Column : Of debt and distress

Written by Shobhana Subramanian | Updated: Dec 27 2012, 07:04am hrs
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. RComs not the only one, almost all of Indias infra players are leveraged to the hiltwhether its a GVK, the Adani Group or a Lanco Infra. And given the way the economys going, it looks like theyre 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 haircutspromoters here are rarely out of pocket.

The numbers coming out of the corporate debt restructuring (CDR) cell show its no different this time aroundbetween April and September, bankers agreed to recast loans worth R50,000 crorewhich means theyve 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 systems 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 limitsthe maximum amounts that they can lend to a company and a group as a share of their net worthfrom 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 packagesthe observations of a panel set up by it suggest thisthere 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 doesnt seem likelyas one analyst noted: Sincere intentions and attempts of the new management team notwithstanding, the challenges of reviving RComs 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 firms power projects now unviable since it cant pass through the higher price of imported coalfollowing a revision in Indonesian lawsthe company is banking on higher tariffs. If that happens, the firm will be out of the woods, else in deep trouble.

Indeed, its 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 its had little luck. Others, too, have talked about roping in equity investors or even discarding assets altogether, but apart from DLFwhich has now sold property worth around R4,200 crore against a targeted R5,000 croreno 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 werent enough takers. GVK Powers consolidated debt is now nudging R15,500 crorea fifth of this having being borrowed to buy stakes in MIAL and BIALwhich is five times estimated sales for the year of around R3,000 crore. With the benefit of hindsight, its clear that most infra players have been over-ambitious and banks recklessneither pencilling in the policy paralysis nor leaving enough of a cushion for unfortunate incidents such as the termination of GMRs contract to run and renovate the Mal airport or the sharp hike in the price of imported coal. Of course, its the banks that are more vulnerableespecially the state-owned lenders who have the bulk of the exposure. Looks like the CDR cell will see record recasts next year.