Kishore Biyani is smiling again. The poster boy of the retail revolution in India is starting a new business called Big Bazaar Direct
. The e-commerce initiative involves setting up a network of
franchisees who will take the Biyani-led Future Group's Big Bazaar
retail chain to the doorsteps of consumers. The venture, says the
company, will usher in the next retail revolution. While that may be a
tad too optimistic, the new business certainly means Biyani has overcome
the difficulties he was facing until recently.
What makes Biyani
bullish? Until a year-and-a-half ago, Future Group was burdened with
massive debt. But the company was not generating enough cash. That not
only made repaying the debt difficult but also put a question mark on
the company's survival. What did Biyani do? In April last year, he sold
his profitable Pantaloon retail business to Aditya Birla Nuvo for Rs
1,600 crore. A month later, he sold his financial services business to
private equity player Warburg Pincus for Rs 590 crore. And this year, he
sold a 22.5 per cent stake in his life insurance joint venture with
Italy's Generali for Rs 300 crore. The sale of assets helped him prune the debt to Rs 3,500 crore from Rs 10,000 crore two years ago, and put him back on track.
In
debt-laden Corporate India there are several instances like the Future
Group. While financially stressed companies globally are shedding assets
- French retail giant Carrefour and Canadian gold producer Barrick Gold
to name two - the trend is most visible in India. Corporate houses such
as GMR Group, Anil Ambani's Reliance Group, Videocon Industries, Adani
Group, GVK Group and Jaiprakash Associates have either sold some assets
and stakes in the companies or are planning to do so in order to ease
their debt burden.
The debt trapA recent Credit
Suisse report shows the collective borrowings of 10 large corporate
houses rose 15 per cent in 2012/13. Anil Ambani's Reliance Group has a
debt of Rs 1,13,543 crore on its books while London-based mining tycoon
Anil Agarwal's Vedanta Group owes Rs 99,610 crore (see A Mountain of
Debt). What raises alarm bells is the worsening interest coverage ratio
at some companies. The ratio indicates a company's ability to pay
interest on its loans. Companies with a ratio of more than one are
considered to be generating enough operating income to meet their
interest obligations. The ratio was 0.7 for GMR, 0.6 for Lanco
Infratech, and 0.4 for GVK.
The interest coverage ratio is
worsening because, while the debt is growing, interest rates remain high
and revenue growth is slipping. The weighted average lending rate of
state-run banks was 12.06 per cent in June 2013, compared with 12.65 per
cent in March 2012, despite the central bank cutting its main lending
rate by 125 basis points. According to ratings firm CRISIL Ltd, revenue
growth at 1,500 listed companies was 15 to 18 per cent in 2011/12 but
has fallen steadily since then. "Growth has plummeted to 3.8 per cent in
the April-to-June quarter of this year," says Prasad Koparkar, Senior
Director, CRISIL.
What brought Corporate India down to its knees?
An economy going through its worst phase in a decade, tepid consumption
and high interest rates all can be blamed for the current mess. A weak
government that has delayed critical reforms in a range of sectors
including financial services, mining, labour, land acquisition and
energy has added to the problems. But, perhaps, the most important
reason why many corporate houses that were in the fast lane until a few
years ago are now struggling to survive is past exuberance.
Sachindra
Nath, Group CEO at Religare Enterprises Ltd, puts things in
perspective. Corporate growth was funded purely out of debt, he says.
"The hypothesis was that with debt they will grow the business.
The
equity valuation subsequently will go up and they will raise further
capital," says Nath. This calculation went horribly wrong as the economy
slowed and capital markets turned choppy.
Wake-up callAashish
Mehra, Partner and Managing Director for Asia Pacific at consultancy
Strategic Decisions Group, says irrational exuberance, poor risk
assessment and overconfidence among companies that they will be able to
manage things if they go wrong led them on the path to self-destruction.
"Business houses went overboard with their investments during the boom
of 2000-2007, choosing to live beyond their means," he says. "When they
realised they might be stuck with a few lemons and they were unable to
manage them, that turned out to be a wake-up call and forced them to put
up a 'on sale' tag."
A prime example of irrational exuberance is
Vijay Mallya's Kingfisher Airlines, which began operations in 2005. It
took on debt to buy planes and acquire a low-cost airline in 2007. By
2011 it became India's second-largest carrier by market share. But it
never made a profit and, by early 2012, wasn't generating enough cash to
service loans, make tax payments or pay staff salaries. Soon, employees
struck work, the tax department froze its accounts and banks refused to
lend more. The airline was ultimately grounded, but not before it
weakened its parent UB Group and forced Mallya to sell a controlling
stake in flagship United Spirits to Diageo Plc in November 2012.
Naresh Goyal, founder of Jet Airways, has fared no better. Jet's debt crossed Rs 12,000 crore last year. In April, Jet sold a 24 per cent stake to Gulf carrier Etihad Airways.
The
aviation sector, however, is not the worst affected. Companies in
infrastructure, real estate and energy sectors lead this race.
Hyderabad-based infrastructure conglomerate GVK Group is looking to
raise about Rs 2,200 crore by selling a stake in GVK Airport Holdings to
trim debt. The cash-strapped group operates Mumbai and Bangalore
airports. Finance chief Issac A. George says the company hopes to
finalise a deal by December.
GVK's southern rival GMR Group sold a
74 per cent stake in a highway project in September for Rs 222 crore to
a fund of infrastructure financier IDFC. This was the second sale of a
road project within six months by the Bangalorebased infrastructure
group founded by G.M. Rao. The company had in March sold its Singapore
power plant. More assets could be put on the block. Madhu Terdal, Group
Chief Financial Officer at GMR Group, says the corporate house continues
to focus on creating liquidity and reducing debt.
Also in
September, Jaiprakash Industries, the Delhi-based builder of roads, dams
and townships, sold its Gujarat cement assets to UltraTech Cement. The
sale of assets with a cement production capacity of 4.8 million tonnes a
year will help Jaiprakash cut its debt by Rs 3,600 crore. But it isn't
enough to ease the Rs 56,000 crore debt burden substantially, and the
company is also planning to sell some of its hydroelectric power plants
and land.
In Gurgaon, DLF, is also striving to cut debt. The
country's biggest property developer had diversified into the
hospitality sector in 2006 after tying up with global hotel chain Hilton
International. In 2007, it bought a controlling stake in
Singapore-based hotel chain Amanresorts International for $400 million.
But the plans didn't work out. The hotels industry suffered a jolt after
the global economic crisis led to a fall in tourist traffic.
Simultaneously,
demand for property dropped and raising funds became challenging. DLF's
net debt shot up to Rs 22,725 crore in 2011/12 from Rs 10,323 crore in
2007/08. The company embarked on a debt-reduction programme in November
2011 when it bought out Hilton from their joint venture to make the
asset sales easier. Last year, DLF sold four land parcels, where it had
planned to build hotels with Hilton, to a Kolkata-based consortium for
Rs 567 crore. It is also looking for a buyer for Amanresorts. The
efforts have helped cut its net debt to Rs 20,369 crore.
Asset
sales are happening in the energy sector, too. In June, Videocon
Industries sold its 10 per cent stake in a Mozambique gas block to a
consortium of Oil & Natural Gas Corporation and Oil India for $2.48
billion (about Rs 17,000 crore). The sale will help the consumer
electronics company led by Venugopal Dhoot to slash its debt to Rs
10,000 crore from Rs 27,000 crore. Another energy company buried under a
pile of debt is Suzlon. The Pune-based wind turbine maker in September
sold a majority stake in its China arm to a local company for about Rs
177 crore to battle its Rs 13,000 crore debt. Lossmaking Lanco Infratech
is restructuring its debt and looking to sell some of its power plants.
Some
companies fell into the debt trap while growing their overseas
businesses. Brothers Malvinder and Shivinder Singh expanded their Fortis
Healthcare hospital chain in the past few years through overseas
acquisitions by borrowing money. Recently, the company sold its
businesses in Vietnam and Australia, which helped prune its debt to Rs
3,284 crore from Rs 7,000 crore. The company's focus is on improving
operating performance though it could evaluate more options for
divestment if required, says Group CEO Vishal Bali.
Shree Renuka
Sugars is another company which expanded its global footprint in recent
years. The company ventured into Brazil with the acquisition of two
loss-making companies in 2010. The sugar maker is now saddled with Rs
7,590 crore of debt, of which Rs 5,190 crore is on the books of the
Brazilian companies. The company's problems mounted after a drought in
the South American nation hurt output. The Brazilian real's steep drop
against the US dollar has made debt servicing even more difficult. The
company is now looking to sell some Brazilian assets including a power
plant.
Share pledges, loan refinancingSelling assets,
especially those core to a company's business, is rarely the first
choice for founders. "There is always an aversion to sell assets," says
Koparkar of CRISIL. Financially stressed companies initially try to cut
costs, defer expansion plans, sell or pledge shares to raise funds, and
refinance loans. When these options fail, companies sell their assets.
"There is no one-size-fits-all solution," says Michael J. Surface,
Leader-Advisory at consulting firm PricewaterhouseCoopers (PwC) India.
"It depends on the company and its liquidity position."
Companies
where founders pledged shares have another problem to worry about.
Suzlon's founders have pledged almost their entire stake in the company
while promoters of Jaypee Infratech have put more than 80 per cent of
their holding as collateral with lenders. The pledging turned
counter-productive when companies' stock market valuations dropped. For
instance, the market value of Shree Renuka, where founders have pledged
about 39 per cent of their stake in the company, has fallen to about Rs
1,200 crore from Rs 2,700 crore five years ago. Similar is the case with
Videocon. Its founders have pledged twothirds of their stake and its
market value has slumped to about Rs 5,600 crore from nearly Rs 10,000
crore in 2007.
Some companies have managed to refinance their
loans from local and overseas lenders. In January 2012, Anil Ambani's
Reliance Communications refinanced its foreign currency convertible
bonds of $1.18 billion from three Chinese lenders. But not everyone is
as successful as Ambani in refinancing loans. Suzlon defaulted on its
overseas bonds last year, though it also managed to raise fresh debt
this year to repay existing loans.
"The refinancing options have dried up," says Koparkar. "A weak rupee has only increased the cost of hedging [overseas loans]."
Cautious banksMany
debt-laden companies have delayed interest payments or defaulted on
loans. This has pushed banks' bad loans higher. Gross bad loans at
Indian banks have jumped to 3.92 per cent of total loans in June 2013
from 2.36 per cent in March 2011. According to the Reserve Bank of India
(RBI), stress tests suggest gross bad loans may rise to 4.4 per cent by
March 2014 in a severe stress scenario.
Banks have also seen a
rapid rise in loan restructuring. The size of restructured assets as a
percentage of gross advances of banks has more than doubled to above six
per cent as of June 2013 from 2.6 per cent in December 2010. Kuntal
Sur, Director for advisory services at consulting firm KPMG, says debt
restructuring is not unusual during economic downturns but it needs
total commitment from the founders of a company to succeed.
The
level of restructured debt has reached alarming levels at some lenders
such as Central Bank of India and Indian Overseas Bank. Central Bank of
India's restructured portfolio is at Rs 14,000 crore to Rs 15,000 crore,
says Executive Director R.K. Goyal. "Our restructured portfolio is a
bit higher because of exposure to discoms [power distribution
companies]. If you exclude the discoms, the restructured assets are
about Rs 6,000-7,000 crore, which is equal to three per cent of our
total advances," he says.
Rising defaults and debt recasts have
made banks wary of lending. "Banks are sitting on a lot of liquidity but
they are cautious about where they invest and who they invest with,"
says PwC's Surface. Avinash Gupta, Senior Director at business services
firm Deloitte Touche Tohmatsu India, says banks are looking for better
quality assets. "You can't keep pushing the can down the road," he says.
"Sometimes you will have to stop and keep looking for better assets."
Banks
are also putting pressure on overleveraged corporate houses to let go
of some assets. And this pressure is unlikely to ease. The new RBI
governor has made his stand clear. Banks must improve the efficiency of
the loan recovery system, Raghuram Rajan said on September 4, the day he
assumed office. "Promoters do not have a divine right to stay in charge
regardless of how badly they mismanage an enterprise, nor do they have
the right to use the banking system to recapitalise their failed
ventures," he added.
So, what is in store for debt-laden
companies? "Those who lack management capability and financial strength
may have to get out of the business and completely rethink the
portfolio," says Suresh Subudhi, Partner and Director at Boston
Consulting Group. Companies with strong management will need to churn
their business portfolio, he says.
They must retain
cash-generating assets and sell cash-sinking assets to improve revenue
growth and enhance profitability, he adds. Mehra of Strategic Decisions
Group agrees. While divesting assets, the key question companies face is
whether they should sell the lemons or the crown jewels. "It would be a
pity to be left only with a lemon portfolio by divesting the crown
jewels," he says. "Perhaps the answer is in the right combination."
There are some who are optimistic about the future. "Liquidity is
improving and the government has cleared many stalled projects," says
Goyal of Central Bank of India. The asset sales will release the funds
as well as management bandwidth for corporate houses to focus on their
main businesses. Nath of Religare says corporate houses are no longer
overenthusiastic and are thinking through their business plans. Retail
pioneer Biyani has shown how to make tough decisions and come back. It's
time for others to take a cue.
