TWELVE MONTHS TOO LONG: A TIME OF DE­SPAIR FOR IN­DIA INC

It was a time best for­got­ten, a year in which bal­ance sheets re­mained bloated, cash flows were crip­pled and prof­its per­ished. Com­pa­nies had no choice but to con­sol­i­date

The Financial Express - - FRONT PAGE - SHOB­HANA SUBRA­MA­NIAN

HUN­KER down. That’s what cor­po­rate In­dia did in 2013; it was sim­ply too risky to ven­ture out. As an in­ef­fec­tive gov­ern­ment dragged its feet on clear­ances and hun­dreds of projects stalled, there was lit­tle in­cen­tive to in­vest. Even money that had been put to work was idling, thanks to the se­vere short­age of gas, iron ore and coal; the dra­matic drop in de­mand, whether for trucks or tooth­paste, meant in­ven­to­ries were at their lean­est.

Never be­fore, per­haps, had Tata Mo­tors kept its fac­to­ries shut for so many days in a year, never be­fore had bankers so be­moaned the lack of lend­ing op­por­tu­ni­ties.

In the end, the capex cy­cle failed to turn, the econ­omy slipped fur­ther, leav­ing man­u­fac­tur­ers with smaller vol­umes, lit­tle pric­ing power and big bills for raw ma­te­ri­als and in­ter­est pay­ments. There were the lucky few that pros­pered, mainly IT play­ers, drug ma­jors and other ex­porters who gained from a de­pre­ci­at­ing cur­rency, but, for most in In­dia Inc, a weak ru­pee hurt the bot­tom line.

The year 2013 was a time best for­got­ten, a year in which bal­ance sheets re­mained bloated, cash flows were crip­pled and prof­its per­ished. The num­bers said it all — for a clutch of 1,700 com­pa­nies, net prof­its in the three months to Septem­ber col­lapsed com­pletely, fall­ing 1% y-o-y.

It wasn’t just the smaller busi­nesses that were reel­ing un­der the slow­down. In Bom­bay House, the head­quar­ters of the Tata Group, where Cyrus Mistry had just taken charge of a large, un­wieldy and a not-so-prof­itable $100bil­lion con­glom­er­ate, there were more prob­lems than one could have imag­ined. Mistry, like many of his fel­low in­dus­tri­al­ists, had his share of over­lever­aged com­pa­nies, cap­i­tal­guz­zlers and, like oth­ers, he too was hop­ing the au­thor­i­ties would be less rigid on reg­u­la­tion and put in place sta­ble poli­cies. It didn’t help that the en­vi­ron­ment was hos­tile, not just at home but also in Europe to which his group had a con­sid­er­able ex­po­sure.

In ret­ro­spect, the ap­proach adopted by the chair man of Tata Sons to con­sol­i­date the busi­nesses, both at home or abroad, tur ned out to be the best.

There were no big-bang ac­qui­si­tions al­though as­sets may have been avail­able cheap; it was all about mak­ing the most of what the group al­ready had — even the pur­suit of a big­ger stake in Ori­ent Ex­press was given up. The idea was to stick to the knit­ting — Tata Sons de­cided it did not want to rush into a tough area like bank­ing and with­drew its ap­pli­ca­tion for a li­cence. There were oth­ers like the Mahin­dra & Mahin­dra group, which de­cided it was time to fo­cus on core com­pe­ten­cies though some like the Aditya Birla Group and Larsen and Toubro felt oth­er­wise.

By and large, though, cor- po­rates were so busy try­ing to eke out ef­fi­cien­cies — money was ex­pen­sive; so, it was es­sen­tial to keep in­ven­to­ries lean — there was lit­tle time to think of new op­por­tu­ni­ties; Ko­tak In­sti­tu­tional Eq­ui­ties es­ti­mated that sanc­tions for fresh projects fell from R113,900 crore in Q1FY11 to R74,900 crore in Q1FY12, R41,300 crore in Q1FY13 and to just R22,000 crore in Q1FY14.

By the end of the year, there were barely a hand­ful of projects tak­ing off, pro­mot­ers plod­ded on, try­ing to com­plete what they had started but with­out sup­port from the gov­ern­ment, more projects stayed in­com­plete; land was not easy to ac­quire and money was costly. GVK and GMR walked off the high­ways they had said they would build, gas-based power plants re­mained starved for fuel.

By the end of the year, there weren’t too many plants run­ning at full ca­pac­ity and Maruti had de­cided not to go ahead with its plant in Sanand in Gu­jarat for the next two-three years.

In Bom­bay House, Mistry de­cided it was time to get real; he ush­ered in a regime of pru­dent ac­count­ing re­valu­ing as­sets to re­veal their true value — se­ri­ous im­pair ment charges were taken at Tata Steel, Tata Chem­i­cals and In­dian Ho­tels.

Few oth­ers, though, wanted more red on their bal­ance sheets; while a weaker ru­pee meant mark-to-mar­ket losses for those with ex­po­sure to the dol­lar or other for­eign cur­ren­cies, and a whole host of com­pa­nies took a hit, sev­eral were un­will­ing to ac­cept that there was a risk. At one point, the Re­serve Bank of In­dia (RBI), es­ti­mat­ing that close to half of cor­po­rate In­dia’s forex ex­po­sure might be un­hedged, asked banks to take ex­tra care while lend­ing to such com­pa­nies.

One would have imag­ined that in times of trou­ble, man­age­ments would look to scale back a lit­tle. Few oth­ers did so, though Mistry whit­tled down as­sets—at Tata Chem­i­cals, for in­stance, some fa­cil­i­ties were shut down—and also tried to to off­load them. Tata Com­mu­ni­ca­tions is re­port­edly in dis­cus­sions with Vo­da­com to sell a stake in Neo­tel while In­dian Ho­tels has been keen to dis­pose of its Aus­tralian prop­erty.

Jet Air­ways handed over a 26% stake to Eti­had, but most in­fra­struc­ture builders, al­though highly lev­er­aged, seemed re­luc­tant to part with as­sets; the Jaiprakash As­so­ci­ates group did well to sell some ce­ment ca­pac­ity in Gu­jarat for R3,800 crore and, while not a big amount, it was nev­er­the­less a be­gin­ning.

More­over, the GMR Group con­tin­ued to sell stakes across busi­ness, in­clud­ing air­ports. Most oth­ers, how­ever, held on for a bet­ter price un­will­ing to take a hit de­spite there be­ing tak­ers.

Mean­while, lenders took it on the chin, re­cast­ing large sums of loans as hun­dreds of man­age­ments de­clared they couldn’t carry on un­less their were given eas­ier terms to re­pay loans. For banks es­pe­cially, 2013 was 12 months too long.

ILLUSTRATION: SHYAM

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