Asset sales do little to cut debt pile of conglomerates

India’s most indebted business houses have made little headway in the past four years in their attempts to improve their financials through assets sales and have raised just a fifth of the debt they piled up.

The urgency to sell businesses to generate cash has increased as banks try to clean up their own books of bad loans, but concluding sales is only getting tougher with sellers far outnumbering potential buyers.

The 10 debt-heavy corporate groups listed in the Credit Suisse House of Debt report have sold and announced the sale of assets adding up to Rs.1.33 trillion since 2012, according to Mint research.

This amount was arrived at by combining the enterprise value of the deals closed and transactions in which agreements have been signed. The amount raised through assets sales is only 20% of the Rs.6.52 trillion in total debt on the books of these groups as of March 2013.

The money raised appears even more insignificant when compared with the Rs.7.33 trillion in debt that these firms had as of March 2015.

Debt levels have risen rather than fallen over the last three years and the debt-servicing ability of many of these firms has also deteriorated, Credit Suisse pointed out in the latest edition of its House of Debt report, released in October 2015.

The 10 groups in the House of Debt report are the Reliance Group, Lanco Group, Jaypee Group, GMR Group, Videocon Group, GVK Group, Essar group, Adani Group, JSW Group and Vedanta Group.

“Nobody at that point of time wanted to sell. No one thought things will deteriorate to such an extent. Banks also continued to lend to projects thinking there will be a turnaround in the economy,” said Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, an arm of Kotak Securities Ltd.

“It is a combination of miscalculation by banks and companies in terms of prolonged downturn in the economy. The metal sector took a further hit due to low commodity prices and infrastructure sector was hit due to project delays and high leverage.

“Today, the question is where are the buyers, they are all in the same boat. There have been deals in cement and power and we may see some more, but steel is in a bad shape,” he added.

Of the 10 groups, the Anil Ambani-led Reliance Group and Manoj Gaur-led Jaypee Group will have generated the maximum from asset sales if the announced and planned assets sales are completed.

Both groups had a wider range of businesses under their umbrella, which allowed for sales of assets that were not operating in stressed sectors.

The Reliance Group, for instance, has monetized its holdings in the multiplex and cement sectors. It is also planning to sell its roads portfolio, in which there is relatively stronger investor interest.

Since 2012, Reliance has sold assets worth Rs.43,911 crore. It is now planning to sell its operational portfolio of road assets, in which the company has invested Rs.8,800 crore.

An email sent to a group spokesperson on Friday remained unanswered. The company has a stated policy of exiting non-core businesses. In September 2015, speaking at the annual general meetings of different group companies, Anil Ambani detailed the plan to sell non-core assets to reduce debt.

In the case of the Jaypee Group, as pressure from lenders has built up, the group has decided to exit its entire cement portfolio. On 28 February, Jaiprakash Associates Ltd agreed to sell its cement portfolio to UltraTech Cement Ltd forRs.16,500 crore.

The deal, once concluded, will take the total amount raised by the Jaypee group through asset sales to Rs.32,240 crore.

But Jaypee may have yielded to calls to sell its cement portfolio a little too late, which meant that the price it got for these assets wasn’t as high as it would have hoped for.

Assets may attract lower valuations if there has been a prolonged period of stress, said Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd.

“The Jaypee group, for instance, sold its hydro power assets at better valuations closer to market value, while the cement asset sale announced recently at $110 per tonne is lower than market value of $140 per tonne,” he said.

In September 2015, the group concluded the sale of two hydropower projects to JSW Energy Ltd for Rs.9,200 crore.

Asset sales by the Reliance and Jaypee groups taken together account for about 57% of the Rs.1.33 trillion in asset sales across the 10 groups. The two groups accounted for 27% of the total debt of the 10 groups as of March 2015.

Other groups continue to drag their feet on reducing their debt.

The GVK Group has so far sold no assets expect development rights to one of its land parcels in Mumbai for Rs.580 crore. As of March 2015, the group had total debt of Rs.33,933 crore.

“GVK is looking at various options for reducing its debt in the coming months, but it’s a bit too premature to reveal any further details,” said a spokesperson for the group in an email response to Mint.

The GMR group since 2012 has sold assets worth about Rs.11,000 crore, according to the October edition of the House of Debt report.

According to a company spokesperson, since fiscal 2012, the group has raisedRs.8,750 crore in equity capital and reduced debt of about Rs.6,180 crore by way of various initiatives. The spokesperson said that net debt of the group in fiscal 2012 was Rs.29,300 crore. This number rose to Rs.40,000 crore at the end of 31 December 2015.

“The debt of the group has peaked out by March 2015 and going forward, the debt level is expected to reduce as no major capex are being incurred,” said the spokesperson in an e-mailed response.

In the case of Lanco Group, asset sales have yielded about Rs.6,950 crore, with most of this coming from the sale of the Udupi power asset to Adani Power Ltd forRs.6,300 crore in April 2015.

An e-mail sent to the spokesperson of Lanco Group did not get a response.

Among the entities that remain in the market to sell assets and bring in fresh equity capital is the Essar group. In November, the Ruias-controlled Essar Steel Ltd said the company had appointed ICICI Securities Ltd and SBI Capital Markets Ltd as advisers to help identify and induct strategic or financial investors in the company. There has been no progress on this.

Since 2012, the group has monetised or announced plans to monetise assets worthRs.9,380 crore. It had debt of Rs.1.01 trillion crore as of March 2015.

“The primary source of repayment of loans is cash flow from operations. In addition, as a prudent measure, we keep identifying other avenues like stake sale in businesses or inducting strategic partners and sale of non-core assets, to further reduce debt,” a spokesperson for Essar group said.

But monetizing assets will not be easy, particularly in sectors such as steel.

“Asset sales in the infrastructure, power, textiles and metals sector would not be easy, valuation looks difficult,” said Madan Sabnavis, chief economist at Care Ratings.

Most of the 10 indebted corporate houses have some exposure to one or more of these sectors.

To be sure, not everybody is in the market to sell. Some groups such as the JSW Group and the Adani Group have actually bought assets from the other indebted corporate houses in the past few years.

In September 2015, JSW Energy Ltd bought the two hydro assets from Jaypee Group’s Jaiprakash Power Ventures Ltd.

Since 2012, the JSW Group has not sold any asset even as its debt rose from Rs.46,118 crore as of March 2013 to Rs.58,172 crore as of March 2015. The management has so far not indicated any plans to sell assets.

Gautam Adani-led Adani Group has also not sold any assets and has instead bought the Udupi power asset from the Lanco group.

Emails sent to spokespersons for the JSW Group and Adani Group on Friday remained unanswered.

Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.

Source: Live Mint, Mar 16, 2016.

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