Adani pledged all $13 billion of its holdings in ACC and Ambuja Cements shares

It is rather ironic that just a couple of weeks after the CreditSights issue appears to have died down, the Adani group has gone ahead and pledged almost its entire stake with the banks which had funded the takeover of shares. Obviously, the banks must have insisted on collateral to fund the Ambuja deal but the size of the pledge is quite gargantuan at $13 billion or nearly $1.04 trillion. This is the largest single share pledge ever done by any Indian promoter at any point of time. Adanis have almost pledged their entire stake in the two cement companies viz. ACC and Ambuja Cements.

Incidentally, one of the risks highlighted by CreditSights in its report about a month back was that the high level of debt would make the group vulnerable and one of the possible scenarios hinted at by CreditSights was the likely impact if the shares held by the promoters have to be pledged to the banks. One can argue that Adani and Ambuja Cements are sound shares and hence are not as volatile as many others have been in the. However, the problem with pledging is that even a correction of 10-15% can invite demands for either putting in more collateral or reducing loan amount. That is when it gets sticky.

The pledge of shares has come at a time when the Adani group is not only going aggressive on green energy but also in a very big way on cement. While Adani group has largely funded its acquisition of ACC and Ambuja through bank borrowings, they are going to need more funds as the group now plans to double the cement capacity from 70 million tonnes per annum (MTPA) to 140 MTPA by 2027. This is not counting the $70 billion of funds that Adani group has already earmarked for green energy. All that is going to cost a lot of money.

While the open offer for ACC and Ambuja may not have been too successful, the shares acquired by Adani from Holcim itself is worth $13 billion. That is what the Adani group has pledged against the loans extended by the banks. As a result of this pledge, nearly 57% of the outstanding shares of ACC and 63% of outstanding shares of Ambuja Cements have now become encumbered. The filing was made by Deutsche Bank, Hong Kong branch, which was one of the key financiers of the Adani acquisition of the shares of ACC and Ambuja Cements. 

However, this deal is once again likely to refresh the debate over the indebtedness of the group. The original CreditSights had gradually taken a back seat after Fitch also decided to buy peace. However, the market is not likely to take this massive pledge too lightly as it is likely to raise some very serious questions about the impact of a correction in the price of ACC and Ambuja, on shareholder wealth and also on the debt collateral of Adani group.

The acquisitions ACC and Ambuja Cements give the Adani Group access to about Rs11,000 crore in free cash. However, that is just a fraction of the loan taken so it can only be of help partially. Adani group will also infuse another Rs20,000 crore through the issue of warrants but all that is going to put a lot of pressure on the debt position of the company. Of course, we cannot ignore the basic fact that both ACC and Ambuja have rallied quite sharply in the last few days and that makes them all the more vulnerable to pledge volatility.

The aggression of the Adani group has been quite evident in the last few years and much of that has translated into shareholder value. The Adani group has become the most valuable group, overtaking the Tatas in the last few weeks. However, with great growth comes great accountability and the onus is on the Adani group to ensure that it is able to carry the shareholders along. It has created tremendous wealth for investors and now it has to be careful that it is not destroyed. The pledging of $13 billion of shares of ACC and Ambuja Cements, may just be the kind of risk factor that they would have wanted to avoid.