Sterling & Wilson deal with Reliance reduces Shapoorji Pallonji' s debt but there is still work to do

When Sterling & Wilson inked a deal with Reliance New Energy Solar earlier in the week, a unit of Reliance Industries, it made the headlines, as it does in the case of any M&A deal.

This one was a little different not just for Reliance's ambitions to make the big move (the group also acquired REC Group for $771 million on the same day) but also that Sterling & Wilson was being picked up for Rs 2,850 crore or Rs 375 per share but at a 14 per cent discount to the prevailing market price -- on Friday, the stock closed at Rs 434 and on Monday it was at Rs 469.5.a

It was just one more confirmation that the Shapoorji Pallonji Group, the company's parent, was on a sticky wicket loaded with the burden of huge debt and looking for ways to cut it.

Less than a month ago, the group sold Eureka Forbes. A name in the water purifier business (it owns the Aquaguard brand), it marked the slow but sure exit from a stable business. There was no compelling reason to let go barring debt and private equity major, Advent gleefully acquired the company for which the promoters will get Rs 3,100 crore for a 72.56 per cent holding.

As things stand, the debt burden is expected to drop significantly and provide much-needed relief to the financially troubled Shapoorji Pallonji Group.

The decision to sell EFL, a company with FY21 revenues of Rs 1,857 crore with a net profit of Rs 52 crore (corresponding revenue for FY20 was Rs 1,922 crore and a net loss of almost Rs 400 crore, with the company being in the red for FY19 as well), comes on the back of commitment to its lenders as a part of a one-time restructuring of a Rs 10,900 crore debt under the Covid-19 relief framework. This was cleared by the banks this March of the total debt of over Rs 22,000 crore. The group owns an 18 per cent stake in Tata Sons with the valuation of that still not very clear.

All eyes will now be on Afcons Infrastructure, a construction company owned by the group. This is closely held and, according to an October 2020 ICRA report, operates in areas such as offshore oil and gas, bridges and flyovers, marine works, road construction, hydro and tunnelling, pipe laying and general civil engineering works.

For FY20, it had a revenue of Rs 10,000 crore, with a net profit of Rs 248 crore (for the previous fiscal, the revenue stood at Rs 8,736 crore and a net profit of Rs 234 crore). The worry is that the same report has downgraded the company's long-term rating to (ICRA)A+ and short-term rating to (ICRA) A1.

"The downgrade of Afcons Infrastructure's ratings reflects the overall deterioration of the credit profile of Shapoorji Pallonji Group and increase in the linkages between AIL and its parent company - Shapoorji Pallonji and Company Private Limited (SPCPL)," stated the report. How the story will unfold from this point is quite fascinating as the group looks at ways to reduce the burden of debt.