Keep calm and sell assets

Talk about biting off more than you can chew. In April 2009, at the peak of the global economic crisis, Manoj Gaur announced that the Jaypee Group would invest a ₹10,000 crore over the next year across its power, infrastructure and cement businesses. The plan was to execute as many as five thermal power projects of 660 MW each, apart from two greenfield projects in the power sector.

The cement business was also looking to increase its capacity of 13.5 million tonne per annum (mtpa) to 23 mtpa in the first phase and eventually to 35 mtpa. Gaur, the group’s executive chairman, was banking on easy access to funds and the belief that the economy would rebound quickly.

Fast forward a few years and, clearly, things didn’t pan out quite as planned. The money did come through, but with the lacklustre economy playing spoilsport, the anticipated growth remained on paper. The result: Jaypee’s debt at its peak soared to a staggering ₹60,000 crore. Since last year, it has been frantically disposing off assets across in a bid to bring down that number. In September 2013, Jaypee Cement sold a 4.8-mtpa unit in Gujarat to Aditya Birla Group company UltraTech. This was followed by the sale of the 74% holding in Bokaro Jaypee Cement to Dalmia Cement for ₹690 crore. 

Desperate times call for tough measures

Around 21 domestic companies have announced 36 deals in the past 18 months

More recently, Reliance Power entered into an agreement to buy three hydroelectric power plants owned by Jaiprakash Power Ventures for an estimated ₹12,000 crore. In early March, a consortium of investors led by TAQA, an Abu Dhabi-based energy and utilities company, along with Indo-Infra and IDFC Alternatives, agreed to acquire two of these plants for ₹10,320 crore, but the deal fell through.

The firm has an operational capacity of 1,800 MW with an asset base of ₹10,000 crore and will add to the 5,000-MW capacity that Reliance Power is developing in hydroelectric power. “Hydroelectric power is a defensive asset since there are no supply risks. It helps Reliance diversify its thermal portfolio and the cost of power generation is lower,” says Bharanidhar Vijayakumar, analyst at Spark Capital. Reliance Power plans to raise ₹9,500 crore as debt and infuse another ₹2,500 crore as equity to fund the acquisition. 

If it’s any consolation, the Jaypee Group isn’t alone. Several high-profile Indian corporate houses, including GMR, the UB Group, Bharti Airtel and Videocon, are desperately looking to offload assets and reduce some of their debt as they realise there will be no bailouts and banks are no longer evergreening their loans. Meanwhile, it’s bonanza time for the buyers as they pick up good assets at sound valuations. As India Inc looks set to shed more debt in the coming year, they will see even more deals up for grabs. 

 Shedding light

A recent report by ratings agency Crisil says that over the past 18 months, 21 domestic companies have announced 36 deals that will raise a total ₹78,900 crore, trimming their debt by nearly 20% (see: Desperate times call for tough measures). The forecast is that companies will raise another ₹60,000 crore during the current fiscal. According to Manish Gupta, director, Crisil Ratings, asset sales are a way for companies to survive the slowdown. “They are refocusing on their core business and reducing high levels of debt on their balance sheet,” he explains. This debt, thinks Gupta, was the result of aggressive expansion and diversification and met through debt funding, which was followed by the economy slowing down. “High interest costs were accompanied by low operating Ebitda margins and delays in project closures.” 

The slowdown has thrown up several opportunities in the form of stressed assets, says MV Seshagiri Rao, group CFO and joint MD, JSW Steel, adding that they must make strategic sense to the buyer. “In a greenfield project, the process of land acquisition and environmental clearance could take as much as a decade, which means project costs go haywire. An existing asset does not come with any of this baggage and makes good business sense,” he points out.

In May 2013, JSW Steel acquired Heidelberg Cement India’s 6 mtpa grinding facility in Maharashtra for an undisclosed amount. The seller said this was a less strategic asset with lower margins and thought it more important to expand capacity in central India. For Rao, low returns weren’t as important as checking if the risk factors were “under control”. “This helped our cement foray,” he thinks. 

Given the shape of the economy, it should come as no surprise that core sectors are seeing the maximum asset sell-offs. Crisil’s analysis shows that as much as ₹48,800 crore — 62% of what has been raised — has come from firms in the beleaguered infrastructure sector. In March 2013, GMR Energy sold its 70% holding in its Singapore operation to FPM Power Holdings for $660 million (₹2,650 crore). Madhu Terdal, group CFO, GMR Group, points to the need for capital for the group’s upcoming projects in the domestic market.

“There were limited opportunities in India to raise capital due to poor sentiments. Besides, a large part of risks associated with the project were already mitigated,” he says, about the rationale for exiting this investment. This deal was followed by GMR Infrastructure selling its 40% stake in Istanbul International Airport for $310 million (₹1,740 crore) to Malaysia Airport Holdings Berhad, reducing its debt from a very sizeable ₹40,000 crore.

It’s clearly a distress sale for debt-ridden companies, especially in the infra space, but what explains the buyers? After all, it is one thing to be optimistic about a stable government and change in sentiments but another to invest $300 million to $1 billion. “What seems cheap today could be 40% cheaper if things worsen, so companies need to take a calculated risk even if there are bargain buys all around,” says the head of equity strategy at a foreign brokerage. Most firms have strategic reasons for buying assets, from increasing their presence in new markets and becoming market leaders to diversifying their revenue streams and thereby, overall risk. Besides, picking up existing assets in infra means most risks are mitigated as all the approvals are in, resulting in a shorter payback period.

Having burnt their fingers during the slowdown, companies are now taking measured steps when it comes to buying assets or investing in projects. That’s not necessarily a bad thing as it was the greed to get their hands on as many assets as possible that got the sellers into trouble in the first place. Financial investors, too, are waiting for the dust to settle. “We would like clarity on issues related to coal block reallocations and road construction. If that happens, it will make a big difference to the sentiment,” says MK Sinha, managing partner and CEO, IDFC Alternatives.

Sinha says that currently, there is a transition from complete disappointment to a pace of good investment climate. “We realise that it is important to be patient since the upside looks attractive. As a fund, we will continue to invest more capital in the time to come,” he adds, expecting the overall investment climate to take six to eight months to pick up. IDFC Alternatives is one of the few PE firms that invest in the infrastructure space. Its India Infrastructure Fund picked up a 74% stake in GMR Ulundurpet Expressways for ₹222 crore in September 2013. The investee firm operates a 73-km road project that forms a part of NH45 in Tamil Nadu.

There aren’t too many PE funds like IDFC Alternatives. Deals such as KKR’s ₹750-crore investment in Dalmia Cement and Barings Private Equity Asia’s ₹1,400-crore investment in Lafarge India were exceptions. Ajay Relan, founder and managing partner, CX Partners, says PE funds in India typically focus on a narrow band of sectors, such as consumer products, IT, ITES and healthcare services.

“PE funds are more likely to invest in firms that have an asset-light model since their return ratios in these sectors are far more attractive,” he says. That explains his firm’s acquisition, along with Capital Square Partners, of Minacs, the Aditya Birla Group’s BPO arm, earlier this year for ₹1,400 crore. “It was a non-core asset for the seller. The AV Birla Group will not divest its stake in financial services, which is what PE funds are really interested in,” Relan adds, with a laugh. Then, while several proposals may have been evaluated, many fell through on valuation differences. “PE firms are asking for significant discount on valuations and the promoters aren’t willing to sell at that price,” says the head of equity strategy quoted earlier. Since most of them are financial investors who don’t want to get into operations, the price they buy at becomes important. 

That’s perhaps one of the reasons why Nandan Chakraborty, MD, institutional research, Axis Capital, thinks PEs may not make big bang investments in infrastructure anytime soon. He believes it makes better sense for large business groups such as the Tatas and Birlas, which have companies with strong balance sheets, to diversify into the infra space. “It is a great time to buy into the sector as there will be many more distressed assets coming up for sale,” he says. Being a strategic investor rather than financial investor in the infrastructure space could mean a two-fold gain, where you can further improve the overall returns by executing projects better. JSW Steel’s Rao says companies that have been conservative will continue to have healthy cash flows and manageable debt-equity ratios. “They will continue to buy assets as long as it makes sense with their existing businesses,” he explains. 

With the PM wooing Japanese and Chinese investors to fund projects, infra companies have more than one option to choose from for their asset sales. The funds raised from the sales will give some of them a much-needed lifeline till the macro environment improves. The hope is that with a new government at the helm, policy decisions will be faster and projects will be far more viable to fund.

 Waiting it out

Of course, there’s also the issue of how expensive asset sales are: a booming stock market has already added a twist to the story. “Yes, valuations are looking up over the past couple of months. We may see even a further upside with sellers of non-core assets recognising a scarcity issue and potential buyers putting in higher bids for assets that are critical to them,” thinks Gopal Khetan, head (M&A advisory), HSBC India. Still, while companies in the IT or pharma space — where India has developed some significant expertise — could command premium valuations, infrastructure assets are likely to come at reasonable valuations given that many of them are using these assets as an extended lifeline. 

For now, buyers will emerge in various forms — strategic domestic or overseas firms — depending on the nature of the asset. They are all banking on India recovering and their investments bearing fruit over time. As Siddhartha Nigam, partner, Grant Thornton Advisory, puts it, “In India, the growth story is inevitable, though there is still some pain left.” 

—With inputs from Kripa Mahalingam