India Inc staring at huge losses in foreign arms

Firms shedding assets and writing off investments, as initial projections go awry, show FY15 results

Many Indian companies are staring at huge losses on their mega investments abroad, prompting a few to write off their investments or to sell assets in distress.

Coal, steel, mining and energy sectors top the list of ‘wealth-destroying’ sectors.

“Many companies went for foreign investments as they wanted to expand their businesses. No one can predict the business environment, which can turn bad within weeks. The losses can be due to political, environmental, financial reasons or simply misreading of the potential of an asset,” says the chairman of a leading group who does not wish to be named.

Take Coal India for example. The company invested close to ~500 crore in Mozambique and said it found no coal worth extracting from the two blocks. It might have to write off the entire investment, say analysts. The Mozambique company also turned out to be a value destroyer for Tata Steel and ICVL, a joint venture of Coal India, NTPC, & NMDC. In July last year, mining major Rio Tinto sold its 65 per cent stake in the African company to ICVL and wrote off its $4 billion investment. The Benga coal mine in Mozambique’s Tete province, in which Tata Steel is a 35 per cent stakeholder, is losing $7.5 million per month.

Similarly, Essar group’s $600 million investment in Trinity Coal Corp in the US turned bad as the company went into Chapter 11 in 2013. Essar officials say as coal prices are at record low, they do not foresee any change in fortunes.

It’s not Africa alone. The investments by GVK group ($1.26 billion in Hancock), Lanco ($600 million in Griffin) and Adani Enterprises ($1 billion) in the Australian coal sector in 2011 remain in the red.

Analysts say the return on these investments will continue to be negative in coming years as well, as coal prices remain at record lows. The Adani family has also invested an additional $2 billion in Australia’s Abbot Point port, which is making losses.

The return on Reliance’s mega investments in the American shale gas sector — three joint ventures — remain low, analysts say. In a smart move, however, RIL last week sold its gas pipeline assets in Eagle Ford shale acreage in the US for $1 billion, netting itself a handsome profit.

Falling crude oil prices, coupled with environmental protests against fracking, are making the future of shale gas fields in the US uncertain for all investors. In 2010, RIL ventured into the shale gas business in that country through joint venture agreements with three companies - two in Pennsylvania's prolific Marcellus region (one each with Atlas Energy and Carrizo Oil & Gas), and one in the Texas region's Eagle Ford acreage (with Pioneer Natural Resources).

The 2014-15 results show the Aditya Birla group's Hindalco took an impairment of ~1,380 crore on its Australian subsidiary, Aditya Birla Minerals, where it had to stop copper production due to a sinkhole incident. This is besides Hindalco's $6-billion investment in Novelis where positive return on investments is still not in sight.

Among the biggest losers is Tata Steel's $13-billion investment in Corus. Since the 2007 investment, Corus has not made money and Tata Steel has had to go for impairment. Such writedowns, analysts say, are the managements' delayed admission of their acquisitions as valuedestructive. On top of that, the company now faces an industrial strike which has put at risk its additional investment, worth $1.8 billion made in the European company.

The road ahead, analysts say, is to cut losses by selling assets. Recently, Crompton Greaves announced it had received firm offers for its Canadian Power and the American transportation and automation business. Also, the company has received non-binding offers from industrial and power sector companies to acquire the European, North American and Indonesian activities of the power segment division. The sale came after sustained losses by these companies, in which Crompton invested ~1,400 crore. Analysts say sale of assets is one of the immediate ways to cut losses from foreign subsidiaries.

A similar strategy was adopted by wind power turbine maker Suzlon in January this year, when it sold its European subsidiary Senvion for $1 billion to US-based private equity firm Centrebridge. The funds were used to service debt and helped the company restructure its balance sheet for 2014-15.

"Like India, there are demand issues abroad. Till these economies begin to pick up steam, this trend will continue. Many companies want to sell assets but Indian companies are not getting the right valuation in a buyers' market. The only way out now is to wait for these economies to pick up," says D R Dogra, chief executive & managing director of CARE Ratings.

Among the biggest losers is Tata Steel's $13-billion investment in Corus. Since the 2007 investment, Corus has not made money and Tata Steel has had to go for impairment