Last fortnight Tata Motors announced a plan to raise funds to partfinance the $2.3-billion acquisition of Ford’s iconic auto brands Land Rover and Jaguar. The latest proposal is slightly different from one the automajor announced in May: That it would raise Rs 7,200 crore via three rights issues. There’s no change in two proposed issues to raise Rs 4,200 crore.
Ratan Tata, Chairman, Tata Group
Company: Tata Motors
Raising funds for: Financing acquisition of Jaguar-Land Rover
Original plan: Announced plans in May to raise Rs 7,200 crore via three rights issues. Rs 4,200 crore was to be raised via an issue of ordinary equity shares, and an offer of equity shares with differential rights; and Rs 3,000 crore through five-year convertible preference shares with a coupon rate of 0.5 per cent
Revised plan: To issue convertible preference shares dropped last fortnight. Will raise Rs 3,000 crore through a divestment of stake in group companies
Around the same time, Aditya Birla group company Hindalco became another Indian mega-corp— which had also made a multi-billion acquisition, of aluminium giant Novelis for $6 billion—to rejig its capital-raising game plan. In June, the Birla aluminium major had proposed to raise Rs 5,000 crore by issuing one rights share for every three held, at a price of Rs 120.
Last fortnight, the Hindalco board decided to scale down the issue price to Rs 96, and changed the ratio to a seemingly more attractive three rights shares for every seven shares held.
Blame it all on the current sluggish market conditions and battered valuations. If the bellwethers of Corporate India are being forced to go back to the drawing board in their quest to finance their big-bang growth plans, it’s largely because the downturn in equities has upset their fund-raising programmes.
For instance, analysts point out that perhaps the finance honchos at Tata Motors weren’t too sure that a rights issue of low coupon-bearing preference shares, where returns would accrue to investors after 3-4 years, would find many takers. Ditto with Hindalco, which had to factor the bearish investor sentiment into its rights issue.
Tata Motors and Hindalco are just two corporations at which the Chief Financial Officers (CFOs) are burning midnight oil to ensure there’s adequate, and affordable, capital to keep the growth engine humming. Across India, a rash of promoters, big and small, has earmarked capital expenditure that runs into thousands of crores.
According to the Centre for Monitoring Indian Economy (CMIE), Corporate India has investments totalling Rs 71,10,334 crore lined up. The trillion-dollar question is: Where is all that money going to come from?
Ashutosh Agarwala, CFO, Strategic Finance
Raising funds for: Expansion of energy business
The threat of deterioration in the investment climate—coupled with lower profit growth—may not be yet visible, but it is very real. As S. Ramesh, COO, Kotak Mahindra Capital, points out, the impact will be felt with a lag effect. “With deterioration in macroeconomic and business conditions, new investments can drop and credit demand could slow down from the current elevated growth to more reasonable levels. The investment slowdown is more likely in the next financial year than the current one as the pipeline of investments this year remains strong,” explains Ramesh.Pawan Agrawal, Director for Corporate and Governance Ratings at credit rating agency Crisil, indicates that early signs of trouble are beginning to show: “Demand in consumer-oriented sectors is slowing down. However, economic growth is still healthy, driven by investment demand. Projects are being implemented in power and infrastructure sectors and capacity expansions are underway.
Kumar Mangalam Birla, Chairman, Aditya Birla Group
One till-recently-red-hot sector that’s been scalded badly is real estate. Banks are reluctant to dole out loans to developers, and the erosion in their stock prices (by as much as 70-75 per cent in a few cases) puts raising equity out of bounds, too. “The business growth over the past 3-4 years was almost volcanic as many developers expanded much beyond their scale.With the scenario changing over a short period of time, the same developers find themselves in overleveraged positions,” says Ajoy Veer Kapur, MD, Saffron Group, a real estate investment fund. Indeed, the scenario is desperate enough for a few real estate promoters to pledge their shareholding in lieu of loans. And interest costs continue to rise.
The Delhi-based Unitech’s interest cost as a percentage of net sales doubled to 18 per cent in the June quarter (over the previous corresponding quarter). For Ansal Properties & Infrastructure, the corresponding figure went up from 2.75 per cent to 9 per cent.
Sajjan Bhajanka,Managing Director
Sumeet Agarwal, analyst, HSBC Securities and Capital Markets, cites higher interest costs and an increase in debt-equity ratios, due to lack of equity financing, as near-term risks associated with the infrastructure sector. It has duly reduced its profit estimates for the sector.Promoters in such core sectors are scampering for alternative sources of financing. Both JSW Energy and GMR Energy had planned to raise Rs 4,000 crore and Rs 3,500 crore, respectively, to fund their power plant expansions. The companies have put their IPOs on hold. Seshagiri Rao, Director Finance, JSW Steel, the promoter company of JSW Energy, is counting on internal accruals. “We had planned a capex of Rs 11,000 crore for JSW Energy, of which Rs 3,000 crore has been funded through internal accruals. The IPO will be considered for the next growth phase,” says Rao.JSW Steel has lined up capital expenditure worth Rs 14,700 crore till 2010. But Rao isn’t biting his nails as the company has achieved financial closure for Rs 6,000 crore and has tied up funds worth Rs 8,000 crore through rupee loans and foreign currency convertible bonds issued in July 2007.
Seshagiri Rao, Director-Finance
But private equity may not be a quick-fix. “If a promoter was willing to dilute, let’s say, a total of 10 per cent in an IPO, he’s likely to dilute a smaller percentage to a private equity player at this stage, so that he maintains an overall target of 10 per cent whenever he goes public,” says Ranu Vohra, MD & CEO, Avendus Advisors. However, there may not be too much of a choice. Rao of JSW Steel is candid when he says CFOs have to make a choice—either take on more debt or sacrifice a stake.
Investment bankers for their part are attempting to design products that are a hybrid of equity and debt in a bid to balance out risk. An example: Structured debt instruments, which carry a low coupon rate and an option to convert into equity at a future date, either at a predetermined price or a price linked to the performance of the company.
Since January, at least three companies have raised funds through optionally-convertible or fully-convertible debentures. Explains Kishore Srinivasan, Executive Director, Structured Finance, Avendus Advisors: “A low coupon rate ensures that the profit and loss doesn’t get strained because of a higher interest outgo; and the conversion to equity acts as a sweetener.”
With the bitter pill of highcost debt and low valuations staring them in the face, such sweeteners may be just what the doctor ordered for India Inc.