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
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.