Deals worth Rs. 600 billion seen this fiscal, after Rs. 800 billion in the last 18 months lead to a substantial lowering of corporate debt
The “recent asset sales by domestic companies will support their credit profiles, because this has led to a substantial lowering of debt. In the past 18 months, 21 companies have announced 36 deals to divest assets and sell equity to strategic partners to raise Rs. 800 billion -- which is nearly a fifth of their debt. Expected policy reforms and a buoyant capital market should lead to more such transactions. Based on interactions, we expect companies to raise another Rs. 600 billion at the very least in 2014-15” believes CRISIL.
Says Pawan Agrawal, Senior Director, CRISIL Ratings: “The increasing trend to divest assets and raise equity is a part of corporates’ efforts to surmount the tough phase of the economic cycle. They are now refocusing on core businesses and striving to improve balance sheets.” In the early part of this decade, expansions and diversifications were funded primarily through debt. Over the past three years, the total debt of these 21 companies increased by nearly 50% to Rs.4.4 trillion as on March 31, 2014. However, a slowing economy and rising interest rates meant operating profit stagnated at just 2% during the period. Consequently, asset sales became necessary to cushion the pressure on balance sheets. Companies have also reworked long-term strategies by exiting non-core businesses and divesting overseas assets. “This should provide greater confidence to their lenders. As the economy picks up, these companies will be in a better position to benefit from emerging opportunities, as compared to the ones that are yet to begin this journey,” Agrawal added.
The CRISIL analysis shows nearly 60% of the total divestment of assets was by companies operating in the infrastructure sector such as power, roads and oil & gas. Further, a good 60% of the transaction value also related to non-core sectors as well as overseas assets acquired during the economic upturn in a bid to diversify geographically.
The encouraging part is, with risk appetite improving, global investors have been seeking good quality, cash-generating Indian assets – and were involved in a quarter of the transactions by value.
“However,” points out Manish Gupta, Director, CRISIL Ratings, “the extent of improvement in corporate credit profiles will be limited because asset sales also reduce operating cash flows.” More than 90% of completed transactions involved cash-generating assets. Even after asset and equity stake sales, the debt-to-EBITDA multiple of these companies is expected to improve only marginally from nearly 9 times as on March 31, 2014, to just below 8 times over the next one year. “This underscores the importance of further asset sales. We believe, therefore, that the momentum of asset and stake sales will continue in the medium term,” Gupta added. As for how much corporate credit profiles improve in future, CRISIL believes this will be a function of the quantum of divestments and the sustainability of debt protection metrics.