Home > companies > Alok Industries may demerge operations

Mumbai: Alok Industries Ltd, which makes cotton and polyster yarn, apparel fabric, garments and home textiles, plans to separate its operations into two or three units that can be individually sold to financial investors, as it struggles under the weight of debt, two bankers with knowledge of the plan said.

“This is only one of the proposals being discussed. Lenders are planning to have a meeting in a couple of weeks where they will be taking a call on which plan would make more sense," one of the two bankers said on condition of anonymity.

On 16 March, The Economic Times reported that large private equity firms and domestic textile firms are keen on buying a controlling stake in Alok Industries.

As of 31 March 2015, the textile maker had 15,347 crore of debt, which, adjusting for non-fund based exposure, would come close to 20,000 crore now, the second of the two bankers quoted above said.

The main lenders include State Bank of India and IDBI Bank Ltd. An email sent to Alok Industries on Monday remained unanswered as of press time.

Alok Industries’s creditors are currently in the process of appointing an external auditor to conduct a forensic audit of the company’s books, the first banker said.

“This would help in better valuing the company when we look for the buyer," he added.

Lenders to Alok Industries decided on a strategic debt restructuring (SDR) of the company in November, the company said in a stock exchange notification.

In January, it said, lenders planned to acquire 65% of the company by converting debt to equity under SDR.

SDR, introduced by the Reserve Bank of India (RBI) in June 2015, allows banks to convert a part of a defaulting borrower’s debt into majority equity and assume operational control.

Under the original scheme, banks were given 18 months to find a buyer. In February, RBI reviewed these norms and said at least a 26% stake in the stressed asset must be sold within 18 months and the rest in tranches. During this 18-month period, the asset is exempt from adverse asset classification norms.

Alok Industries wouldn’t be the first company to demerge its operations to find buyers. Gammon India Ltd split itself into three units, with one housing its transmission and distribution business, the second the engineering, procurement and construction assets, and the third controlling all residual businesses. “This is done so that the most profitable business can be separated from the rest of the company and sold off first," the second banker cited above said, also requesting anonymity.

Since RBI announced SDR norms, banks have decided to convert debt to majority equity in at least 20 entities. These include Electrosteel Steels Ltd, Ankit Metal and Power Ltd, Rohit Ferro-Tech Ltd, IVRCL Ltd, Gammon India, Monnet Ispat and Energy Ltd, VISA Steel Ltd, Lanco Teesta Hydro Power Pvt. Ltd, Jyoti Structures Ltd.

None of these have seen a stake sale or change of management.

“Sometimes, sum of the parts may exceed the total, which may work in favour of the banks. If the banks involved are able to split a company and make each part saleable, it works in their favour as investors might be interested in paying for smaller parts," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP.

“However, it would be in the interest of banks to ensure that buyers are on the table first," he said.

According to Parekh, the only downside of this arrangement would be the interoperability of the different units and how they would be structured if the operations are split under different owners.

India’s banks are struggling under the burden of bad loans that piled up in the aftermath of an economic downturn that made it difficult for many corporate borrowers to repay loans. The cash flows of many conglomerates were also squeezed by projects stalled because of delays in securing mandatory approvals.

Gross bad loans across India’s 39 listed banks rose to 4.38 trillion in the quarter ended December from 3.4 trillion at the end of September, according to data collated by Capitaline, a financial database.

Stressed assets (which include gross bad loans, restructured assets and written-off accounts) in the banking system rose to 14.5% of total assets as of 31 December, compared with 9.8% in March 2012, according to data from RBI, which has set a March 2017 deadline for banks to clean up their books.

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