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Column : Of debt and distress

Reliance Communications will make a piffling R500 crore as profits this year, after forking out more than four times the amount by way of interest.

Banks were not careful about companies becoming highly leveraged

Reliance Communications will make a piffling R500 crore as profits this year, after forking out more than four times the amount by way of interest. So highly leveraged has the telco become with borrowings of roughly R35,000 crore that its net debt to trailing 12 months-ebitda is now a staggering six times. RCom?s not the only one, almost all of India?s infra players are leveraged to the hilt?whether it?s a GVK, the Adani Group or a Lanco Infra. And given the way the economy?s going, it looks like they?re going to stay that way for a while. That would not worry them too much; Indian corporate history is littered with instances of banks taking hits and haircuts?promoters here are rarely out of pocket.

The numbers coming out of the corporate debt restructuring (CDR) cell show it?s no different this time around?between April and September, bankers agreed to recast loans worth R50,000 crore?which means they?ve sort of ever-greened the loans by easing the repayment terms for the promoters who, for their part, will bring in a fraction of the net present value of the hit that banks will take. By the look of things, the situation will worsen before 2012-13 is out.

Indeed, that companies were way too indebted has been clear for many months now; in an assessment made earlier this year, Credit Suisse observed that the total debt of 10 business groups had jumped five-fold in five years, and at around R5.5 lakh crore, accounted for a frightening 98% of the banking system?s net worth. Evidently, bankers had not foreseen the sharp turn in the economic cycle would crimp cash flows to this extent nor that the policy paralysis in government that would stall projects, starve power plants of gas and coal, and steel mills of iron ore.

The Reserve Bank of India (RBI), too, had not thought it necessary to turn cautious, else the central bank could have pruned banks? prudential loan limits?the maximum amounts that they can lend to a company and a group as a share of their net worth?from the very generous levels of 15% and 40%, respectively. Although RBI has realised that banks are not setting aside enough capital to take care of potentially toxic assets and the fact that promoters have got away with too small a sacrifice in the restructuring packages?the observations of a panel set up by it suggest this?there has been little action on this front so far. In any case, tougher norms will help only in the future; for now, the damage has been done.

And so we have, at the top of the heap Vedanta and Essar groups, each indebted to the tune of roughly R1 lakh crore. The Reliance ADAG Group comes close behind with loans of close to R86,000 crore, and following are the Jaypee and JSW groups. A quick turnaround in business prospects doesn?t seem likely?as one analyst noted: ?Sincere intentions and attempts of the new management team notwithstanding, the challenges of reviving RCom?s India wireless business are far too stiff to overcome.?

So Adani Power, for instance, which reported losses for consecutive quarters thanks to the shortage, or at times, complete unavailability of coal, and delays in the completion of some of its power plants, will see its debt rise to R37,500 crore by March 2013. With the firm?s power projects now unviable since it can?t pass through the higher price of imported coal?following a revision in Indonesian laws?the company is banking on higher tariffs. If that happens, the firm will be out of the woods, else in deep trouble.

Indeed, it?s astounding how completely out of whack the debt of some companies is. At Lanco Infra, for instance, the current net to equity is an unbelievable 5:1 and gross borrowings of some R34,000 crore are twice expected revenues for 2012-13 of R17,000 crore. Profits this year will be paltry R250 crore. The management has been saying it wants to sell stakes in power projects as also in Griffin Coal Mining so that it can grow the business, but so far it?s had little luck. Others, too, have talked about roping in equity investors or even discarding assets altogether, but apart from DLF?which has now sold property worth around R4,200 crore against a targeted R5,000 crore?no one else has much to show for it.

RCom, for instance, wanted to list its undersea cable business Flag but called off the IPO ostensibly because there weren?t enough takers. GVK Power?s consolidated debt is now nudging R15,500 crore?a fifth of this having being borrowed to buy stakes in MIAL and BIAL?which is five times estimated sales for the year of around R3,000 crore. With the benefit of hindsight, it?s clear that most infra players have been over-ambitious and banks reckless?neither pencilling in the policy paralysis nor leaving enough of a cushion for unfortunate incidents such as the termination of GMR?s contract to run and renovate the Mal? airport or the sharp hike in the price of imported coal. Of course, it?s the banks that are more vulnerable?especially the state-owned lenders who have the bulk of the exposure. Looks like the CDR cell will see record recasts next year.

shobhana.subramanian@expressindia.com

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First published on: 27-12-2012 at 01:34 IST
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