M&A activity must be encouraged to save assets & jobs.
It is no secret the private sector hasn’t been spending on new projects for at least four years now. The big spender has been Reliance Industries which has invested close to `2 lakh crore in its telecom enterprise and other telecom players have had relatively small surpluses to plough back into their businesses. Consequently, it comes as no surprise that the country saw fresh investments of just `1 lakh crore in the December 2018 quarter. The amount is not to be sneezed at, but it is a fall of more than 50% both sequentially and y-o-y. And it is the smallest quarterly amount since mid-2004. What’s worse, the value of stalled projects rose slightly in Q3FY19.
To be sure, some chunky investments have been made by big business houses in the steel and cement sectors. For instance, in the last six months, a clutch of acquisitions has taken place via the IBC route—Ultratech has bought Binani Cement while Tata Steel has snapped up Bhushan Steel. Earlier, Ultratech had bought some cement units from the Jaypee group. This process will continue since the courts continue to work on the resolution of stressed assets via the IBC. Moreover, given businesses remain stressed and RBI is clear the stringent norms for debt defaults enforced by it will be implemented, one can expect the future of more companies to be decided in the courts.
While it may not mean fresh capacity, M&A activity is to be encouraged because it often helps save precious assets and, more importantly, jobs. Unfortunately, the story in India, over the past four or five years, has been one of wealth destruction. Several hundred companies have been wound down or liquidated primarily because the projects have suffered from lack of fuel linkages or have not received the necessary clearances or because promoters have defaulted on their loans. Take the case of Lanco Infratech which is in the process of being liquidated. There may be more to come because companies remain stressed. A Credit Suisse (CS) analysis for the September 2018 quarter suggests only a slight improvement in the debt profile of companies. The share of debt with an interest cover (IC) of less than one was 41% compared with 43% in the June quarter. The improvement resulted partly from the acquisition of Bhushan Steel by Tata Steel.
The stress in the telecom sector, CS noted, had intensified with nearly all telecom debt (ex-Jio) in its sample having an IC of less than one. With several real estate developers having reported a rise in debt levels in Q2FY19, and with transaction volumes muted, this sector could be in trouble. Unless there are signs aggregate demand is picking up pace, which it is not, capex will crawl.