Tag Archives: L&T

The Tepidity Hangover

While most agencies are speculating on the estimated GDP growth rate for India and the fact that oil is a big worry for our financial health, not one is able to capture the mood of the economy despite the numbers. Are we well past the painful period in the economy? How long do we have to wait to see the green shoots seen by some (but not most)? The answers are at best befuddled. So, let’s start looking at what is definitely the positive part of what is visible.

The Insolvency & Bankruptcy Code (IBC) has brought all delinquent cases on the auction table and bids are at advanced stages. Having bidders indicates that the propositions are attractive. We have the case of Bhushan Steel, which has helped bankers redeem their loans by curtailing losses that would have been caused if the company had gone into liquidation. Bhushan Steel would have fetched only Rs 140 billion if liquidated, but Tata Steel has paid Rs 325 billion for the 5-million capacity plant 150 km away from its Kalinganagar plant. With most banks having already made provisions for 50 per cent of the total Rs 560 billion Bhushan owed them, proceeds from the sale are seen boosting their profitability.

What’s remarkable in this case is that while the liquidation of the company would have fetched Rs 140 billion, the transparent process of auctioning the company has been able to restore a better realisation at nearly three times this value. Further, the asset is getting a bidder that will restore two-third of the funds lent to an active status. In the erstwhile BIFR regime, this asset would have gathered rust until the plant became inoperable and the workers would have lost their means of a livelihood. If the IBC can similarly convert many of these stressed assets into earning assets despite a haircut, it would stem the loss of jobs and save assets from decimation.

On another note, subsidies to the poor in India would not reach the intended beneficiary and would be diverted owing to poor governance. Today, direct benefit transfer and Aadhar linking have helped save Rs 830 billion. What’s more, the housing shortage in urban areas is now settled at 10 million homes, while the government wants to build another 10 million homes for the rural poor by the end of 2018. Houses are being constructed at breakneck speed, with L&T, Shapoorji and NCC being some of the companies picking up large contracts. Further, mega infrastructure projects like the metro, trans-harbour link, coastal road, airports, Bharatmala, Sagarmala, railway stations, freight corridors and bullet train will continue to face execution challenges – but remain our biggest prospects. Grab them and get going or you will miss the opportunity under the hangover of tepidity.

PRIME THE PUMP

Earlier in May, when I had asked Sajjan Jindal, chief of JSW – the group with the best appetite for capital investment – when the private sector would begin investing, he had replied that we were poised for an imminent renewal in sentiment for private investment. Recently, Ajay Piramal, head of Piramal Group and Shriram Group, reflected that a higher GDP number would initiate private investment flow into the economy. And, the World Bank projects that gross fixed capital formation (GFCF), which indicates investment demand in the economy, will grow by 6.8 per cent in FY18 and 8.8 per cent in FY19.

However, the situation appears to be suboptimal currently. According to CMIE, announcements of new industrial and infrastructural projects remained muted in the first quarter of 2017-18. Only 448 projects were announced during the quarter. This is the lowest quarterly project announcement seen since June 2014, the time when the last capex cycle bottomed out. Further, the completion of projects has dipped over previous consecutive quarters. Lower project initiation and a falling commissioning rate will be a double whammy – the only way to change this situation is to enhance the rate of commissioning of the project pipeline and, at the same time, improve the launch of new infrastructure projects. Stalled projects have also not seen any significant resolution. Ideally, the current government is in the best position to resolve and move this rapidly. If the RBI has recognised the need to resolve the mountain of debt through insolvency resolution professionals, why not seek help in resolving stalled projects too?

Foreign funds are keen to invest in toll-operate-transfer (TOT) projects so they can realise the toll yields on completed projects. Hence, NHAI is preparing to offer such completed projects and generate liquidity. Further, the Insolvency & Bankruptcy Code will help quicker consolidation as companies find a solution for bailing out. L&T’s results also indicate that larger companies with stronger balance sheets can take on the burden of stressful financial cycles as contracting for infrastructure is essentially becoming a big boys’ game. There is a need for out-of-the-box solutions to resolve the infrastructure growth gridlock.

So, if private investment is yet to make its mark, what is keeping our engines sputtering if not humming? Public spending. Government spending grew by 13 per cent, year-on-year, in the two months April-May 2017 to touch Rs 4.6 lakh crore against Rs 2.9 lakh crore in April-May 2016. Capital expenditure for infrastructure creation and other assets rose 63 per cent in April-May to Rs 54,000 crore from Rs 33,000 crore in the same two months a year ago. With GST affecting working capital cycles, government spending will be needed to keep the economy pumped up.