Citigroup Says Firms to Delay Deals to Cut Debt: Corporate India

Indian companies may defer plans to acquire rivals and add capacity by about three years as they focus on reducing record debt, according to Rahul Shukla, Citigroup Inc.’s local head of corporate banking.

Net debt at companies, excluding banks and finance firms, on the S&P BSE200 index more then doubled to $196 billion as on Dec. 31 from $92 billion in 2008, according to data compiled by Bloomberg. It would take two to three years for companies to cut their liabilities, Shukla said.

A delay in investments may stall Finance Minister Palaniappan Chidambaram’s attempt to revive growth in Asia’s third-largest economy, said Anjan Ghosh, head, corporate ratings at the Indian partner of Moody’s Investors Service. The nation’s central bank forecast industrial activity will remain subdued after a gauge measuring company expenditure on machinery, shrank in 16 out of the 20 months through February and car sales grew at the slowest pace since 2003.

“In the past, when the government had policy pronouncements, the corporate sector backed it, lapped it up and put up the requisite investments,” Shukla, 44, said in an interview in Mumbai. “Today they are saying they will not lead but follow actual government and public capex before they go out and do it.”

The $1.8 trillion economy expanded at a decade-low 5 percent in the 12 months to March, according to an estimate from the statistics agency. The central bank forecasts gross domestic product may rise 5.7 percent in the year that began April 1. The nation has the potential to grow at 8 percent, Chidambaram said in a speech on April 24.

Walk Out

Two years of policy paralysis before Singh appointed Chidambaram as the finance minister in 2012 and allegations of corruption against officials have contributed to a logjam and deterred spending on infrastructure.

GMR Infrastructure Ltd. threatened to walk out of a highway project in January, citing delays, while Larsen & Toubro Ltd., India’s biggest engineering and construction company, is seeking to boost overseas revenue as business slows at home.

The volume of mergers and acquisitions in India dropped in the first-quarter to $4.65 billion, the lowest since 2009. While overseas companies have bought rivals and increased stakes in their units, there has been no transaction larger than $500 million where Indian companies bought rivals.

‘Major Challenge’

“Project, cash-flow uncertainty is undermining investor sentiment,” ICICI Bank Ltd. Chief Executive Office Chanda Kochhar said in an interview with Bloomberg TV India. “Reviving confidence is major challenge.”

A push by banks to improve bad loan ratios is also prompting companies to focus on cutting debt, said Shukla. The government has ordered state-run lenders to cut gross bad loan ratio to 1 percent of total assets by March, Rajiv Takru, secretary at department of financial services, said on April 14. The measure was at 4 percent of total assets as of September.

State Bank of India, the nation’s biggest lender, last month said it will seize the collateral pledged by Kingfisher Airlines Ltd. as the grounded carrier struggles with a 86 billion-rupee ($1.6 billion) debt pile and five years of losses.

State-run United Bank of India’s 515 million rupee of loan to Bilcare Ltd., a medical packaging company, have been classified as delinquent, according to an advertisement published in the Times of India newspaper on April 8.

Debt Doubles

The lender, in the advertisement, said it reserves its right to initiate legal action against the company. Bilcare said

in an e-mail response that there’s a “mismatch in cash flows” and the company is in talks with United Bank to revamp its debt.

Net debt at members of the BSE200 index more then doubled in 2008 from a year earlier to $91.6 billion, according to data compiled by Bloomberg. By 2010, that swelled to $133 billion.

“The Indian banking system, which had supported most of the financing, has also become far stricter,” said Shukla. That “pushes balance sheets towards deleveraging versus carrying a lot of debt or rescheduling over a period of time. We see that across different companies.”

Volatility in the markets is preventing companies from selling shares and use the proceeds to pay debt. The Sensex’s 30-day volatility more than doubled to 15.88 on May 3 from the year’s low on Jan. 10. The value of initial public offerings have dropped 55 percent to 3.5 billion rupees starting January in the worst start to a year since 2009, according to data compiled by Bloomberg.

Loan Payments

Companies are refinancing to extend the tenure of their loans amid lack of equity funding opportunities, according to Shukla. Most are borrowing from overseas, he said.

Suzlon Energy Ltd., India’s biggest convertible bond defaulter, raised $647 million selling five-year bonds backed by the State Bank of India, to repay U.S. dollar-denominated debt. Vedanta Resources Plc, the oil and metals producer controlled by Indian billionaire Anil Agarwal, is looking to refinance around $3.5 billion of loans, three people familiar with the matter said in March.

“Ultimately you have to raise equity and deleverage yourself,” Shukla said. “Any equity raising leads to dilution and promoters think twice before taking that option.”

Investment Restrictions

To attract investment and boost growth before elections next year Prime Minister Manmohan Singh’s government has eased rules to allow foreign direct investment in retail and airlines. Chidambaram said in March restrictions in about two dozen industries from telecommunications to banking can be removed or relaxed.

“People will wait for concrete signals before they go out and start putting up investments,” Shukla said. “People have to see more effects of actual implementation of these policies to give them greater confidence.”

Etihad Airways PJSC last month became the first to purchase a stake in an Indian carrier after Singh allowed foreign airlines acquire stakes in local rivals. Etihad said it will purchase 24 percent stake in Jet Airways (India) Ltd.

India on May 2 approved Ikea’s proposal to invest 102 billion rupees in the South Asian nation.

Still, projects to add new capacity has significantly dropped, said State Bank Chairman Pratip Chaudhuri. The lender’s profit probably fell 8 percent in the three months ended March 31, according to a median survey of 39 analysts surveyed by Bloomberg. That’s the first decline in net income in seven quarters.

“If you look at projects stuck, the numbers are historically bad,” Elena Okorochenko, managing director for Asia-Pacific sovereign ratings at Standard & Poor’s, said in New Delhi on May 4. “The announcements are there, the measures are there, the figures are not yet showing that investments, and growth generated by the investments, are picking up.”

Slowdown Spreading

The slowdown may be spreading to consumption spending, the Reserve Bank of India said on May 3, as it cut its benchmark rate to 7.25 percent from 7.5 percent. Borrowers have become risk averse because of governance concerns and delays in approvals, it said.

“As much as reform measures are important, necessary and urgent, what is even more important is to implement reforms,” Reserve Bank of India Governor Duvvuri Subbarao said in an interview to Bloomberg TV India on May 4. “There is need to revise sentiment. If few large investors get cracking, that itself will have a huge multiplier effect.”

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