A great Indian deleveraging is needed to put things right; Country’s conglomerates hobbled by heavy debt cargo

January 14, 2014 5:54 am

A great Indian deleveraging is needed to put things right

By James Crabtree

Country’s conglomerates hobbled by heavy debt cargo

Mumbai’s spiffy new international terminal boasts soaring interiors, modern facilities and even a 3km “art wall” – made partly from cow dung. The $2bn project has raised hopes among weary travellers, fed up with India’s often-grim airports, but it also embodies a conundrum: the crisis facing the country’s heavily indebted industrial conglomerates.Manmohan Singh, India’s prime minister, inaugurated Mumbai’s “T2” last week, as it races to open later this month. Owners GVK face equally pressing financial deadlines, however, as they attempt to sell a Rs25bn ($406m) stake in their most prestigious asset.

The Hyderabad-based group’s finances are precarious – net debts hit $2.6bn last year, with an interest cover ratio of 0.4 – but far from unusual in India. Numerous other major business houses, from billionaire Anil Ambani’s Reliance Group to infrastructure conglomerates such as GMR and Lanco, are also mulling asset sales to escape debts taken on during a recent infrastructure boom.

A great Indian deleveraging is clearly needed. Gross debt at the ten largest financially strapped industrial groups topped a total of $100bn last year, according to Credit Suisse. Banks have been badly hit: troubled assets roughly doubled to about 10 per cent of loans over the past two years. They are projected to rise further in 2014.

Raghuram Rajan, central bank governor, sounds increasingly alarmed over the behaviour of his nation’s more delinquent tycoons, warning that they have no “divine right to stay in charge, regardless of how badly they mismanage an enterprise, [or] to use the banking system to recapitalise their failed ventures”.

The Reserve Bank of India said this month that the collapse of just one group could trigger “contagion in the banking system”.

Such a disaster is unlikely, if only because India’s bankers are generally unwilling to force companies to the wall. Even so, the debt crisis is having a profound effect. Private sector investment has all but collapsed, undermining hopes of a robust economic recovery. And without infusions of capital, India may be menaced by zombie industrial conglomerates for years to come.

Sanjay Reddy, GVK’s vice-chairman, dismisses this prospect, saying that a deal for his airport assets will be struck within months. Possible investors include global pension and sovereign funds, along with infrastructure-focused private equity. “Amongst all infrastructure classes, airports are the safest assets,” he told the Financial Times. “We have had plenty of offers.”

Deals of this sort could see India’s heavily indebted groups raise as much as $10bn by mid-2015, according to broker CLSA. But their path forward remains fraught, for three reasons.

First, many stretched tycoons are unwilling to sell, at least at sensible prices.

Second, numerous troubled projects remain hobbled by regulatory snarl-ups. This deters investors, especially in the energy sector.

Perhaps the most troubling factor, however, is the peculiar relationship between India’s tycoons and their bankers, who seem unwilling either to force debtors to sell up or to help them to do so – a problem given that so many industrial projects have little or no equity left, again making them unattractive to buyers.

“It is the worst of both worlds,” says Saurabh Mukherjee, head of equities at broker Ambit Capital in Mumbai. “The banks won’t get tough, but they won’t take a haircut on their debt, either. The result is a big mess. Someone has to blink.”

Finding a way forward requires action from all sides. India’s politicians ought to follow Mr Rajan and step up the pressure to offload assets. Bankers must also be tougher. Ultimately, however, a change of attitude is needed from the tycoons: a realisation that it is better to sell out now at a reasonable price and move on than to spend years haggling and hoping for bailouts.

Projects such as Mumbai’s T2 prove that Indian companies can build world-class infrastructure, fit to rival China. But the system behind them is broken. Buccaneering tycoons take on excessive debts, pocketing the upside but expecting generous forbearance when things go wrong.

State-backed banks, meanwhile, seem oddly keen to hand out cash to industrial groups with weak financial track records but strong political connections.

The result has been bad for companies and banks alike, but worst of all for India itself: with so many major conglomerates paralysed by debt, the country has virtually no chance of meeting a government target to invest $1tn in new infrastructure by 2017.

A great Indian deleveraging is now just the first step needed to put things right.