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Illustration: Binay Sinha
Indian conglomerates, including Adani, Reliance Industries, Tata, and JSW, are poised to invest $800 billion over the next 10 years, almost triple what they spent over the prior decade. Almost 40 per cent of estimated spending will be in new businesses like green hydrogen, clean energy, semiconductors, and electric vehicles (EVs), according to S&P Global Ratings.
The opportunity is huge. But this also presents risks—execution risk, and the risk of borrowing heavily on technology with unproven commercial payoff, such as green hydrogen.
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The rating agency in its report on Indian conglomerates said as absolute debt levels rise, firms will need to continuously strengthen their core businesses to maintain their credit profiles. Any underperformance during the investment phase would likely hit credit metrics.
The Vedanta, Tata, Adani, Reliance, and JSW groups alone are preparing about $350 billion of investment in these sectors over the next decade, said Neel Gopalakrishnan, credit analyst, S&P Global Ratings.
Many of the other conglomerates will focus more on their established businesses, with an emphasis on boosting scale and profitability. The Birla, Mahindra, Hinduja, Hero, ITC, Bajaj, and Murugappa groups have a record of conservative growth, it added.
Indian conglomerates will likely invest about $400-500 billion over the next 10 years in existing businesses if they continue investing at a similar rate as seen over the past two years.
Most new biz investments to need external funding
S&P Ratings said Tata Group stands out among the conglomerates reviewed by the agency because it generates substantial positive discretionary cash flow and holds large legacy cash balances.
The rest of the reviewed conglomerates spend most or all of their operating cash flows on capital spending and dividends. The agency said it believed a large part of their investments in new business areas will be funded externally. The upshot is that existing businesses should be able to grow without much additional debt.
Assuming consistent earnings before interest, taxes, depreciation, and amortisation (Ebitda) growth over the next decade, up to half of the new investment can be funded without increasing leverage. The rest will be funded using a combination of debt and equity.
Some companies have means to reduce incremental debt. For example, Tata Group, which aims to spend heavily on expanding Air India’s fleet, could use a sale-and-leaseback arrangement with lessors for many of its planes. This will reduce debt and potentially fund a part of the planes retained on the balance sheet.
Groups will likely be ready to scale back their investment if an emerging technology fails to live up to its promise. Adani, for example, intends to spend only about $10 billion on its Phase-I green hydrogen production, for which it targets 1 million tonnes of capacity per year, starting in 2027, it added.
First Published: Oct 14 2024 | 5:47 PM IST
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