The biggest takeaway from the R3,800 crore sale of cement assets in Gujarat by Jaiprakash Associates to UltraTech Cement is that corporates finally seem to have become serious about deleveraging their balance sheets. Several years of aggressive expansion—much of it in unrelated areas and on borrowed money—had caused balance sheets to become bloated. With projects stranded due to the lack of clearances or unable to generate cash flows because they were starved for key inputs, the debt has been piling up. With interest rates high and access to the capital market limited, it had become difficult for corporates to offload debt. And at a time when the economy is slowing sharply—GDP grew at just 4.45% in the three months to June 2013—this has become a big risk for banks. Indeed, the 4.8 million tonnes of capacity that JP Associates sold was operating at a capacity utilisation of just 65% and JCCL—the entity that housed the power plant—has been reporting losses because the other units too are not running at optimal levels. Promoters in India have always been reluctant to give up any business that they start, fearful of a stigma, even if it makes commercial sense. JP Associates has taken more than a year to close out the deal but what’s encouraging is that management has gone on record to say it would consider selling more assets. The group must continue to hawk what it can because the R3,600 crore or so that the sale of the Gujarat cement plant will fetch it can only help lower its consolidated debt, of R60,000 crore, very marginally.
Other corporates too could take a leaf out of JP Associates’ book by getting rid of non-core assets and not waiting for unrealistic prices; else, in a downturn as sharp as the current one, they run the risk of hurting their core businesses. Some have begun to do that—the GMR Group, for instance, has disposed of its stakes in Island Power Homeland Energy and the Jadcherla road project. The sooner companies start deleveraging the easier it will be for them to start picking up equity and mending their balance sheets; that, in turn, will help repair banks’ balance sheets, allowing them to support businesses once the economy turns. Clearly, there’s no dearth of opportunity else a seasoned industrialist like Kumar Mangalam Birla would not have risked even a relatively small sum of $600 million.