CreditSights sheepishly admits errors in Adani leverage story

In the business of equity and credit analysis, mistakes do happen. Your view are based on a certain set of assumptions and such assumptions may be proved wrong. That is legitimate. However, what happened in the case of CreditSights is almost looking like something out of the ordinary. It is surprising to see that CreditSights, which had raised several red flags about the extent of leverage in the Adani group, has suddenly done a volte face. Whether this volte face was done under pressure or under delayed realization may never be known. 

First a quick background to this volte face. About 2 weeks back, CreditSights, the research arm of Fitch Ratings, had brought out a rather scathing report on the Adani group. The gist of the report was that the Adani group was dangerously overleveraged. It had used a series of ratios to underline that the Adani group strategy of inorganic growth with the help of debt funding may compromise the financial stability of the group. About 2 days back, the Adani group issued a 15-page response to the excess leverage report of CreditSights.

In its detailed response to the CreditSights report, the Adani group had pointed out that contrary to the concerns raised in the CreditSights report, the leverage of the Adani group had progressively come down. In addition, the Adani group response also pointed to some factual calculational errors done in the CreditSights report which had overstated their debt levels. In response, CreditSights just sheepishly accepted it had made errors in the Adani leverage story. Whether that is the story, or there is more to it, we will leave aside for now.

How the Fitch unit did a volte face

CreditSights, the debt research unit of Fitch Group, had raised red flags over Adani Group being over leveraged. However post the response from the Adani group, CreditSights admitted that it had discovered calculation errors in its recent debt report on two Adani Group companies. It is not clear why CreditSights did not do the due diligence earlier or seek inputs from Adani group earlier. CreditSights reiterated that latest corrections did not change its investment recommendations; but the damage had been largely done.

In a rapid come down from its position, CreditSights has now accepted that they will reconcile their calculations with the Adani Group’s presentation. Apparently, CreditSights claims to have spoken to the Adani group CFO and its head of corporate finance earlier. It is hard to fathom why these discrepancies did not get highlighted at that point of time. If these are mistakes, then these are huge mistakes done by the research team at CreditSights.

CreditSights claims it had discovered calculation errors in two Adani Group companies viz. Adani Transmission and Adani Power. In the case of Adani Transmission, CreditSights corrected its EBITDA estimates from Rs4,200 crore to Rs5,200 crore. That is 24% off. For Adani Power, the gross debt estimate had been corrected from Rs58,200 crore to Rs48,900 crore. This appears to be a rapid comedown for CreditSights after it had claimed with aplomb that Adani group could “spiral into a debt trap and possibly a default”.

Most of the large companies do tend to put pressure on analysts who bring out scathing reports in a number of ways, including loss of client business. In this case, it does look like CreditSights has buckled under pressure. Fitch must clarify how it got things so very wrong. Either its analysts made a mess of the numbers or the pressure was too much. Either ways, it does not speak too well on the research precision or the independence of Fitch as a research and rating agency. Clearly, the last word on this subject has not been said.