India Inc faces rough weather in overseas biz; domestic ops take priority

Post-Covid-19, the action has shifted to the home market

In the past 12 years, Indian companies — led by the Tatas, Birlas and Mukesh Ambani’s Reliance Industries — poured billions of dollars in acquiring assets overseas. The gold rush was followed by other groups like Bharti, JSW Group, and the Mahindra group. 

But, as global economies contract because of the Covid-19 pandemic, the focus of most of the India Inc has now moved back to the home market where demand is expected to pick substantially from the coming festival season, bankers said. “The pandemic has given a lot of time to promoters to look at the performances of group companies overseas and now, they are taking tough calls,” said a banker advising Indian companies.

The chief executive officers (CEOs) said sudden and mid-way changes in laws (as experienced by Anil Agarwal-owned Vedanta in Zambia), increased activism by environmentalists and fall in demand from local firms are the key reasons for companies failing in their overseas acquisitions. Besides, unexpected political events such as the Brexit also impacted operations of Indian companies in Europe.

“The Tata group is still trying to bring its steel business on track and has announced several steps in the past few years, including sale of few assets in the UK and a merger with ThyssenKrupp. However, nothing has worked in its favour. The company has now sought a bailout from the British government in lieu of a stake in its operations,” said a Mumbai-based banker. 

Tata Motors is also staring at huge losses because of Jaguar Land Rover, which is facing declining demand in China and Europe. The UK’s exit from the European Union has also impacted the company’s fortunes negatively. A similar story was played with RIL’s shale gas assets in the US where it invested over $10 billion but there were no remarkable returns as oil prices fall made shale gas production unviable. 

JSW Steel said it had decided to scale down its investments in the US to focus on India where demand for steel is going up. The US operations remained a continued cause of worry for the organisation as it seldom made money. The Mahindra group acquired South Korea’s Ssangyong and failed to turn around the operations in 10 years. The group has decided to sell stake in the unit this month after rejecting pumping any more money in the unit.

Bharti Airtel, which had acquired the African operations of Zain Telecom in 2010 for $10.7 billion, had a tough time turning around the business. The telco listed its African subsidiary in the London stock market in July 2019 and reported 57 per cent fall in net profit in the June quarter because of the pandemic.

Silver lining

The only silver lining for Indian companies is the overseas businesses of the Aditya Birla group, which celebrated 50 years of its global presence in November last year. According to analysts, the acquisition by Aditya Birla group of Novelis in the US in 2006 and later of Aleris by Novelis last year has yielded good results.

The group’s journey started in Thailand and now, has presence across 36 countries in six continents, with over 120,000 employees from 42 nationalities. Over 50 per cent of the group’s global revenues now come from overseas operations.

In the June quarter, Novelis reported earnings before interest tax depreciation and amortisation (Ebitda) of $253 million, which was down 32 per cent (YoY) mainly because of lower auto and aerospace shipments and sluggish demand.  

Analysts said they were optimistic about Novelis’s balance sheet strength as its net debt-to-Ebitda of 3.7 times even after the Aleris acquisition is comfortable and the company plans to reduce it below 3 times over the next two years. Though the free cash flow of the firm in the current financial year will remain at the same level as FY20, it also plans to put its entire surplus cash flow to cut debt.