India Inc in rush to deleverage

Last Updated 20 October 2019, 16:34 IST

India Inc has been witnessing a rising number of high-profile stake sales over the last few months, as many big companies are reducing their ownerships in their prized entities in a bid to deleverage themselves.

Since the beginning of the current financial year, India has seen at least nine big stake sales. One thing common among all those companies -- a huge pile of debt or liquidity concerns.

At the end of the June quarter, the total outstanding amount of India Inc in the debt market stood at Rs 30.6 lakh crore, while bank debt to industries and services sector stood at Rs 42.7 lakh crore. The combined number is four times the net sales of India Inc at the end of the June quarter, which according to CARE Ratings stood at Rs 18.5 lakh crore.

The most prominent stake sale has been by Asia's richest man Mukesh Ambani, who announced sale of 20% stake to Saudi Aramco in Reliance Industries' (RIL) refining and petrochemicals business, valued at $75 billion. The stake sale is expected to fetch RIL an amount in excess of Rs 1.07 lakh crore.

Even as the company has one of the best cash flows in the country, Ambani during the annual general meeting of the company said that they would reduce net debt to zero – hinting at a deleveraging exercise. The company ended the last financial year with net debt -- a total debt of a company minus cash on hand -- of Rs 1,54,478 crore.

His younger brother, Anil Ambani, who has been battling financial woes, has been on a spate of stake sale in his companies. The other companies selling their stakes are: Piramal Enterprises (which has seen ratings downgrade by ICRA) selling stake in Shriram Transport, financial institutions invoking pledged shares of Rana Kapoor in YES Bank, Indiabulls (marred with concerns over liquidity) selling stake in its real-estate arm to Embassy Group's Jitu Virwani and Gautam Adani selling stake to Total Holdings, among others.

On the other hand, Essel Group, which has defaulted twice on its bonds, has seen many asset managers invoking the pledged shares. Last week, mutual funds lapped up 22% shares sold by the promoters of the Bajaj Consumer Care –- who will be using this money to repay their personal debt. The majority of promoters’ pledge will come down after this stake sale. A host of funds including Aditya Birla Sun Life Mutual Fund, ICICI Prudential Mutual Fund, HDFC Mutual Fund and Steinberg India Emerging Opportunities Fund were among the buyers of shares.

Experts attribute this phenomenon to the fact that most of these big corporates are on the deleveraging exercise. "The current deleveraging phase is more secular and structural in nature courtesy IBC and real reforms happening in the banking sector. Years of excesses are now being corrected at the business level, and who's who of the industry are also engulfed in this snowball of an unwinding of excessive debt in the economy," said Umesh Mehta, Head of Research at Samco Securities.

Experts suggest that a high degree of leverage would be impacting the bottom lines of the companies, which is why they are going for the stake sale. "The debt, in a way might be constraining their overall growth. Huge debt will lead to higher servicing costs," said Kavita Chacko, Senior Economist, Care Ratings.

A couple of other analysts from Dalal Street told DH that they expect the trend to continue for at least a year more. “It seems like India Inc is on the deleveraging process. And this is expected to continue for at least six months now,” an analyst said.

(Published 20 October 2019, 14:40 IST)

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