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Debt Challenge

Anand Adhikari & Nevin John     February 18, 2021

Eighty four years ago, the patriarch of Mumbai-headquartered Shapoorji Pallonji family and grandfather of 52-year-old Cyrus Mistry got a golden opportunity to buy 12.5 per cent stake in Tata Sons from F E Dinshaw Estate, a finance firm owned by F E Dinshaw which had provided the Tatas growth capital in their formative years. After Dinshaw died, his legal heirs sold the stake to construction magnate Shapoorji Mistry. Later, Mistry senior increased the stake to 16.5 per cent by buying from JRD Tata's siblings.

Over the years, the Mistry family held on to the shares through thick and thin. In fact, Cyrus's father, Pallonji Mistry, had to cough up a large sum in mid-90s to participate in Tata Sons' rights issue, which increased the family's stake to 18.4 per cent. The Tatas, however, claim that the Mistrys became shareholders only in 1965, that is, 55 years ago, by buying shares from Dinshaw Group. Whatever be the truth, such a large stake in a $110 billion group is a family treasure for the Mistry family that it is trying to monetise to get out of the financial crunch it is facing, much like the F E Dinshaw family scions had done decades ago.

The consolidated debt of Shapoorji Pallonji (SP) Group, which claims to be a $7 billion (Rs 51,100 crore) group, rose from Rs 19,981 crore in FY17 to Rs 31,035 crore in FY19. Numbers for FY20 and FY21 are not available but ratings agency ICRA has pegged the holding company's FY21 debt repayment obligation at close to Rs 10,000 crore. Shapoorji Pallonji And Company Pvt Ltd (SPCPL), the holding company, had even sought a one-time resolution of its obligations under Covid relief regulations of the Reserve Bank of India (RBI) in September.

It is no surprise then that the stake in Tata Sons is at the heart of a fierce court battle between the Tata Group and the Mistry family. The Mistry family has valued the stake at Rs 1.75 lakh crore whereas the Tatas have quoted Rs 80,000 crore. The Mistrys have already charged the Tatas with blocking their attempts to raise funds in the midst of the pandemic. "The matter is before the Supreme Court, and we are hopeful that the honorable SC will uphold the rights of minority shareholders," SP Group said in an email response to Business Today. So, what is forcing the 155-year-old SP Group to put the family jewel on the table for pledging or sale?

Nuts & Bolts

SPCPL, India's oldest existing construction company, operates through a dozen subsidiaries in sectors such as engineering & construction, real estate and infrastructure. These, in turn, have multiple subsidiaries, both in India and abroad. All these businesses have been hit badly over the past few years due to slowdown. Covid has dealt them a further blow.

For example, bulk of revenue of SPCPL comes from real estate and construction. "They will have liquidity issues as they operate in capital intensive sectors. The proceeds from Tata Sons stake sale will remove liquidity concerns and allow private group companies to go for value unlocking," says Deven R. Choksey, MD, KR Choksey Investment Managers.

However, in spite of financial difficulties over the last few years, pledging their stake in Tata Sons was not the first option for Mistry brothers. For almost two years, the group availed every possible option to raise funds. As a first step, SPACL pledged shares of half-a-dozen operating companies like Forbes & Company, Sterling and Wilson Private Ltd, Afcons Infrastructure, Sterling And Wilson Solar Ltd, among others. At the same time, it knocked on doors of existing lenders. Some approved additional loans. Many insisted on more collateral. The holding company also extended corporate guarantees on behalf of group companies, says a banker. One more option was fire sale of businesses, which would have been disastrous, as real estate, construction and infrastructure can deliver substantial value if adequate liquidity is injected into them. Pledging or sale of stake in Tata Sons was the last option. "The Mistrys would also be looking for simplification of SP Group's capital structure through sale of stake in Tata Sons," says Choksey.

In fact, the process of pledging a small part of Tata Sons stake had started early last year when the brothers, Cyrus and Shapoor Mistry, initiated discussions with global investors for raising around Rs 11,000 crore. As per available information, Cyrus Investments has pledged 37,122 Tata Sons shares, which is about 9.2 per cent of its stake in the Tata holding company. Between January and April, Rs 5,000 crore was raised from Axis Bank and IDBI Trusteeship. However, the Tatas soon raised the red flag and claimed the first right to buy as, in extreme situation of the Mistry family not honouring the debt obligations, there is a possibility of invocation of pledged shares, resulting in transfer of ownership. Faced with a legal tangle, the Mistry brothers decided to completely exit Tata Sons by valuing the holding company around Rs 9.51 lakh crore. They have pinned their hope on the Supreme Court, which will soon give a ruling on the issue.

Trouble Starts

The first sign of debt trouble came when promoters failed to repay dues to group company Sterling and Wilson Solar Ltd in June last year. Sterling and Wilson is a global solar EPC (engineering, procurement and construction) player. Subsequently, the promoters, including Khurshed Daruvala, missed the September deadline to repay the remaining Rs 1,148 crore to Sterling & Wilson out of the Rs 2,644 crore promised at the time of the company's initial public offer (IPO). The promoters have got an extension till September this year to pay the amount. Around the same time, SPCPL failed to repay short-term commercial paper of Rs 200 crore to Union Bank of India. The company approached bankers for one-time loan restructuring due to Covid disruption and liquidity mismatches. The holding company had some liquid funds but decided not to pay as RBI restructuring was under way.

These events were serious enough for rating agencies to take note. Leading ones like ICRA, CARE and India Ratings started downgrading group companies because of liquidity position and delay in fund raising at the holding company level. In a note, CARE recently said promoter fund raising (via pledging of Tata Sons shares) of Rs 11,000 crore, supposed to be completed by June last year, was postponed to September and later got stuck in legal issues. Group companies need funds for refinancing debt and running the business. A default will create more trouble.

"SP Group is badly stuck as it is not able to monetise real estate and infrastructure assets. They were awarded a massive project in Colaba. It requires Rs 15,000-20,000 crore for execution. The size of the development is expected to be Rs 50,000 crore. But they have not been able to liquidate whatever has been constructed," says Arun Kejriwal, Director, KRIS, an investment advisory firm.

Now, a lot will depend on pledging of Tata Sons shares. Relations between the Tata Group management and the Mistrys are not the best. Cyrus Mistry is battling with the Tatas over his ouster as Tata Sons Chairman four years ago. And even if the Tatas decide to buy out the Mistrys, valuation is going to be a big bone of contention.

Debt Chakravyuha

The one-time restructuring was availed on October 26, 2020, by 100 per cent of the company's lenders. "We are finalising the plan in consultation with our lenders," says the SP Group. An ICRA report in October last year said the company has made slower-than-expected progress on asset monetisation that has delayed the planned deleveraging. So, how will the group come out of the debt chakravyuha given that the stake in Tata Sons is stuck in legal issues?

Quick asset monetisation is the only way out for the group for now, say experts. Shapoorji Pallonji Infrastructure Capital (SP Infra) has good assets in renewable- and gas-based power, roads & highways and ports. It is keen to sell its solar assets, both operational and under development. In April last year, SP Infra had sold as many as five solar assets to private equity firm KKR for Rs 1,554 crore. Next in line are roads assets. There are also plans to rope in strategic investors in ports.

SP Real Estate is also ripe for value unlocking. Monetisation of land is another option; the group owns several land parcels at prime locations. The company, among the top five developers, claims to have a development pipeline of 80 million square feet. It is present in key markets such as Pune, Bangalore, Gurugram and Kolkata.

IPO and stake sale to strategic players are the other options that the company is considering. But there is an issue here. The group has only three listed companies. IPOs of two companies have failed to materialise in the past. Eureka Forbes, a subsidiary of Forbes & Company and a well-known brand in water purification and vacuum cleaner market, was up for an IPO and strategic sale two years ago, but the plan didn't materialise. A restructuring is under way, which includes merger of Eureka Forbes and two of its subsidiaries - Aquaignis Technologies (electric water purifier business) and Euro Forbes Financials. In the second leg of the restructuring, Eureka Forbes and Forbes & Company will merge. In the third stage, the Forbes Environs business will be de-merged. "The plan is to list or bring strategic investors in Forbes Environs, which is into water treatment, RO and sewerage treatment," says a source.

EPC player Afcons Infrastructure is also a good candidate for value unlocking via IPO or strategic sale. The company, where promoters hold 95 per cent stake, planned an IPO way back in 2007, but deferred it later. The aim of the fund-raising was overseas expansion. Afcons, with consolidated revenues of Rs 10,130 crore, is bigger than many EPC players. Sources suggest it has done the groundwork for monetisation of assets. "There is no plan to list Afcons at present," says the company.

However, investors are not very happy with the stock market record of group companies. Take the listing of Sterling and Wilson Solar in August 2019. The company, with a market cap of Rs 3,800 crore, offered one share for Rs 780. It is trading at Rs 240. The BSE Sensex has risen 30 per cent during the period. The promoters of Sterling and Wilson Solar include SPCPL and Khurshed Daruvala. Arun Kejriwal of KRIS says promoters have not honoured the debt obligations to the company despite commitment to pay up after the IPO. "The company has excellent business, but investors are not happy," he says.

Similarly, another listed entity, Forbes & Company, with a market cap of Rs 2000 crore, is struggling. Its stock price is almost at the same level as it was prior to Covid in January last year. Gokak Textile, another listed entity with a market cap of just Rs 16 crore, is also languishing. "They have to showcase and deliver returns to exploit the stock market route for value unlocking. Today, institutional investors look for management delivery, consistency and transparency," says an industry veteran.

Lastly, the group is making efforts to generate funds by cutting overheads, repositioning businesses and improving profitability. Take the loss-making Sterling and Wilson Private Ltd, which is into electrical contracting services and is implementing a plan to reduce overheads, focus on margins and bid for large projects. It had earlier de-merged the solar EPC business as Sterling Wilson Solar Ltd with a public listing in 2019. Sterling and Wilson has ambitious plans, but is waiting for payment of past dues from promoters. "Once the loans are repaid, we should be focusing on growth aggressively and increasing shareholder value," says Bikesh Ogra, CEO of Sterling and Wilson Solar Ltd. In the past one year, the company has seen a couple of large orders in Middle East and North America getting renegotiated because of rapidly falling solar tariffs, which resulted in its exit from those projects and fall in revenues/profitability. It is also facing stiff competition from Chinese EPC players in the Middle East. "We are now very selective as Chinese players are quoting ridiculously low prices," says Ogra. The company, though, has expanded in Europe, Australia and North America, where margins are higher than in the Middle East.

The group, with large global operations, is also faces headwinds from falling global growth and fast-changing political dynamics. If pledging or sale of Tata Sons shares is delayed further, the group will have no option but to take some hard decisions about selling its businesses.

@anandadhikari; nevinjl


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