Over the past few years, several policymakers have been heard complaining that Indian firms are not investing enough. The latest data on asset sales provides a clear and stark answer for that phenomenon: the Indian economy is currently going through the biggest deleveraging of the past quarter century, if not the biggest in history.
Data sourced from Thomson Reuters Eikon show that Indian companies have sold more assets in 2016 than they have in any year since liberalization. It is no wonder then that private investments have been tepid as the deleveraging process picked up pace over the past year or so. The data shows that asset-sale deals announced, pending or completed in 2016 are worth $40.85 billion. This beats the previous peak of $27.96 billion announced in 2007 by a wide margin. The Reuters data covers any tangible asset, branch, division, operations or subsidiary sold off by a parent firm.
While the previous peak was driven by demand from investors who wanted a stake in the ‘India growth story’, the current round of asset sales has been driven largely by distress of indebted corporations. Essar features in the list of top deals in both 2007 and 2016. The top deals in 2007 include Vodafone’s acquisition of Hutchison Essar and Matsushita Electric Works’ acquisition of Anchor Electricals. The top deals of 2016 include the sale of controlling stake in Essar Oil to PJSC Rosneft Oil Co by the heavily indebted Essar group, and UltraTech Cement Ltd’s acquisition of Jaypee Group’s cement assets. However, in terms of completed deals, 2016 has seen lower amount of such deals compared to previous years but that is largely because many of the asset sales are yet to receive regulatory approvals.
As the charts below show, the asset sales have been led by stressed firms in the debt-laden sectors of the Indian economy such as energy, real estate, and metals. Many of the leading firms in these sectors are owned by some of the most indebted corporate groups of the country.
The debt overhang of India’s corporate sector has been many years in the making and the unwinding of debt is taking almost as much time as the accumulation of debt. The seeds of the current debt problems were sown during the effervescent lending of the boom years in the mid-2000s. The credit boom leading up to the great global financial crash of 2008 witnessed a dilution of lending norms by banks and an aggressive asset-buying spree by Indian corporations. The financial crash brought an end to such excesses, and the boom turned to bust. In a 2012 report, Credit Suisse pointed out that the borrowings of the top 10 indebted conglomerates in the country (which included Essar, Reliance ADAG, Vedanta, Adani and the Jaypee group) had grown five times in the five years leading up to 2012 to Rs5.4 trillion, which equalled 13% of total bank loans.
Even then, delayed recognition of bad loans by banks and regulatory forbearance by the Reserve Bank of India (RBI) ensured that indebted firms and conglomerates did not face the pressures of paying back their debts that they are faced with today. In a 2015 update of their original report, Credit Suisse pointed out that the total borrowings of the top 10 indebted groups stood at Rs7.3 trillion.
Thanks to tightening of norms related to restructuring of assets, and greater power provided to lenders to recover dues, promoters have been forced to consider selling distressed assets and subsidiaries to retire some of their debt. Some of the top deals of the past year feature firms owned by the top 10 indebted corporate groups and other large indebted conglomerates.
But does this year’s asset-selling spree signal an end to India’s debt woes? Most analysts suggest that is unlikely. In fact, the debt problem has become more acute for companies which are not able to meet their interest obligations or have an interest cover less than 1.
“Contrary to expectations of a recovery in stressed companies, the share of debt with interest cover (IC) saw a slight increase up to 39% vs 38%. The share of chronically stressed companies also increased to 34% vs 32% QoQ, and 30% (vs 34%) debt was with loss-making companies,” noted a 19 September Credit Suisse report by analysts Ashish Gupta, Kush Shah and Prashant Kumar.
Bankers have pointed out that cash from many asset sales is only enough to stay out of debt trouble for a year or so. And once cash-generating assets have been sold, it could lead to fresh problems for indebted groups as the cash from the deals run out. It is likely that bankers or promoters, or more likely both, would have to take a hit in the coming quarters.
A 20 September Religare Capital Markets Ltd report, which examined six steel companies to analyse their debt servicing capability, noted that EBITDA (or earnings before interest, taxes, depreciation and amortization) would have to triple for these companies to be able to meet their debt obligations. “Given the limited upsides to EBITDA (ex-sale of non-core assets), we believe debt servicing will be possible only post a 35-40% loan haircut by banks,” said the report authored by analysts Pritesh Jani, Parag Jariwala and Vikesh Mehta.
The continuing spectre of further deleveraging seems to have affected risk appetite across the economy. As the chart below shows, cash levels have witnessed a rise for Indian firms after the crash of 2008 even though indebted firms have lagged others. Yet, the hangover of debt and the turning of the credit cycle seems to be deterring firms from making new investments.
The tepid investment climate has affected overall demand in the economy and in turn hurt the debt-servicing capabilities of the indebted groups, analysts say.
India’s debt issues will not be solved without an improvement in growth or a pick-up in demand, said V. Balasubramanian, head of equities at IDBI Mutual Fund.
“The problem is huge,” said Balasubramanian. And even the biggest year of asset sales will likely fall short of solving it.
This is the first of a four-part data journalism series on corporate debt in the country. The second part will examine the leverage levels of small-cap firms