From the MDs Desk
The issues that were threatening to derail the bounce-back in the GlobalEconomy in 2011 did precisely that. The Sovereign Debt Crisis roiling Europe and thecontinuing overhang of toxic assets in the European banking system saw policymakers scrambling with unconventional policy measures to save the day. In the face ofthese problems, all major economies including China are forecasted to slow downconsiderably in 2012 vis--vis 2010 and 2011. Germany, however, bucked the trend andcontinued to hold forth in Europe in terms of, both, economic growth (marginally though)and reducing unemployment. To add to the silver lining, the US economy held its own,showing promising signs of recovery as the Federal Reserve pledged to keep interestrates at near-zero levels till 2014.
Meanwhile, in India, there was a secular downtrend in GDP growth, as reflected in Q3GDP growth hitting an 11-Quarter low of 6.1%. The fiscal deficitfigure for FY12 came at5.9% v/s a target of 4.6% - a significant deviation. Factoring in these dismal figures,S&P has downgraded Indias credit rating outlook to negative, whileIMF has forecasted Indias GDP growth to fall below 7% (6.9%). In the face of suchdeceleration in GDP growth, the RBI finallyrelented and cut the repo rate by 50bps to8.00% in April 2012, after cutting the CRR by a cumulative 125 bps in February and March2012 to combat tight liquidity situation. However, it still has its hands under leashbecause, while inflation (WPI) has eased to sub-7% in 2012 from an average of 9.5% in 2010and 2011, fiscal pressures and expanded government borrowings are expected to deteraggressive rate cuts and keep bond yields around 8%.
As all these factors played out, Indian companies were squeezed from all directionswhile continuing to face high interest rates and a lot of them gave in. This wasreflected in no better way than by the sheer size of the number and volume of companiesreferred to the CDR Forum for Debt Restructuring. High profile cases, such as, GTL Infra,Bharti Shipyard, HCC, and Hotel Leela, hogged media limelight among CDR cases. As did thesheer volume of Debt over Rs. 67,000 cr referred to the CDR Forum in a singlefinancial year. It also points to the sheer number of cases that might be undergoingbilateral restructuring the one most exposed to public attention being KingfisherAirlines. Keeping with the trend, rising NPA levels reached historical highs in Indianbanks, especially Public Sector banks.
A distinct feature in the Current Crisis is the struggle faced by first timeentrepreneurs. They form the single most vulnerable class of borrowers today. Havingexperienced an explosion of opportunity with access to capital in the boom years, theyhave been hit the hardest by the multitude of problems confronting todays economy.Without the deep relations afforded by the backing of an industrial house or conglomerate,nor the deep pockets of such an entity, they are at the mercy of circumstances. Manycompanies that are run by first time entrepreneurs are fighting for survival, and thecurrent economic reality means that there can be no viable solution on offer without hugelevel of sacrifices from lenders. However, such an approach has never been trodden by theIndian banking system which continues to be intent on short-termism and piecemealsolutions which are, at best, suited to "window dress" balance sheets.
Among the various sectors, we continue to see stress in the Infrastructure sector,Power sector and also in Metals and Mining sectors. Steel, in particular, saw a number ofcompanies buckling under the pressure of High Interest burden, scarcity of raw material(in the face of Iron Ore bans) and government inaction over sanction of mining leases /allocation of mines etc. Except for large companies and those which have access to captivemines, the rest found the environment stifling. Likewise, the Infra spaces are beset withtheir own challenges and stresses. These sectors are crucial for India to move forward asan economy because we are lagging way behind the world in per capita steel consumption,infrastructure facilities and electricity generation to sustain the targeted real GDPgrowth of 8% p.a.
We continue to focus as a specialist in Financial Restructuring Advisorywhile offering the full bouquet of financial consulting services as per ourclients needs. This, however, adds many critical risk dimensions to our business fee realization, stiff resistance from banks, and unfair competition from banksponsored advisory firms, elongated mandate execution cycles and with the sudden expansionof cases undergoing debt restructuring and the high profile nature of companiesinvolved created intense competition in both the top-end and the mid-layer of the advisorymarket. A lot of dormant players became active while fresh ones mushroomed as new serviceofferings of mid-tier advisory firms who were earlier not in this space. On the whole,this is complex, challenging, and increasingly, a business with diminishing remuneration.
In the face of these distinct challenges and complexities facing the Advisory Servicesbusiness, we are beginning to feel the necessity for a re-orientation of our overallbusiness from the shareholders perspective. Among the options we are considering isthe separation of our treasury/investment arm of our business from the increasinglyvolatile and demanding nature of our Advisory business by creating a separate subsidiaryto transfer and independently run the Advisory business. We are also considering thedivestment of our NBFC subsidiary, owing to its small size and lack of scale in operationswhich hampers long term returns in this segment. However, suitable diligence andcompliance measures will be put in place to manage the existing investment portfolio inthe company safeguarding the interest of shareholders.
We believe that these strategic re-orientation efforts and corporate restructuringwould be better alignedPower to the long term interests of shareholders.