Adani/TotalEnergies: French company’s due diligence was inadequate

Until this year Indian billionaire Gautam Adani had star quality, and with it a gravitational pull. That force attracted a top corporate investor TotalEnergies into the Adani orbit. It has invested $3.1bn in various Adani Group companies since 2018, including into the listed Adani Total Gas and Adani Green Energy. Both shares have halved in value since the publication of a critical report on the Adani Group by short seller Hindenburg Research last week.

This is embarrassing for TotalEnergies. Concerns about Adani had surfaced in August, yet the French company only commented on Friday. Claims that its exposure only represents about 2 per cent of capital employed should not diminish shareholder concerns.

These investments, public and private, focused on helping India reduce its carbon footprint. Coal supplies 44 per cent of the country’s energy consumption, according to the International Energy Agency.

TotalEnergies bought over 37 per cent of the locally listed Adani Total Gas in October 2019 to sell LNG into India. Despite this month’s fall, its share price remains well above TotalEnergies’ likely entry price. Also, Adani Total Gas appears to have minimal leverage with net debt of worth $100mn, about the same as its trailing ebitda.

However, the French energy group could have a problem with Adani Green Energy. The former acquired a 19.75 per cent interest in this company, one of India’s largest renewable power producers, in January 2021. Then that was worth about $4bn. As of Friday that was worth 11 per cent less.

Adani cannot afford to lose TotalEnergies’ support. Though profitable, Adani Green Energy is highly leveraged at 14 times its historical ebitda with rapidly rising capital spending. Moody’s noted in August that a key credit risk factor for Adani Green Energy, given its debts, was any reduction in the shareholding by TotalEnergies.

Adani’s star shows every sign of burning out. TotalEnergies must not only consider marking down its exposure to the Adani Group, but should also rethink its India energy strategy.