After the acquisition spree during the India Shining phase, Indian promoters are now back to investment bankers — this time to try and sell assets.
The Future Group’s move to bring in Aditya Birla group as an investor into its retail venture Pantaloon is just one in a long list of such sell-off moves. In fact, Future Group Founder Kishore Biyani is also known to be looking to sell investments in joint ventures and non-core businesses like Future capital and insurance business. This would help the company pare down its overall debt of around Rs 7,000 crore.
Anil Ambani’s Reliance Group has also been in the market to sell 26% stake in its telecom company, Reliance Communications, and is still on the lookout for large ticket investments in its telecom tower company, Reliance Infratel. The group has already sold 26% stake in Reliance Capital to Nippon Life.
Many more stretched groups and companies are going in for stake sales, as boom time growth hangover is catching up with many, in the form of mounting debt. Amitabh Malhotra, managing director at investment banking firm Rothschild, says that this is due to a combination of many factors. “Companies have gone in for significant expansion and have gone in for capital expenditure. Now, these companies are over-leveraged. There is limited funding either in the form of debt or equity,” he said.
GMR group has managed to get investors into its airports and power business in the last two years. It also went through the cycle of buying 50% stake in Dutch power company Intergen in 2008, and sold it in 2010 at a small profit. Not only did the company reduce its debt, but also released cash for its core infrastructure business. Suzlon Energy too has sold off its stake in Hansen, and used the cash to get complete control over yet another international subsidiary, RePower in Germany.
Real estate major DLF is looking at selling some of its stake in the asset management joint venture with Prudential Financial. It was also in talks with potential buyers to sell its exhibition unit-- DT Cinemas. DLF was close to signing a deal with PVR to sell its exhibition unit but the deal was called off due to valuation differences. The group is also understood to be looking at raising cash by selling its hotel asset, Aman Resorts, apart from selling land parcels across the country and getting out of its Wind business. DLF has a debt of around Rs 22,000 crore, and it has been reported that the company wants to reduce this debt by Rs 6,000 crore by 2013.
Similarly, DB Realty is believed to have been looking at getting investors in some of its projects in Mumbai.
New projects and expansions were planned as the economic growth was forecast to grow at a strong 8-9%. The same numbers have been pared down substantially, changing the financial dynamics of original investments. A number of companies took huge debts to create assets that would generate value over the next three-four years. As business fundamentals changed, cash flow slackened, though debts remained constant. “Promoters went overboard, economists went overboard in terms of the BRIC growth story and foreign investors lapped it up,” said Sonam Udasi, head of research at IDBI Capital.
The total debt of BSE 100 companies (excluding banks) has gone up 1.5 times since 2006-07. The total debt numbers was at around Rs 3,13,929 crore in the boom time year of 2006-07. This number has swelled to Rs 8,00,294 crore currently, as per BS research (updated for latest results declared by companies).
It’s not the big boys alone. Mid-cap companies too have stretched themselves. Data from Crisil shows that the average debt size of mid-cap companies has doubled since 2007. In the last two years, their interest payment cover has declined by 55 basis points, indicating the pressure on the ability to service the debt. “Profits have come under pressure with increased interest costs and higher commodity prices,” said Subodh Rai, senior director, Crisil Ratings.
Jagannadham Thunuguntla, head of research at SMC Global Securities, terms these aggressive expansions “bull market blunders”. “During the boom of 2006-07, many Indian corporations went on an overdrive and in an urgency of capturing growth they went ahead and invested in different businesses. For this, many went ahead and took debt at high interest rates,” he said.
Bharat Banka, chief executive officer at Aditya Birla Capital Advisors, said that some more investment decisions were made during 2009 and 2010. “Companies had planned disproportionate expansions as they thought the worst is behind them,” he said.
But why are companies deciding to sell off now? Lesser bullish promoters are going by the current prediction of slower growth in India, as well as gloomy international environment. “The global context too is not favourable. No one thought that this could happen to an emerging economy,” said Udasi.
As companies go through such re-assessment of their portfolio, Banka calls exiting a sensible strategy. “If one part of a body is injured and cannot be repaired, then you should go out and cut it off,” he said. Some of these deals have taken place in 2010.
Equity markets, which tasted new highs during the boom time, have also been indifferent, leaving promoters with a huge gap in terms of funding avenue. “Some companies had concrete plans to tap the market. Many were planning initial public offers to raise more than $1 billion but they have not happened,” said Banka.
Amongst sectors, infrastructure and real estate are among the worst hit. GVK Power and Infrastructure is looking to induct a partner into its airports business, and also looking for an investor in its Australian mine - Hancock Coal. Lanco Infratech too is scouting for an investor in its power business, and a buyer for its wind power assets.
“In general, most companies in the construction sector are more leveraged as working capital cycles are getting longer and project executions are taking time,” said Banka. Delays on account of land acquisitions and government clearances, have led to excess leverage.
Looking for buyers:
* RCom's 26% stake in the company and tower business
* Future Group's insurance business, financial services
* Lanco Infra's stake in power business, wind power assets
* GVK stake in airports business and Hancock Coal