Managing growth

A significant drop in demand coupled with lack of credit is among the key reasons responsible for a number of Indian companies restructuring their organisations, rescheduling loans and scaling down expansions. Not wishing to be left out of the race to grow bigger at the shortest time possible, companies had borrowed heavily from domestic and foreign sources to fund ambitious expansions, acquisitions and diversification.

"The global market," says Arvind Mahajan, executive director, KPMG, "was all about maximising growth opportunities, and financing this was not an issue." As the cycle turned and cash flows thinned, companies were left with a mountain of debt to service. Says Kaushal Sampat, chief operating officer, Dun & Bradstreet India, "A sudden change in business environment resulted in an increase in debt as well as in building up of inventories. This lead to working capital and cash getting trapped in longer-than-expected cycles, which impacted the repayment capacity."

Restructuring the business

With business growth not keeping pace, aggressive expansion plans, acquisitions at peak valuations (in 2007) and subsequent market meltdown has meant a collapse of asset values leaving promoters with little choice but to cut costs, rationalise the workforce and sell assets.

The sectors that have been most impacted by the market downturn and the most leveraged have been steel, mining, shipping, auto and real estate. Experts suggest that to counter the downturn, companies have to move out of markets which they are unfamiliar with or don’t add significantly to the topline, exit non-core operations and recalibrate the risk they can take.

A popular restructuring exercise is to split the businesses to unlock values as the collective market capitalisation post the split is likely to be higher. While companies that have adopted this route over the last six months have been NDTV, Emami, Pantaloon and Strides Arcolab, those that have spun off non-core assets include DLF.

On the other hand, a few others are merging or onsolidating their businesses under a single roof (or focussed entities) to extract operational and financial gains, and not necessarily due to compulsions arising out of the current environment (like Reliance Industries, Jaiprakash).

Managing risks

Such has been the reversal of market sentiment that integration which would otherwise have been hailed as a positive move is now seen with a critical eye. Says Badri Narayanan, partner, Ernst & Young India, "In a supply exceeds demand scenario, you would rather outsource inputs (there are more suppliers) than make it yourself. Backward integration does not help."

While companies must expand to grow, are risk management systems absent which could have indicated the level of risk and downturn companies could stomach? Analysts say that the degree of volatility has been unprecedented, but there have been sectors such as real estate where greed overtook prudence (see table Realty plans).

Nirmal Gangwal, CEO, Brescon, a corporate advisory says that a good number guiding principles such as debt to Ebidta, margins based on average of peak and bottom cycles and gearing exist, but companies perceive liability management as an accounting function and rarely are strategies devised which encompass possible effects of liailities in a worst-case scenario.

Impact

While debt restructuring allows a company facing liquidity issues to negotiate with creditors to reschedule payments, what is its impact on operations? Says Sourav Chatterjee, vice president of investment bank, Equirus Capital, "Many of the financial restructuring exercises come with additional strings attached, which in the long run would put the companies at a disadvantage as compared to the broader market." Companies, which are under a debt restructuring programme such as Wockhardt, will not be able to either acquire or expand until the debt recast plans are in place.

We have identified seven companies, which are undergoing restructuring, and analysed the reasons for doing so and the impact of the measures on their growth prospects. Read on to know more.
 

PLAN OF ACTION
Company	Business Segments	Activity	Rationale
Crompton Greaves	Power & Industrial equip, Consumer Prod	Purchase of Avantha Power	Diversify, buy cheap assets
DLF	Commerical, Residential, SEZ, Retail, Infra	Merge DLF Assets with itself, divest windmill biz	Exit to investors, focus on core operations, raise cash
Dr Reddy's	Generics, Biotech, Drug discovery	Exit smaller generic markets around the world	Cost cutting
Emami	Health and Personal care	Reorganise realty and FMCG biz of Zandu and Emami into separate entities	Common business synergies
Havell's	Electrical and Power Distribution equipment	Closure of UK-based CFL plant	Cost cutting
Jaiprakash Associa	Cement, Hotels, Realty Construction	Merge hotels, cement and realty biz with itself	Group consolidation, diversified revenue base, enables it to bid for bigger projects
Mcnally Bharat	Engineering	Transfer of production division to subsidiary	Capital infusion, value creation
MindTree	Software	New market segments, set up business units	Achieve revenue growth ($1 billion target)
NDTV	News, Entertainment	Spin off news business into separate company	Attract new investors
Pantaloon Retail	Retail, Consumer Finance, Insurance	Spin off businesses into separate companies	Raise funds
Piramal Healthcare	Generics, Drug Discovery	Closure of UK-based manufacturing plant	Cost cutting
Reliance Inds	Oil & Gas, Petchem, Retail, SEZ	Merger of Reliance Petroleum with itself	Synergies from integrated operations
Stritdes Arcolab	Generics, Drug Discovery	Trifurcate pharma into R&D, pharma & specialty	Unlock value
Unitech	Realty, Telecom	Restructuring of loans	Raise cash
Wockhardt	Generics, Biotech, Hospitals, Drug discovery	CDR programme	Repayment of loans

DLF

India’s largest realty player is postponing projects, selling non-core assets, offering discounts and identifying new avenues of funds to beat a demand slowdown. Due to a dip in demand, the company has delayed about a quarter of the 61 million square feet (mnsqft) (total land bank of about 751 mnsqft) it is developing across the country.

The slow offtake has meant that DLF Assets or DAL, a group company, which accounts for half of revenues, owes it about Rs 5,500 crore. In addition to this, there are also reports of private equity investor D E Shaw, which has invested about Rs 2,000 crore in DAL, wanting to exit from the company.

To recover the dues and pay D E Shaw, DLF may choose to either rope in fresh investors, raise more funds by mortgaging lease rentals of DAL or buy partial stake/merge the subsidiary into itself. Analysts believe that DAL is unlikely to be merged into DLF as the former enjoys tax benefits (as a SEZ developer) which might not be available to the combined entity.

DLF is also reported to be looking at hiving off its wind power assets in which it has invested about Rs 2,000 crore so far. According to analysts the assets could fetch upwards of Rs 1,100 crore. The cash crunch has also reportedly forced the company to request the Ministry of Commerce to denotify four of the nine SEZs it was planning to set up.

Price discounts for its recent middle-income project launches in Hyderabad, Chennai, Bangalore and Gurgaon and relaunch of some of its existing properties at reduced prices is likely to generate cash flows and is considered a positive for the stock.

While total debt at Rs 15,500 crore translates into a debt-to-equity of 0.6 times, a pressing concern is the short-term debt of Rs 1,600 crore payable in June this year.

The stock has moved up over 45 per cent in the last month (more than the gains recorded by BSE Sensex), which analysts believe is not justified given that the near-term prospects don’t looking too good. At Rs 234, the stock trades at an expensive 26 times its fully diluted FY10 estimated EPS of Rs 9.

Emami

Having acquired a 72 per cent stake in Zandu Pharmaceutical Works for Rs 750 crore in October last year, Kolkata-based Emami is restructuring the operations of the acquired unit. While a committee will recommend the steps for the integration keeping in mind "commercial angle, corporate governance issues, tax options as well as costs", it is believed that the FMCG and realty businesses of the two companies are likely to be merged. In addition, Emami has sold chemical intermediates company, Zandu Chemicals, as it did not fit into the Zandu Pharma’s ayurvedic product portfolio.

On the operations front, the company will be banking on two segments — therapeutic oils (Navaratna oil) and antiseptic cream (Boroplus)—which contribute about 55 per cent of sales, to power future growth. The company has 54 per cent market share in the therapeutic oil category (market size of Rs 400 crore) and a 70 per cent market in antiseptic cream (market size of Rs 190 crore) with both segments growing at 15-20 per cent rates.

The company is likely to grow its net profits by 15 per cent over the next one year on the back of increased sales and cost control. At Rs 220, the stock is trading at 13.6 times its FY09 earnings estimate of Rs 16 and should deliver decent returns over the next one year.
 

NOT SO ATTRACTIVE
FY09E in Rs crore	DLF	Emami	Jaiprakash Asso	Pantaloon Retail	Wockhardt
Sales	10,100.0	621.0	5,200.0	6,380.0	3,785.0
% change y-o-y	-28.0	6.4<