Editorial: Cutting the flab

Dec 26 2013, 05:24 IST
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SummaryInfra firms are doing well to try to deleverage

Most of India’s infrastructure builders are neck-deep in debt and, given the fragile nature of the economic recovery, cash flows could remain crimped for another year or two. In the meantime, banks have been accommodative making repayment terms easier for companies and even providing additional support—Lanco Infra is a case in point where banks have said they’re willing to lend the firm an extra R3,000 crore over and above the existing exposure of R7,500 crore. While they wait for their businesses to get back on track, however, companies have to try and deleverage their balance sheets. Some promoters have already started the process; in September, Jaiprakash Associates—whose consolidated debt is nudging R60,000 crore—sold of some of its cement capacity in Gujarat for R3,800 crore and the management has said it would consider more of such sales. Even before this, GMR Infra, which has piled up a consolidated debt of around R38,000 crore, has been periodically selling assets; it offloaded a stake in Island Power which fetched it $330 million and also in Homeland Energy and the Jadcherla road project. It may soon conclude a deal to sell a share in the Sabiha Gokcen airport in Istanbul.

While infra players may feel they’re letting go of good assets, the point is they also need to be less geared to be able to complete ongoing ventures—GMR, for instance, needs around R800 crore of equity to complete the power plants it has taken on. The good news is that there are takers for assets; the Aditya Birla Group bought out the JP Group’s cement plant while PE funds are shopping for road assets. While it is important to allow firms to diversify, it is important for banks to discourage reckless diversification which has led to promoters being stretched very thin. As Credit Suisse pointed out in a recent report, debt levels at the most leveraged business houses in the country have risen 15% in FY13 and, in several instances, the increase in the borrowings had outpaced asset sales. It’s hardly surprising, then, that both infra firms and banks are in the mess they are in.

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