India Inc takes the sale route to beat crisis

After many denials and protracted bargaining with several buyers, pharma major Wockhardt sold 10 of its hospitals to Fortis last week. The hospitals sale came within two months of the company selling its German business Esparma for an undisclosed amount.

Wockhardt is in good company. Many others, including DLF, Suzlon, UB, the Tata and the Aditya Birla Group are selling stake or assets to reduce debt and the strain on their balance sheets. That’s because they have been hit either by slowing sales, or have a big exposure to markets in the West where demand has contracted sharply as a result of the economic downturn.

The range of businesses on the sale list is wide: from hotels (DLF) to animal healthcare (Wockhardt) to electric insulators (the Birla Group), most of which are being termed non-core by the sellers.

Analysts expect the sale season to be a prolonged one. Badri Narayanan, partner, mergers and acquisitions at Ernst & Young, said, “with the economy reviving and more buyers coming to the fore, we expect the trend of selling assets to accelerate.”

“Promoters are losing their loyalty,” said Harish H V, partner Grant Thornton India. “The trend of restructuring the business would accelerate as the companies make themselves ready for the changing times,” he said.

DLF’s promoters sold 10 per cent in the company in May and are selling assets like hotels and insurance as the real estate major plans to raise Rs 10,000 crore in three years through asset sales to reduce its debt burden of Rs 14,000 crore.

Suzlon is trying to sell its gearbox making subsidiary, Hansen Transmission, to reduce its Rs13,000 crore debt, part of which it has to repay soon. In January, Suzlon had sold 10 per cent stake in Hansen to a UK fund for Rs 60 crore. Suzlon owner Tulsi Tanti has also been selling shares to meet fund requirements.

While Vijay Mallya’s UB Group is looking at a strategic sale of its equity in United Spirits, a Tata group company like Tata Motors is selling its cross-holdings in other group firms to meet the loan repayment schedule for buying Jaguar Land Rover.

Many of them had over-leveraged themselves. “Most of these companies were facing severe debt issues and had to address it. Equity is the only permanent effective way to address it, and the present market situation both from liquidity, demand and valuation provide that (opportunity) to the companies,’’ said an investment banker.

Sourav Mallik, executive director — M&A, Kotak Investment Banking, said companies (which are selling stakes or assets) have been hit by a combination of factors. ‘’Either they have over-reached beyond what is available financially, acquired debt which is not available for refinancing, or went for too many acquisitions. The downturn was prolonged and significant, which companies didn’t anticipate.

Prabal Banerji, Group CFO, Hinduja Group, said the other problems were the overseas debt market is not there, and the cost of Indian debt is very high while product markets continue to be volatile (real estate). ‘‘Companies are no longer raising debt but trying to raise equity, reduce debt and finance long-term requirements of capital,’’ he said.

Partly, India Inc has to blame itself. When the going was good, companies expanded like there was no tomorrow. They bought expensive assets (Novelis, Corus or Jaguar Land Rover), and, worse, funded these almost entirely through debt. When the markets in the West began contracting, the acquisitions began to weigh down on the groups.

Arvind Parakh, director, JSL Ltd, said that Indian companies were lucky that they were living in a zero per cent world. “Had interest rates been 5-6 per cent (in the West), the interest burden would have created a bigger hole in many balance-sheets and led to downgrading of stocks,” he said.

Parakh said people would have to rethink their entire strategy, deleverage, or see if they had the ability to sustain the losses. “If they can sustain the cash losses, the future is bright.’’

The problems have been compounded by a contraction in product markets, and equity dilution or asset sale is the only way to reduce debt. Take DLF, for instance. If there’s no demand and its revenues and profit dry up, it doesn’t have any other option but to dilute equity or sell its assets to repay the large debt it has accumulated.

‘‘If the product markets were doing well, this debt would not have looked excessive. With the contraction in the business, the leverage looks large,’’ says an investment banker with Yes Bank. ‘‘If end-product markets don’t revive in the next one-and-half years, you will see many more business on sale where leverage is large,’’ he warned.