Going after working capital: SP Group firms' among most leveraged in India

The conglomerate had gross debt to equity ratio of 2.4x on an average during the year ended March this year, as against 0.82x on an average for top-listed companies, excluding financials and oil

The financial fiasco at Sterling & Wilson Solar, part of Shapoorji Pallonji Group (SP Group), was in the making for years as the group expanded rapidly in working capital-intensive sectors like construction, infrastructure, and solar projects. 

The group’s top five companies, including the main operating and holding company Shapoorji Pallonji & Co (SPCPL), reported an average gross debt to equity ratio of 2.4x during FY19. Adjusted for cash and equivalents on companies’ books, the net debt to equity improved to 2.04x at the end of March 2019, from 2.14x a year ago. 

This makes SP Group one of the most leveraged business groups in the country. For example, India's top 1,000 listed companies, excluding financials and oil, had an average gross debt to equity ratio of 0.82x as of March 2019, with large business groups on the higher side. Tata Group companies, for instance, had a gross debt to equity ratio of around 1.0x at the end of March 2019, while it was 1.6x in the case of Aditya Birla Group and 1.1x for the Vedanta group. SP Group’s leverage ratio is closer to financially stretched construction and infrastructure groups, such as Hindustan Construction (2.6x) and IRB Infrastructure (2.63x). 

The companies of SP Group in the sample include SPCPL, Forbes & Co, Afcons Infrastructure, Gokak Textiles, and Sterling & Wilson Solar. SCPCL was the group largest company in terms of revenues last financial year on a standalone basis, while Sterling & Wilson Solar was the most profitable, accounting for nearly half the group companies’ combined net profit of around Rs 1,200 crore. 

SP Group companies’ combined revenue in FY19 was up 21.4 per cent year-on-year (YoY), while their net profit was up 30.3 per cent, led by Sterling & Wilson Solar. 
 

However, the group combined debt, too, was up around 35 per cent YoY to around Rs 14,500 crore. 

Analysts attribute this to the group's over-dependence on its engineering, procurement and construction (EPC) businesses which could translate into its high working-capital requirement as clients’ delay payments, resulting in negative operating cash flows. This gap in cash flows has to be filled with borrowings at regular intervals to pay for running expenses. 

This, the analysts say, exposes the group's flagship company SPCPL to refinancing risk in a tight lending market. "SPCPL remains exposed to high refinancing risk with Rs 4,010 crore of debt due for repayment in FY20, including commercial papers (CPs) of Rs 1,260 crore. However, comfort can be taken from the current liquidity, recent sanctions for long-term funding, and financial flexibility enjoyed by the group with a demonstrated track record of refinancing debt in the past," wrote analysts at ICRA in their rating rationale for the group’s flagship company. The rating agency has given AA- rating, classified as outstanding, but it wants SCCPL to deleverage its balance sheet and reduce the level of contingent liability on its books.

However, this won’t be easy given the large working capital requirement of the group’s three largest operating companies — SCCPL, Afcons Infrastructure, and Sterling & Wilson Solar. Afcons Infrastructure for example put in nearly Rs 900 crore as working capital in FY19 against a cash profit of Rs 353 crore, with the balance coming from fresh borrowings. Sterling & Wilson Solar invested nearly Rs 2,700 crore in working capital in FY19 against a cash profit of around Rs 650 crore, while SCCPL had a working capital requirement of Rs 824 crore on a standalone basis against a cash profit of Rs 495 crore last year. 

Analysts say that the group need to go slow on its rapid growth in the cash guzzling EPC business and focus on cash-flow generation, including divesting part of SPCPL’s listed and unlisted portfolios of equity assets.

SPCPL has dozens of subsidiaries and minority stakes in an equally large number of listed and unlisted firms outside the group, including an 18.4 per cent stake in Tata Sons valued around $14 billion or Rs 1 trillion.
 

• SP Group’s leverage ratio is closer to financially stretched construction and infrastructure group

• SP Group firms’ combined revenue in FY19 was up 21.4 per cent, while their net profit was up 30.3 per cent per cent, led by Sterling & Wilson Solar

• The group’s combined debt, too, was up around 35 per cent YoY to around Rs 14,500 crore