Cash strapped and under-capitalised, SP group faces biggest test ever

A shift from a low-risk project execution model to big bets on infrastructure and real estate projects has plunged the group into crisis

For over a century, the Shapoorji Pallonji group has been one of the country’s top construction firms and thanks to its 18.4 per cent stake in Tata Sons, one of the most influential as well. This dominance, however, did not really reflect in its business operations. The Mumbai-based group was financially conservative and preferred the low-risk model of project execution rather than asset ownership that may demand big-ticket investments.

Around five years ago the group decided to shift gear. “A confluence of lower fiscal and current account deficits, declining inflation, benign commodity price outlook and structural reforms shall boost investments,” wrote group chairman Shapoor P Mistry in the Forbes & Co annual report for year 2014-15.

Sensing a big growth opportunity, the group decided to leverage its financial muscle and experience to become one of the country’s top infrastructure groups. In early 2017, the group announced plans to invest Rs 25,000 crore in infrastructure projects that included two tolled highways, a port each in Odisha and Gujarat and solar power projects across India. The group also decided to set up a 225 Mw gas- and diesel-based power plants in Bangladesh. In 2016 Shapoorji Pallonji launched Joyville to deliver affordable homes across multiple locations nationwide.

Growth was now the top priority for the group and it showed in the balance sheet of Shapoorji Pallonji & Company Private Limited (SPCPL) — the group holding company and promoter of all group ventures including listed companies such as Forbes & Co and Sterling & Wilson Solar.

SPCPL assets on consolidated basis have almost quadrupled in the last five years from around Rs 18,000 crore at the end of March 2014 to Rs 68,350 crore at the end of March 2019. In the same period, group revenues were up 3.5x from Rs 14,000 crore to around Rs 50,000 crore (FY19 is the latest year for which its finances are available publicly). This made it the fastest-growing company among the country’s top-tier infrastructure companies (by way of comparison, Larsen & Toubro’s infrastructure and construction division saw revenues double and assets rise 2.3x from around Rs 30,000 crore at the end of FY14 to Rs 70,000 crore at the end of FY2019).

The SP group’s fast-paced growth, however, came at the cost of profitability and cash flows. Though operating profit was up 3.5x in the past five years and net profit doubled during the period, at 0.7 per cent of net sales, the net profit margin is among the lowest in the industry and a fraction of L&T’s.

The infrastructure business has also turned out to be a cash guzzler and the company reported negative cash flow from operations in FY19, while its subsidiary Sterling & Wilson Solar reported negative cash flows for operations for three consecutive years (Sterling & Wilson was listed but has lost substantial market valuation since its listing). This made the group reliant on external financing to sustain its operations and pay dues.

The expansion in group assets was largely financed through incremental borrowings rather than internal accruals. Between FY14 and FY19, the group’s net worth was up just 50 per cent from Rs 3,468 crore to Rs 4,712 crore, while long-term borrowings jumped from Rs 2,845 crore to Rs 15,337 crore.

As a result, the group remains undercapitalised with one the highest debt-to-equity and debt-to-EBITDA ratios in the industry. The group’s asset-to-equity (or net worth) ratio was 14.5x in FY19 and the long-term debt-to-equity ratio was 3.3x. The corresponding ratios for Larsen & Toubro’s EPC division was 2.6x and 0.08x in FY19 respectively.

Early this month, India Ratings downgraded SP Jammu Udhampur Ltd’s non-convertible debenture citing potential erosion of its debt service coverage and deteriorating credit profile of its sponsor.

In November last year, ICRA had downgraded SPCPL citing refinancing risks and delay in its deleveraging plans through equity infusion and asset monetisation.

“The group has already defaulted on loan repayment to its listed subsidiary, Sterling & Wilson, which has given it another one year to repay their loans,” says a banker. “It has no option but to restructure its debt as per the K V Kamath panel recommendations,” he added.

On a standalone basis, SP Construction Pvt Ltd has asked banks to restructure its Rs 10,900 crore of debt after seeking a moratorium for the Covid-19.

The company’s sales, like that for other developers, came to a standstill, though analysts say that it will come out of the crisis but in the long run. “Buyer sentiment to prefer projects by developers, where there is an assurance of timely delivery is driving sales. Other key criteria considered by buyers include the brand name, credibility, and track record while evaluating options; and SP, led by its strong management, is well known for all of these qualities,” said Ramesh Nair, country head of JLL.

The share sale by at least two group companies — Afcons Infrastructure, one of the India’s top EPC companies, and water purifier Eureka Forbes — had been postponed in the past making it difficult for the group to monetise assets.

The expensive four-year battle with the Tata group has also put the SP group in a bind. The groups’ promoters, Pallonji Mistry and Ratan Tata, 82, shared a cordial relationship. After the 91-year Mistry, now ailing, left the day-to-day business in the hands of his sons, Shapoor and Cyrus, the bonhomie between the families evaporated with the latter’s abrupt dismissal from the chairmanship of Tata Sons in 2016 after just four years in charge.

While that fierce boardroom battle rages in court, the SP group’s plans to sell its Tata Sons stake has added a new twist to the saga. The latest development is an application from the Tata group to the Supreme Court to restrain the SP Group from raising Rs 3,750 crore from Canadian financial powerhouse, Brookfield, using its Tata Sons shareholding as collateral. The money was to be used to pay an inter-group loan from Sterling & Wilson.

“With the Mistry group now saying that it is ready to sell its 18.37 per cent stake in Tata Sons, the Tatas have several options to buy back their stake including selling part of TCS shares or pledging it to raise debt. They can even sell some of the laggard businesses like Tata Capital to raise funds,” he added. “But this is a good opportunity for the Tatas to settle this issue once and for all.”

The question whether an end to the Tata spat will end the behemoth’s financial woes, though, is still to be answered.