BackManufacturing, power, non-financial firms shed Rs40,300 cr assets in 2 years
Firms sold assets as the slump and high level of debt pushed them to trim operations
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Mumbai: Companies from the manufacturing, power and non-financial services sectors, facing debt repayments and sluggish economic growth, have shed the most assets over the past two years since October 2012, data from the Centre for Monitoring Indian Economy (CMIE) show.
Assets worth ₹ 40,299.24 crore were sold in this period, as per the CMIE data. August alone saw asset sales of ₹ 7,325 crore, the highest since March 2013.
Firms sold assets as the slump and high level of debt pushed them to trim operations. India’s economic growth has languished below 5% in each of the last two fiscal years, mostly due to delay in project approvals and lack of raw material linkages.
CMIE monitors merger and acquisition announcements by tracking company announcements, particularly those made by listed firms to stock exchanges and also reasonably reliable media reports. This includes open offers, substantial acquisition of shares, and sale of assets. But the ₹ 40,299.24 crore amount pertains just to asset sales.
Firms have also raised equity capital to bolster their balance sheets. A 7 July report from Crisil Ratings noted that firms had announced deals worth ₹ 80,000 crore to sell assets and raise equity in the 18 months till July.
Of the total asset sales, the manufacturing sector alone sold assets worth ₹ 30,126 crore. Power producers reported asset sales of ₹ 6,384.14 crore; cement firms sold assets worth ₹ 4,160 crore. Service sector firms (other than financials) sold ₹ 3,360 crore worth of assets.
Within the manufacturing industry, the chemicals and chemical products sub-sector saw assets valued at ₹ 20,955.26 crore being sold in the two-year period. The industry has been facing tepid demand, partly due to lower industrial output, while rising raw material costs have eroded profitability.
Indian manufacturing firms did not look at opportunities like lean manufacturing during the slowdown, which would have minimized the negative impact, said Sankar Krishnan, managing director and co-head of Alvarez & Marsal India, a firm which provides performance improvement, turnaround management and business advisory services.
“Companies could have done things to improve the cost structure and balance their capital expenditure, like American firms did during the slowdown in the US."
Krishnan expects more such asset sales. “Distressed sales will happen because banks which are holding many non-performing assets will sooner or later take some action. In the next six months, asset sales will continue or may even accelerate," he said.
For the power sector, lack of adequate raw material linkages and clearances have left a number of projects stranded. This forced many promoters to consolidate their portfolios by selling non-performing power assets.
Recent examples of asset sales in the power sector include the ₹ 6,000 crore acquisition of Lanco Infratech Ltd’s Udupi power plant by Adani Power Ltd, and JSW Energy Ltd’s acquisition of Jaypee Group’s three hydro power plants.
Three years back, power firms were not doing well operationally, but had a comfortable backing from sponsors who were adequately backed by private equity (PE) firms or bank loans at the sponsor level and so, sponsors were able to keep funding these projects, says Venkataraman Rajaraman, director, infrastructure and project finance at India Ratings and Research Pvt. Ltd.
But now, Rajaraman says, liquidity conditions are tight and valuation expectations are not being met, weakening the sponsor’s ability to fund projects, leading to asset sales.
However, hopes of quicker clearances and a revival in economic growth may slow asset sales, as some companies may choose to wait for better valuations before selling assets.
“With the new coal block ordinance by the government, the assets in distress are in the wait-and-watch mode and some promoters have kept their asset sale plans on hold awaiting some positive developments consequent to this ordinance," Rajaraman said.
The rate of sale of distressed assets may fall if the centre undertakes the right reforms to improve the functioning of sectors such as power, he added.
Meanwhile, the hotels and tourism industry saw ₹ 1,380 crore worth of asset sale, higher than sectors such as metals, consumer products, telecom and oil and gas, as per the data.
The hotels and tourism industry had a number of highly leveraged firms, said Achin Khanna, managing director, consulting and valuation at HVS South Asia, a hospitality consulting firm.
“Some hotel asset sales have happened because of general overleveraging that developers have ended up doing," he said.
The operational profitability of these hotels, although healthy, is not always enough to service debt and these assets end up in distress sales, Khanna said.
Another reason for these sales, according to Khanna, is that private equity and hotel investment funds have shown an interest in the sector of late.
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