After the acquisition spree during the ‘India Shining’ phase, home promoters are now back to investment bankers, this time to try and sell assets.
The Future Group’s decision to bring in the Aditya Birla Group as an investor into its retail venture, Pantaloon, is 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 the insurance business. This would help the company pare its overall debt of Rs 7,000 crore.
Anil Ambani’s Reliance Group has also been in the market to sell 26 per cent stake in its telecom company, Reliance Communications. It is still on the lookout for large-ticket investments in its telecom tower company, Reliance Infratel. The group has already sold 26 per cent stake in Reliance Capital to Nippon Life.
| LOOKING FOR BUYERS | |
| Seller | Asset for sale |
| RCom | 26% stake in the company and tower business |
| Future Group | Insurance business, financial services |
| Lanco Infra | Stake in power business, wind power assets |
| GVK | Stake in airports business and Hancock Coal |
Debt hangover
Many more stretched groups and companies are going 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 this is due to a combination of many factors. “Companies had gone for significant expansion and capital expenditure. Now, these companies are over-leveraged. There is limited funding, either in the form of debt or equity,” he explained.
The GMR Group has managed to get investors into its airports and power business in the past two years. It also boughtying 50 per cent stake in Dutch power company Intergen in 2008 and sold it in 2010 at a small profit. Not only did the company reduce debt, but also released cash for its core infrastructure business. Suzlon Energy has sold its stake in Hansen and used the cash to get complete control over another international subsidiary, RePower in Germany.
Real estate major DLF exited its asset management joint venture with Prudential Financial, and has sold its multiplex chain in the past two years. It is also known to be looking at other deals to raise cash by selling a key hotel asset, Aman Resorts, apart from selling land lots in Delhi. DB Realty has also talked about looking for investors in some of their projects.
New projects and expansion were planned as economic growth was forecast to grow at a strong eight to nine per cent yearly. These numbers have been pared substantially, changing the financial dynamics of original investments. A number of companies took huge debt to create assets that would generate value over the next three to four years. As business fundamentals changed, cash flow slackened, though debt 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 Rs 3,13,929 crore in the boom time year of 2006-07. It is now Rs 8,00,294 crore, finds the by BS Research Bureau (updated for the latest results declared by companies).
It’s not the big boys alone. Mid-cap companies, too, have stretched themselves. Data from CRISIL shows the average debt size of mid-cap companies has doubled since 2007. In the past two years, their interest payment cover 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.
Then & now
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 some more investment decisions were made during 2009 and 2010. “Companies had planned disproportionate expansions as they thought the worst was 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 the gloomy international environment. “The global context, too, is not favourable. No one thought 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.
Equity markets, which tasted new highs during the boom time, have also been indifferent, leaving promoters with a huge gap in 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.
Among 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 for an investor in its Australian mine, Hancock Coal. Lanco Infratech 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.
