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Large infrastructure cos face tough time as cash flows dries up

By Dev Chatterjee
July 09, 2015 08:22 IST
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UBS said 15 to 20 per cent of companies analysed by the bank are already categorised as non performing loans

Global bank, has red flagged the falling financial metrics of six highly leveraged companies -- Jaypee, Essar, GMR, GVK, Lanco, and groups – and said Indian banks have increased their exposure to these companies in spite of a deterioration in their cash flow and inability to service debt in the last few years.

In a study, UBS said 15 to 20 per cent of companies analysed by the bank are already categorised as non performing loans or have been restructured, and therefore, are part of the banks’ impaired assets.

“The total loan approvals by banks have increased by 85 per cent since FY12 for the banks under our coverage including non-fund based exposures. While strong growth could be partly driven by disbursements to already approved loans for projects, banks also seem to be supporting some accounts, leading to a stretched working capital cycle,” it said in a report dated July 7.

All the six companies identified by UBS as stressed assets have already taken steps to reduce their debt. While sold off its cement and power plants, the group sold its slurry pipeline and oxygen plant to raise funds apart from converting local loans with dollar loans. Essar Steel also plans to sell assets worth Rs 12,000 crore (Rs 120 billion) in the current fiscal to reduce its debt.

On the other hand, is also talking to its banks to take advantage of the 5/25 scheme to restructure its debt. The group has put its plans to develop an expensive coal mine in Australia in deep freeze while sold off its Udupi power plant to the Adani group for Rs 6,000 crore (Rs 60 billion). The 5/25 scheme increases the tenure of the loan by 25 years with an option to refinance the loan in five years.

UBS said going forward these companies will have to sell more assets to support their interest and principal repayments and help them avoid defaults. A slowing economy, ambitious projects and land acquisition delays are the main reasons why many projects of these six groups failed to take off or were stuck mid way after construction started.

On GMR Infrastructure, UBS said the consolidated debt of the company has increased from Rs 21,200 crore (Rs 212 billion) in FY 11 to Rs 46,000 crore (Rs 460 billion) in first half of FY15, while its debt-to-equity ratio has risen from 1.9 times to 5.5 times over the same period. Its interest coverage ratio is low at 0.7 times. ICICI Bank and Yes Bank increased their exposure to the group since fiscal 2012 despite stress on the balance sheet.

UBS said the total consolidated debt of Hyderabad-based GVK Power and Infrastructure has increased from Rs 5,500 crore (Rs 55 billion) in FY11 to Rs 22,300 crore (Rs 223 billion) by FY15, whereas its debt-to-equity ratio has risen from 1.5 times to 10.7 times over the same period and as a result its interest coverage ratio was low at 0.6 times.

UBS analysed data for 17 companies in GVK Group, with a total exposure of Rs 11,800 crore (Rs 118 billion) and said Axis Bank and Infrastructure Development Finance (IDFC) have the highest exposure to the group.

On Lanco, UBS said the total consolidated debt increased from Rs 16,700 crore (Rs 167 billion) in FY 11 to Rs 38,000 crore (Rs 380 billion) in 9M FY15, whereas its debt-to-equity ratio has risen from 3.3 times to 14.1 times to over the same period. Its cash interest coverage ratio is also low at 0.8 times.

But with the sale of its Udupi plant, Lanco will be able to reduce its debt to around Rs 32,000 crore. UBS analysed data for eight companies in Lanco Group, with a total exposure of Rs 26,100 crore (Rs 261 billion) and found that Punjab National Bank, ICICI Bank and REC have the highest exposure to Lanco.

UBS also analysed the 11 Essar Group companies excluding Essar Oil and Essar Power (Salaya) and said ICICI Bank, SBI and PNB have large exposure. The total debt of the group was Rs 93,600 crore (Rs 936 billion), up from Rs 75,800 crore (Rs 758 billion) a year ago period. A top official of the Essar group said the group has taken multiple steps to cut its debt including a plan to sell 49 per cent stake in Essar Oil and its ports.

On Jaypee group, UBS said ICICI Bank, SBI, Axis, and Yes Bank have increased their loan approvals by 250 per cent in the last three years even as the group’s debt rose to an alarming Rs 96,200 crore (Rs 962 billion). Jaypee sold off its power plants to JSW group for Rs 12,000 crore (Rs 120 billion) in the last fiscal apart from selling its cement units in Gujarat and MP to Ultratech.

UBS said it is difficult to depend on collateral in India as the Kingfisher Airlines case shows lending against collateral is risky given delays in the judicial process. Kingfisher Airlines shut shop after taking a Rs 7,000 crore (Rs 70 billion) loans from the Indian banks. Till date, Indian banks are unable to get their money back from the airline and the overall recovery is less than 15 per cent, it said.

UBS said it analysed data of the banks’ filings with the Registrar of Companies. But it said these charge documents may not accurately represent the actual loan exposure of banks to respective companies as they do not capture partial repayments or undisbursed money, and includes non-fund based facilities. Therefore, UBS adjusted the data for repayments wherever information is available.

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Dev Chatterjee in Mumbai
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