The report titled ‘Adani Group: Deeply Overleveraged’ states that over the past few years, the Gautam Adani-led group pursued an aggressive expansion plan that has pressured its credit metrics and cash flows. The Adani Group has seven listed entities on the Indian stock exchanges.
“In a worst-case scenario, overly ambitious debt-funded growth plans could eventually spiral into a massive debt trap, and possibly culminate into a distressed situation or default of one or more group companies,” the report said.
What is a company ‘over leveraged’?
Financial Leverage=Operating Income/Net Income
Therefore, a company is said to be overleveraged if its running expenses overshadow its income, and it cannot pay interest on its various debts. An overleveraged company runs the risk of bankruptcy if their sales falter or their profits drop.
When is a company ‘over leveraged’?
A company or business is said to be “over leveraged” if it has unsustainably high debt against its operating cash flows and equity. Such a company would find it difficult to make interest and principal repayments to its creditors, and may struggle to meet its operating expenses as well. In the latter case, the company may be forced to borrow even more just to keep going, and thus enter a vicious cycle. This situation can ultimately lead to the company going bankrupt.
What happens when a company is over leveraged?
Being over leveraged constraints companies’ growth plans. If payments are not paid in time, it may lose assets, which may be taken over by creditors, who may also launch legal proceedings to recover their money. The inability to repay existing debts puts limitations on future borrowing by the company. Also, an over leveraged company will find it extremely difficult to get in new sets of investors, all of which will add up to further diminish its financial present and future.
This case is looks like 2008 American lehman brothers case...
Tweet of Author Rejimon Kuttappan on Fitch report :-
Rejimon Kuttappan
@rejitweets
Many biggies fell because they started to invest in unrelated business.
Fitch says Adani is also doing the same.
Scary because, he has to pay a lot to the country.
If he falls, then its going to shake India.
And Mann Ki Baath won't settle the issue.
Thank You
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