Zero cash flows during Corona time spark fire sale of India Inc's assets

Not just mid- and small-sized firms, even big ones will either sell group companies or stakes in their listed entities to tide over crisis; more sell-offs seen in coming months

Hit by falling cash flows and low demand, several Indian companies are dialing their investment bankers to speed up the sale of assets in order to survive the pandemic. Companies with high debt are especially vulnerable, as their finance costs will remain high amid low cash flows.
 
Chief executives said that with economic recovery looking uncertain in the near term, and with corporate revenues expected to fall another 16 per cent in the current financial year, asset sales will gain momentum.
 
“It’s not only the mid- and small-sized companies, but even the big boys who will either sell group firms, or a stake in their listed entities, to tide over this crisis,” said a banker.
 
The sale of assets by Future Group companies to Reliance Retail is a classic example of how zero cash flows during the pandemic resulted in a fire sale, said lenders.
 
“The other option for lenders was to send the Future Group companies to the National Company Law Tribunal (NCLT) for debt resolution under the IBC (Insolvency and Bankruptcy Code), which would have been a lose-lose deal for all,” said another banker.

 
Besides cash-rich Reliance Industries, which itself sold stakes in its telecom and retail ventures at a premium valuation, several other groups such as GMR, Piramal Enterprises, Emami, and real estate firm RMZ sold stakes or assets to reduce their debt.
 
“The big and established players like SP (which sold its solar projects to KKR for $200 million) have the capacity to survive the long haul. This will accelerate the trend of consolidation in real estate and we will see the larger and more established players like them increasing their market share. It is also believed that only these players will continue finding private equity interest in the coming months,” said Ramesh Nair, country head and MD of JLL India.
 
Among the major transactions, GMR sold 49 per cent stake in its airport holding company to Groupe ADP of France for Rs 10,780 crore. At the same time, the GVK Group sold its Mumbai airport to the Adani group. Piramal Group sold 20 per cent stake in its pharma arm to private equity firm Carlyle for Rs 3,523 crore earlier this month. 
 
“Companies that were waiting for better valuations are now ready to do transactions as they have to repay loans. The most hit are the mid-sized companies, which are suppliers to other companies,” the banker said.

 
Asset sales will rise despite several measures announced by the Reserve Bank of India to reduce financial burden on companies. The K V Kamath committee report has outlined how banks will give relief to companies hit by the pandemic. However, this will not be enough, analysts said.
 
Rating agency Ind-Ra has predicted that the aggregate revenue of Indian mid-sized companies will decline by 15.9 per cent in FY21, as against 6.02 per cent envisaged in May. Further, amid a significant delay in economic recovery, the ability of issuers to withstand the shock of lower capacity utilisation, along with stressed liquidity, will be key, it warned.
 
In addition, a weak cash flow recovery and stretched liquidity among corporate houses will also hit banks and result in significant haircut.
 
Near-term delinquency is likely for entities having limited access to the restructuring window, given the incremental risk aversion by lenders, particularly lower down the credit curve, Ind-Ra said.