, in December 2021. Now, a former revenue secretary in the Union government, E.A.S. Sarma has written to the Comptroller and Auditor General of India noting what he alleges are anomalies in the state government’s sale of its Gangavaram stake to the Adanis and demanded an audit.
To better understand the Gangavaram deal, The Wire met port promoters, spoke to senior executives in ports and other infrastructure companies acquired by Adani and their peers in industry, the relatives and associates of promoters whose firms have been acquired by Adani, a former chief secretary in Andhra Pradesh, former bureaucrats in mid- and senior positions in Andhra Pradesh, including those in the state’s planning and ports department; and the owners of firms that dealt with Gangavaram – like those importing coal through the port, and those offering shipping logistics, as well as activists and trade union leaders working in Gangavaram.
In all, about 45 interviews were conducted. Subsequently, detailed sets of questions were emailed to all the dramatis personae – the Adani Group; D.V.S. Raju; Warburg Pincus, C. Sridhar of Navayuga Engineering Company; K. Muralidharan (formerly at the Andhra Pradesh Maritime Board); KPMG, which valued Gangavaram; the Union ministry for ports and shipping; and Andhra Pradesh CM Jagan Mohan Reddy.
The Adani growth machine
For observers of corporate India, the sprawling Adani group is something of a black box.
Despite being in long-gestation, low-margin sectors like infrastructure – and a much lower group EBITDA than peers like Reliance and Tata – the group has grown furiously. Not only did it direct cash into existing businesses and loss-making arms, it simultaneously acquired rival firms – through buy-outs like Gangavaram and asset sales by India’s bankruptcy courts – and announced large forays into sunrise sectors like green hydrogen, renewables manufacturing and defence. Most recently, it acquired a large media company, NDTV, and added to its considerable presence in the cement sector by buying Sanghi Cements.
Since January, when Hindenburg Research released its report on the Adani group, the spotlight has turned onto the financial arrangements that have enabled this dizzyingly rapid expansion. Hindenburg alleges Adani has used a clutch of offshore entities to push up its share prices, a charge the company denies. In the past, the company has pledged shares to raise debt. It has used international bonds to mop up additional debt. Those borrowed sums are used for not just capex but, as Hindenburg charged, also to smoothen out earnings – and to launch new businesses (Adani has used borrowed funds as equity for new businesses).
An expert panel tasked by the Supreme Court to look into some of the questions raised by Hindenburg concluded that there was no evidence to sustain the charge of stock manipulation. It also concluded that there had been no regulatory failure on the part of the Securities and Exchange Board of India – though repealed provisions had hampered SEBI’s ability to investigate what it noted were “opaque structures” that the Adani group was accused of using.
In the wake of Hindenburg, some investors have highlighted the strength of Adani’s underlying assets. Supporting the group with both cash flows and hard assets, acquisitions account for a large chunk of those assets. As Hindenburg Research says in its report, “(APSEZ) is… the only listed (Group) entity which seems capable of consistently generating substantive positive cash flow: approximately INR 52 billion (US $640 million) as of 31 March, 2022.”
Central to APSEZ’s cash flow is the array of strong assets the company has assembled. Take Adani Ports. Its first port came up in 1998 (Mundra, Gujarat). In the next 14 years, it added two more ports, both in Gujarat – Dahej (2010) and Hazira (2012). Thereafter, its growth has been quicksilver. It added Mormugao (2013); acquired Dhamra from L&T and Tata (2014); set up Tuna Tekra and acquired Katupalli from L&T (2015); signed Ennore (2018); bagged Vizhinjam (2019); acquired Krishnapatnam (2020); bought Dighi through India’s bankruptcy courts and acquired Gangavaram (2021). As this article was being written, the conglomerate bagged the port at Karaikal through bankruptcy proceedings. In all, then, the Adani group has 13 ports – of which, six have been acquired – in India. It also has Haifa in Israel and a terminal in Colombo.
These acquisitions are significant given the history of the sector. The first generation of India’s ports – like Kandla, Paradeep and JNPT – were built by the state. The second generation – like Mundra, Gangavaram and Krishnapatnam – were built after liberalisation as public-private partnerships. Reflecting both cronyism and the need to attract private sector participation in what were untested and risky greenfield projects, the Union and state governments offered generous incentives to promoters. If a project matured and took off after its difficult gestation period, the promoter stood to make a handsome profit. As would the government, which retained a stake in the partnership.
Krishnapatnam’s agreement with the Andhra Pradesh government, for instance, not only gave its promoters, the Navayuga group, an exclusive zone – in which no other port could come up – of 30 kilometres on either side, it also pegged the concession fee payable to the state at just 2.6% (of gross income) for the first 30 years. As the PIL filed in the Andhra Pradesh high court says, the average revenue share offered by other ports/terminals on India’s eastern shore stands at 33.15%. “The revenue share offered in the case of already established major ports was as high as 52% since there is already established infrastructure, ready customer and infrastructural linkages with minimal risk to the bidder/terminal operator,” the petitioners wrote in their affidavit.
A 2015 CAG report on PPP projects in major ports contains similar numbers. In 2005, Dubai Ports International bagged a tender to build and run a container transshipment terminal at Cochin Port Trust by offering a revenue share of 33.3 percent of gross revenues. In 2009, JNPT awarded the project to build a container terminal to PSA Mumbai Investment after it promised a revenue share of 50.828 per cent.
Gangavaram’s terms are the same as those of Krishnapatnam. “Its initial concession [in 2002-03] was given on the basis of a DPR,” or detailed project report, a senior executive at a private port in southern India told The Wire on condition of anonymity. Defending the low revenue share for the government of 2.1% that was written into the initial concession, he said, “There was no asset. Also, these concessions were signed at a time when the economy was growing at the ‘Hindu’ rate of growth.”
By the time Adani acquired Gangavaram, however, the situation had changed. The port had become a mature concession with ongoing operations, an established market position, monopolistic cash flows and vastly transformed surroundings as an industrial area developed around the port. And yet, by acquiring the concession through Gangaravam, Adani will give the Andhra Pradesh government a revenue share of just 2.1 per cent till 2039, i.e. during “the first 30 years of the Concession Period, and at double the rate for [two] extended spells of 10 years each.”
The economics of the deal needs to be underlined. According to the Adani Ports website, Gangavaram can handle 60 million tons of cargo in a year. If Adani charges Rs 300 per ton of cargo, it will generate a top line of Rs 1,800 crore. If Gangavaram settles at similar operating margins like the rest of Adani Ports (44.22%) – its EBIDTA margins in FY21 stood at 59% – it will make Rs 795.9 crore as operating profit. The government’s revenue share, however, will stand at just Rs 37.8 crore.
Effectively, then, the Adani group has acquired a mature asset on greenfield terms. Profits that should have gone to the initial risk-taking entrepreneur or the state government – which could have earned a fatter revenue share by re-tendering the concession as a mature PPP – flow to Adani instead.
The centrality of concessions
Since they become highly profitable after the first ten or so years, matured concessions are not always up for sale. And yet, Adani has picked up six ports in just nine years. It has done so, in the case of Gangavaram, without paying a high EV/EBIDTA multiple either.
In other words, while the company paid Rs 6,200 crore for Gangavaram, after the acquisition, at a multiple of 20, the port could arguably be estimated to be worth Rs 12,680 crore. By pledging these shares, the group could conceivably raise more cash than what it had paid Raju – and then repay those loans through Gangavaram’s cash flows.
The Adani Group told The Wire it has “proven its expertise in designing, building and managing world class infrastructure projects” and that, “in addition to greenfield projects, the Group has also relied on strategic acquisitions to expand its business. Our business expansion decisions emerge from a careful evaluation of the state of the potential acquisition, its prospects for growth and its synergies with our existing operations, through fair, transparent and well-established business processes. These are business transactions handled professionally, with mutual respect and trust.”
The second part of this article, ‘Adani’s Acquisitions: Inside the Company’s Growth Machine’, can be read here.
The Adani Group’s response to The Wire’s questionnaire sent as part of the reporting for this series can be read in full in the second part.
M. Rajshekhar is an independent reporter studying corruption, oligarchy and the political economy of India’s environment. He is also the author of Despite the State: Why India Lets Its People Down and How They Cope. Reporting for this project was supported by Pulitzer Center.
Note: This story was edited at 10:10 am on August 25, 2023 to add the date on which The Wire’s questionnaire to Warburg Pincus was sent and at noon to include a para from Adani’s response to The Wire’s questions, which has been carried in full in Part 2