The RBI Shakes the Corporate Tree to Make it Debt Free

Photo: The Economic Times

Mergers and acquisitions are one of the sexiest things in business world, but it has a soft underbelly which is always fraught with risks.

After years of furious expansions including leveraged buyouts of cheap foreign assets, India Inc is now not only slowing down but is also in a debt spiral; displaying leveraged balance sheets which showed a quantum surge in threat - ratio, in their own books and businesses.  

A whole catalogue of reasons played havoc with corporate blueprints: Business and commodity cycle downturn, prolonged up cycle in interest rates, export markets drying up, expansion plans derailed due to environmental and forest clearances, consumption slowdown, judicial activism, witch hunt by the 5Cs — CVC, CAG, CBI, CIC and courts, policy paralysis et al.

Very recently, India Ratings said in a report that almost half of the top 500 corporate borrowers in the country will find it difficult to refinance some of their loans. These borrowers have taken loans amounting to Rs.11.8 lakh crore, of which Rs.5.1 lakh crore is already stressed while another Rs.6.7 lakh crore faces elevated risk of refinancing.

However, Reserve Bank of India recently came out with a proposal (at par with international standards), which gave high flexibility to banks to bail out companies with high debt. The RBI decided to shake the "Debt Tree", to give the ailing companies of India Inc, one more chance to become debt free..

This innovative scheme, for debt-ridden companies, will spell relief in terms of ease of loan repayment period. The scheme will cover operational projects with loans of Rs.500 crore. 

The revised norms are in line with the measures being announced by RBI and the government to reduce the NPA problem. The new guidelines are more beneficial for resolution of those cases where a lot of debt has already been provided for...

Under the scheme, (lending) banks can split the loans of struggling firms into sustainable and unsustainable debt. 

Sustainable debt refers to loans that can be serviced with a firm's existing cash flow. Banks have been given the option of converting the unsustainable debt, which cannot be serviced with cash flow, into equity. 

Apart from most of the PSBs, the biggest gainers will be the companies like Jaiprakash Associates Ltd (Rs.8), Reliance Communications Ltd (Rs.48.50), Vedanta Ltd (Rs.125.50), GMR Infrastructure Ltd (Rs.12.79), Lanco Infratech Ltd (4.87), and so on...

Meanwhile, there were some media reports a couple of months back, that the asset sales along with reorganization efforts have yielded some relief for the Jaypee Group, as the Reserve Bank of India (RBI) has allowed banks with exposure to the (Jaypee) Group to classify the loans as standard assets for the January-March quarter. 

It is pertinent to mention here that both Jaiprakash Associates Ltd and Jaypee Infratech Ltd were set to be classified as non-performing assets (NPAs) during the March quarter, after the RBI’s stringent asset quality review in December. However, the Economic Times, reported that the banking regulator had reduced the burden of provisioning on banks by removing some names from the list of stressed accounts, including Jaiprakash Associates Ltd. “The group has made some additional efforts to ensure that repayment happens as per schedule. This allows us to give them some more time as a standard account,” said a senior official at a public sector bank that has exposure to at least two of the group’s companies.

In March 31, in one of the biggest deals in the domestic cement industry, Jaypee Group announced part sale of its cement business to Kumarmangalam Birla-led Ultratech for Rs.15,900 crore. It is encouraging to note that in FY16, the group managed to pare down debt by a whooping, Rs.25,100 crore. Jaiprakash Associates Ltd sold the Jaypee Group headquarters, commercial space and 250 acres of land in its Noida township project for Rs.2,700 crore to Axis Bank.

Moreover, better-than-expected earnings, strong economic data and lesser obstacles on the global front, will continue to trigger healthy domestic inflows, fueling more retail participation in the coming days with Small-cap and Mid-cap Indices outshining the Sensex/Nifty.

Reserve Bank of India Governor Raghuram Rajan’s remark that, in the land of the blind, the one-eyed man is king, has underlined the reality that the Indian economy is recovering fast, and is robust in the midst of a global downturn.

Bibliography: The Economic Times, Live Mint, The Daily Pioneer and The Hindu Business Line. 

Scheme for Sustainable Structuring of Stressed Assets

Photo: Buzz

Very Recently, the RBI has allowed lenders to carve out the "unsustainable" portion of their loans to troubled corporates and convert them into equity. The new restructuring scheme will help public sector banks in cleaning up large chunks of their bad loans, which amount to Rs 4.76 lakh crore. The extent of loans which cannot be supported by cash flows are termed unsustainable. This move will also aid the companies, which are reeling with large debts. 

What separates this scheme from earlier steps is that instead of leaving it to banks, an overseeing committee of eminent persons will be constituted by the Indian Banks Association in consultation with the RBI to identify loans eligible for restructuring. Banks will be able to upgrade bad loans through this exercise. But they may have to take a haircut as the market value of the stressed company may be less than the value of debt that is converted.

Photo: Live Mint

Once the unsustainable debt is converted to equity, banks can sell this stake to a new owner who will have the advantage of getting to run the business with a more manageable debt. Also, there has been talk of the government helping to set up a fund to pick up equity in stressed companies. It is not clear whether there are any plans for the equity created following the conversion to be sold to such a fund.

Thus, the RBI adopted international best practices in distinguishing between maleficent promoters and a business that has gone bad and can be brought back on track. The biggest beneficiaries of these would be banks which can now clean up their books quickly and move forward.

"Resolution of large accounts facing financial difficulties may require coordinated restructuring which often involves a substantial write-down of debt or large provisions. Often, such high write-downs act as a disincentive to lenders," the RBI said in a statement.

"After due consultation with lenders, RBI has formulated the 'Scheme for Sustainable Structuring of Stressed Assets' (S4A) as an optional framework for the resolution of large stressed accounts. The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around," said RBI.

The Reserve Bank of India (RBI) allowing banks to conduct deep restructuring of large accounts to revive projects that can be saved, effectively has thrown a lifeline to promoters who risked losing their companies.

This very tactical move by the RBI came at a time when Banks are struggling to dispose of many stressed assets they have already acquired and have no clue what to do next. 

According to this scheme, titled 'Scheme for Sustainable Structuring of Stressed Assets', accounts that are worth Rs.500 crore or more and have already started commercial operations will be eligible for the new recast scheme. Only those promoters who have shown no malfeasance in their actions while running the show can ask for the permission to continue with the management, even if they get reduced to minority shareholders in the process.

Some of the completed projects in these sectors were hit by external factors. Deep restructuring is done to ensure long-term sustenance. The strategic debt restructuring (SDR) scheme was of limited use in such cases. Under it, banks could convert debt into equity and take control of a company and sell off the assets. However, if they were not able to dispose of the assets within 18 months, the lenders had to incur heavy provisions.

In about a dozen companies where banks invoked SDR, they have not found a single buyer, defeating the entire purpose of loan recovery and at the cost of running down the company, which often times could be just victims of economic downturn.

Stating the 18-month timeframe of SDR was not enough for making full provisions on large loans, banks had asked for more time, necessitating the new scheme, RBI said. The new scheme gives a second chance to the existing promoters, and helps banks restructure loans at a faster pace to protect the value of the assets.

Under the new scheme proposed by the regulator, lenders will first segregate the existing debt of a company into "sustainable" (the share which can be serviced by the company even if cash flow remains the same as now) and "unsustainable".

The restructuring exercise involves the unsustainable portion of the debt, which at the time of such recast should not be more than 50 per cent of the total debt.

As part of the resolution mechanism of the new plan, the unsustainable portion of the debt should be converted into equity/redeemable cumulative optionally convertible preference shares. Banks should not grant any fresh moratorium on interest or principal repayment, or reduction of interest rate for servicing of the sustainable debt portion.

Both the promoters and the banks will have to take equal haircut in the process.

If there is no change in the existing management, the banks can also convert a portion of the unsustainable debt into coupon yielding debt instrument.

Equity shares thus acquired should be marked to market on a daily, or at least on a weekly basis for listed firms. In case the company is not listed, banks should take the lowest value after working out a prescribed rule the central bank outlined.

The upside for the banks would be primarily their equity holdings if the restructured entity turns around.

This scheme, will help the debt ridden companies not only to improve their cash flows, but it will also give them a cushion against, distress selling of assets. 

Just imagine what will happen, if a company instead of selling an asset at a distress price, goes for churning money out of, albeit with the aid of the banks (or the lenders). Will it not be a GAME - CHANGER for those debt laden companies? It is precisely one of the main reasons, due to which the stocks of debt-ridden companies are moving-up, since the last few days; apart from other factors. 

Therefore, the companies like Lanco Infratech Ltd (Rs.4.80), Gammon Infrastructure Ltd (Rs.6), Jaiprakash Associates Ltd (Rs.7.60), Reliance Communications Ltd (Rs.49), etc, will. be one of the biggest beneficiaries.

Source: Edited excerpts from The Times of India and Business Standard

Asset sales help Jaypee to bring down debt

June 20, 2016: Some of India's top business houses were termed "House of Debt" last year as they went on a massive expansion and diversification spree fuelled mainly by debt. As the economy slowed down, some of these groups failed to repay loans and were forced by banks to sell assets. We look at how these groups performed during the fiscal ending March this year and whether they managed to save themselves or sunk deeper into crisis.

For the promoters of Jaypee group, the aggressive expansion during the last decade across the infrastructure vertical has come with a steep price. The Delhi-based group had to sell profitable assets to remain afloat even as banks, alarmed by its defaults, are pressurising the group to put more assets on the block.

A senior banker with Mumbai-based public sector lender said the intent of Jaypee group to reduce debt level is genuine as evident from the sale of operating key operating assets like power plants and cement business. "But still more has to be done to bring down debt level to sustainable level. For this, the group is looking to monetize or swap its real estate along the Delhi-Agra expressway. While it is a feasible, the valuation of such assets holds key for effective deal making, " the official said asking not to be quoted. Bankers also say when compared to other "house of debt" groups, Jaypee is sincere in bringing down its debt levels.

But that sincerity is due to a reason. During fiscal 2016 results statement, flagship Jaiprakash Associates revealed that it has defaulted to bank loans, interest and statutory payments of Rs.4,539 crore. The defaults were mainly due to a massive loss of Rs.3,200 crore on revenues of Rs.17,181 crore in the fiscal 2016 and analysts said it's the Rs.7,500 crore odd finance costs, or almost Rs 21 crore a day, which is draining company's funds. The stock markets also punished the group as the market value of the group declined 72 per cent as on March 2015 to Rs.1,670 crore as on June this year.

Photo: The Times of India

Analysts said the group wanted to grow too fast with diversification in real estate and infrastructure sector without worrying about any slowdown. Two of its marquee projects - the Delhi-Agra expressway and Formula 1 stadium turned out to be white elephants with zero visibility of earnings. To make matters worse, Axis Bank took over the group's headquarters in Delhi as the group failed to repay loans.

For bankers the biggest worry is that the company's revenues and profits are falling faster than the debt obligations despite recent asset sell-off. For example, in FY16 Jaypee consolidated revenue was down 14 per cent year-on-year while operating profit was down 32.4 per cent. In comparison, company's consolidated debt declined by only 5 per cent last fiscal while interest obligations were up 4 per cent in the same period. The result, Jaypee's net debt to equity on consolidated basis inched-up to 4.4 from 4.0 a year ago and its interest coverage ratio declined to 0.6, making it virtually impossible to service debt with its internal accruals.

Analysts are not surprised. "This is what happens in a fire sale. You are forced to sell the most liquid and cash-rich assets and you are left assets with few buyers. This is what is happening with Jaiprakash Associates pushing the company even deeper into a debt trap," says G Chokkalingam, founder & CEO Equinomics Research & Advisory.

Jaypee is forced to divest its cash cement and hydro-power assets and there are few takers for its cash guzzling real estate, infrastructure projects or hospitality projects. The salvation for Jaypee lies in a secular growth revival in economy lifting the demand and valuation of its struggling infrastructure, power, hospitality and real estate business, analysts said.

Future after asset sales

Analysts say Jaypee has taken multiple steps to improve its financial metrics. In February this year, Jaypee sold its cement unit with a capacity of 17.2 mtpa to Aditya Birla group's Ultratech at an enterprise value of Rs.15,900 crore. The deal is not closed yet. Its subsidiary, Jaiprakash Power sold its hydro power projects to JSW Energy for Rs.9,300 crore. In September last year, the company sold its Bina power project to JSW for Rs.3,500 crore. It had sold its 74 per cent stake in Bokaro Cement to Dalmia for Rs.668 crore in November 2014 and its cement grinding unit in Haryana to Shree Cement in April 2015 for Rs.358 crore. These asset sales will help the group to bring down debt significantly and an investor could see the improvement in its financials by this fiscal end, said a Mumbai analyst.

Post the cement sale, Jaypee will have 10.6 mtpa of cement capacity in Madhya Pradesh, Uttar Pradesh, Andhra Pradesh and Karnataka, a hotel division with five luxury hotels, real estate division with land around Yamuna Expressway. 

"We have time and again shown our will to take proactive steps to tide over these turbulent times caused by the economic slowdown," Jaypee Chairman Manoj Gaur said on April 1 this year soon after signing the deal with the Birlas. 

Jaypee had blamed worsening performance of core sectors and a shaky economy for the fall in financial metrics. But despite assets sales, it has a long road ahead to return to black.

Courtesy: The Business Standard

Today's Recommendations...

1. Buy J P Associates Ltd at Rs.7.57, T: Rs.12-14, SL: Rs.6.4. The company should be one of the biggest beneficiaries, if the banks gives go ahead to convert a part of their debts into equities. Moreover, the company is in the process of hiring consultants, for a quick turnaround. As a strategy to shed its debts, the company has increased its focus on high realization markets and has withdrawn from certain markets of Haryana and Delhi where due to low prices and high freights (long lead markets) the net realization was very low and operations unviable.

Photo: The Times of India

Besides, in another significant developemnt, Jaiprakash Associates Ltd and Jaypee Infra are offering land parcels of around 2,200 acres to banks in a bid to buy peace with lenders and settle most of its loans.Banks have shown willingness to take over land parcels to avoid putting a non-performing asset (NPA) tag on the two Jaypee group companies. No project has been launched on these lands so far.

2. Buy Lanco Infrastructure Ltd at Rs.5.88, T: Rs.9, SL: Rs.5.40 (strict). The company is slowly coming into black, after lot of debt restructuring. 

3. Unitech Ltd has nearly touched my second target of Rs.6 (Rs.5.99 intra-day in BSE), therefore, book some profits.

4. Keep accumulating Reliance Communications Ltd (Rs.47.20) and hold for some time, to get some very good returns in the short term (less than 90 days). This is a no-brainer - you need to buy and forget for some time, just like your Fixed Deposits. 

5. Gammon Industries Ltd (Rs.14.89) hit the 20% upper circuits today. And Gammon Infrastructure Ltd (Rs.5.47) is up more than 6%. The infrastructure and real estate stocks should do well, after the news of Dr.Rajan's exit, as the government of India is likely to stop INFLATION TARGETING and focus on GROWTH. 

The Nifty is now as 8184, up ~14%. But I hope by the end of the day, it should close above 8200, with a spurt in the Infrastructure stocks, because of the NDA government now focusing on growth. Which means the interest rates, will now have a more pronounced downward trajectory, compromising a part of the inflation.

Real estate stocks rally on REIT buzz, Unitech Ltd, the biggest gainer

The rally in real estate stocks — driven by hopes of relaxed real

Photo: DNA India

estate investment trust (REIT) norms to be considered by markets regulator Sebi on Friday — saw Unitech shares jumping 15.75%, followed by HDIL (7.15%), Oberoi Realty (5.91%) and Sobha (4.22 %). 

All the four stocks were mentioned in this blog, the last week and Unitech Ltd, as expected gave one of the finest returns. 

The PTI reported a few days back that: Securities and Exchange Board of India (SEBI) is likely to consider a slew of norms pertaining to the real estate sector.  The regulator could consider making REITs "more attractive" to investors by permitting large investments from such trusts in under-construction asset. This has led to renewed optimism in the shares of real estate space. 

Now there is another counter, which did not rally much on last Friday and has the potential to cross Rs.10-12, in the short term, because of RBI's new debt restructuring plan. The CMP of the share is Rs.7.70 in NSE and Rs.7.73 in the BSE. The name of the scrip will be mentioned tomorrow in this blog. 

Regarding managing of corporate debts, the DNA India wrote on 27 May, 2016: 

It comes as a surprise that big corporations are finding ways to deal with debt and the banks are encouraging them to go ahead. As reported in this paper on Thursday, the economic research department of the State Bank of India has found that some of the big corporations are setting aside part of their assets to deal with debt. For example, Anil Ambani’s ADAG has set aside assets worth Rs.59,761 crore to manage a debt of Rs.1,24,956 crore.

That is a little less than 50% of the total debt. Reducing debt will improve not only the balance sheet of the corporation, but also that of the banks with their stressed assets. The banks, ICICI’s Chanda Kochhar has revealed in a media interaction, are encouraging corporations to sell off either core or non-core assets to bring down the debt burden.

Therefore, I feel that: as long as any company is able to service its debts, from internal accruals, I feel it is safe to invest in those companies, provided their financials are tracked regularly.  

In a significant development, in the domestic arena, the data released on last Thursday showed that India's CAD narrowed to $300 million (0.1% of GDP) in the March quarter (Q4) from $7.1 billion in the preceding quarter and $700 million in the fourth quarter of 2014-15.

The sharp decline in the deficit was attributed to a correction in trade deficit that shrank to $24.8 billion in Q4 from $34 billion in the December quarter and $31.6 billion in the March 2015 quarter. 

With inflation still below the RBI's comfort zone and the banks gearing up to take advantage of the new RBI guidelines, to clean the NPA, we could look forward for softer interest rates for some more time. Therefore, in such a situation, the companies, which are debt ridden and whose share prices were beaten down during the last few months, offer a good choice for punters, to rake in short term gains.

DO YOU KNOW?

Photo: The Hindu

The euphoria which fueled a Market Rally back in 2013-2014 on hope that Prime Minster Narendra Modi would boost growth, revive the investment cycle and prop up earnings growth, helped push earnings multiples for some of the mid and small cap stocks to reach record highs. 

However, some of these shares lost steam slowly in the past 12 months. But they are still good buying opportunity on dips, feel experts. Investors have to be selective before putting their hard-earned money in these stocks. 

One such stock is Reliance Communications Ltd, which looks to cut down the debts by 75% in the next few months. 

"Integration of MTS business with RCom is on track. We expect to complete the integration in August. We expect to make announcement with respect to Aircel merger anytime in June. Once we complete the Aircel transaction, we will go for the tower deal," RCom CEO for consumer business Gurdeep Singh said during a conference call on Tuesday.

"With completion of these deals, we expect RCom's debt to reduce by 75 per cent."

RCom's net debt at the end of March 2016 stood at Rs 41,362.1 crore.

RCom and Aircel have extended discussion period for a possible merger of the two till June 22. Mr Singh said discussions are in advanced stages.

Reliance Communications Ltd (R-Com) and Aircel Ltd are likely to complete the merger of their wireless operations by the end of the month, a top Reliance Group official said last week. Talks between RCom and Aircel, if successful, would lead to a combined entity holding 19.3% of the total spectrum allocated to the industry - the highest by an entity. .

On a lighter note: Outlook's Essar leaks show who controls the vital pillars of Indian democracy.. 

The two brothers, Mukesh and Anil (Ambani) have already tied up in the telecom space.

But most of the investors are now confused, because some of the rating agencies have still not changed their negative outlook on Reliance Communications Ltd, even though it has taken pro-active steps to push-up its fundamentals. 

And as usual some financial analysts who fail to understand the potential of this deal, continue to peddle their "Avoid Jargon". This has led to many Investors losing patience and selling the scrip of Reliance Communications Ltd at a distressed price, like they did in case of Vedanta Ltd (Rs.122.55), Hindalco Ltd (Rs.118.80), BHEL (Rs122.35), JSW Energy Ltd (Rs.84.10) and so on; only to repent later. 

Most Investors have a habit of believing more or drinking a bottle of cold drink more when they see suited-booted persons sitting in TV-channels and shooting their trading ideas. This is the irony!! 

Meanwhile, after R-Com and Aircel had begun discussions about six months ago, the former's shares have fallen by more 45% since then. 

This again gives the investors to zoom-in, in this shares, especially when the Telecom Commission has lowered the annual spectrum usage fee for telcos to 3% of revenue for all bands in the upcoming auction slated for July, and brought the 4G airwaves purchased in 2010 under the ambit of a formula to calculate the overall fee for each carrier. 

The Business Today writes, on 3 July, 2016 edition: 

It is a one-stop solution the government seems to have found to preclude allegations of corruption in the allocation of natural resources - hold an auction. From oil and gas blocks to coal blocks to spectrum bandwidth, auctions have become the preferred mode of sale to both ensure transparency and generate substantial revenue. The civil aviation ministry even considered auctioning unused and future bilateral rights (rights to fly to foreign destinations negotiated with destination countries), though the proposal was eventually stalled due to internal differences over its advisability. The reverse auction, where the government is the buyer of goods or services, has also become an effective means of driving down prices, especially in the case of solar tariffs.

Last year alone, a total of 55 coal mines were auctioned over three rounds, of which 28 went to private companies and 27 to Central and state PSUs. 3G and broadband wireless spectrum was auctioned too, earning the government over Rs.1.1 lakh crore. This year, there are expectations of another Rs 70,000 crore from the auction of 67 small oil and gas fields, which began in late May. (So far, under the New Exploration Licensing Policy or NELP, formulated in 1998, over 250 hydrocarbon blocks have been auctioned across nine rounds.)

Anyway, in the latest move to help banks deal with their stressed assets, RBI has issued guidelines to help banks identify opportunities to convert up to half of their non-performing debt positions in indebted companies into equity, should the borrowers meet certain criteria that would determine if their debt is sustainable in the long-term. Under RBI's ‘Scheme for Sustainable Structuring of Stressed Assets,’ the conversion into equity or quasi-equity instruments could provide an incentive to lenders to share in the profits should the indebted company turn around, according to an RBI note.

So what types of bad debt situations are eligible for this provision? Stressed debt related to all commercially operational entities that owe more than Rs.500 crore to lenders, including interest, would qualify. Additionally, their debt should also meet RBI’s test of sustainability which includes.

Once the sustainable debt has been worked out, the banks and borrowing companies can evaluate various recapitalisation scenarios with the help of an external agency. The equity portion of the deal will have to be "marked to market," or deemed at fair value, according to the RBI note.

Banks would also have to follow certain terms and conditions that will govern the sustainable debt portion -- such as one that would prohibit them from extending the repayment schedule of the loans, or otherwise amending loan terms, according to the note. Other caveats and conditions can be found here.

To be sure, banks have had the option to convert their debt into equity in the past, but the procedures have been somewhat onerous in India that would allow banks to take “haircuts,” where a lender agrees to a loan repayment less than what is owed.


The latest move is good news for banks as they have another option and framework at hand to resolve their bad debt mess, according to Srikanth Vadlamani, a senior analyst with Moody’s Investors Service. 

Thus, Dr.Raghuram Rajan's exit, could bring in a rally in the shares of companies, who have been sitting on the piles of debts, because it could rekindle the hopes of a massive interest rate cuts; if the INR remains stable. This gives legs to the shares like Reliance Communications Ltd (Rs.47.20). 

I will recommend another, a very well known share tomorrow in this blog (anytime after 10 am in the morning), which could get benefited both by Dr.Rajan's exit and also due to RBI's latest move, regarding restructuring of the debt portfolios. 

Therefore, buy the shares of Reliance Communications Ltd at the CMP of Rs.47.20, for a target of Rs.72-plus in some months. Just buy and forget!! 

RCom readies blueprint to revive telecom fortunes

[Editor: One thing I would like to mention here: don't depend on rating agencies and brokerage houses's "MOTIVATED UPGRADES", for your stock picking decisions!! You must remember, how some years back, Kotak Securities downgraded Reliance Industries Ltd only to see a spurt in the stock price. CLSA downgraded Vedanta Ltd, the stock is moving up everyday. Lot of downgrades were seen in Unitech Ltd (Rs.5.65), but the stock gave more than 50% return in the last few days. Recently, JSW Energy Ltd was seen downgraded to hold from buy, the stock touched Rs.85.95 yesterday. Also, how can we forget a series of downgrades by rating agencies on BHEL, the stock is now up more than 30%, from those prices. 

And at the end S P Tulsiyan said, after the results of Punjab National Bank Ltd, that he would not touch the PSBs in the next two quarters; only to recommend a buy on SBI a couple of weeks later - - pointing out how fickle are their decisions or how treacherous they can be while recommending stocks to the gullible investors/traders. 

Anyway, Reliance Communications Ltd has repeatedly said that it expects to cut down debt by 75% through merger of MTS, Aircel and sales of mobile towers. So, I feel there is no reason to be apprehensive about the company. Therefore, I again reiterate a buy on the shares of reliance communications Ltd at the CMP of Rs.47.20 for a target of Rs.72. This stock is to be bought and kept holding for some days; like your fixed deposits to get some wonderful returns. ]

MUMBAI, JUNE 7: Reliance Communications (RCom) may be a ‘trouble zone’ for the Anil Ambani-led Group, but the company has prepared a blueprint to revive its fortunes.

The plan includes sale of its tower assets, merging its wireless business with Aircel, and migrating from CDMA-based 2G services to 4G services. All of this is aimed at reducing its debt pile and expected to be completed within the next few months.

Tower asset sale

To start with, RCom has ended the exclusive nature of discussions with private equity firm Tillman Global Holdings LLC to sell its tower assets. The Anil Ambani-backed telecom firm has extended the discussions to at least two or three other interested bidders. In December, RCom had inked an agreement to sell its tower assets to private equity firms TPG and Tillman Global. The companies had entered into an exclusivity agreement till January 15. The exclusivity was then further extended.

However, differences over valuation forced RCom to look beyond Tillman. In order to improve the valuation, the tower deal will now happen only after RCom seals the merger of its wireless business with Aircel.

RCom wants to sell its 44,000 telecom towers to pare debt, which stands at ₹40,479 crore. The company hopes to get about ₹20,000-22,000 crore from the sale of tower assets. Of the balance ₹20,000 crore debt, RCom plans to transfer ₹14,000 crore to the newly created company post the merger with Aircel.

The merged entity will be owned jointly by RCom and Aircel. RCom will carve out its wireless mobile business and transfer the same to the new entity.

The enterprise business – which includes the international cable unit and the fixed line infrastructure within the country – will continue to be under RCom.

Post the merger with Aircel, expected to happen by end-June, the new entity is estimated to have a combined market share of 13 per cent in terms of the overall industry revenue.

Debt transfer

EBITDA of the new company is expected to be around ₹5,000-6,500 crore and the overall debt will be close to ₹28,000 crore. Aircel, which has nearly ₹18,000-20,000 crore of debt on its books, will transfer ₹14,000 crore to the new entity.

The balance debt will be settled by Aircel prior to the merger. Aircel has already sold its 4G spectrum to Airtel for nearly ₹4,000 crore. Once the merger with Aircel is done, RCom hopes to get better valuation for its tower assets riding on higher tenancy ratio and brighter prospects in the wireless business, especially 4G services.

RCom has already begun shutting down its CDMA-based 2G network by migrating subscribers to 4G services. Here too, the company is ensuring its focus on high-quality consumers.

End of CDMA services

Over the next few months, RCom will shut down CDMA networks across the country. The company has done a deal with Mukesh Ambani-backed Reliance Industries to share and trade 4G network and spectrum.

This, along with the spectrum from Aircel, will be enough for RCom’s wireless business to challenge Idea Cellular’s (the no. 3mobile operator in the country), according to senior company executives.

Analysts tracking the telecom sector said that though the plan looks good on paper, the actual outcome will depend on how soon Anil Ambani closes the sale of tower assets. “RCom’s tower asset has been on the block for a while. Fresh round of talks began in December but there seems to be a gap in expected valuation and what buyers are ready to offer. Hence the uncertainty continues,” said an analyst on conditions of anonymity.

But the company insists there are no delays. Senior executives said negotiations for the tower sale started only six months back, at a time when similar deals in the industry have taken 2-3 years.

Courtesy: The Hindu Business Line

Adani Power Ltd: Buy

CMP:Rs.29.85

Reliance Capital Ltd: Q4FY17, Result Update

Reliance Capital Ltd (R-Cap) reported a net profit increase of 2% in the March, 2016 quarter from a year earlier after setting aside a special reserve for its insurance unit.

Consolidated net profit for the fourth quarter grew to Rs.415 crore, from Rs.407 crore a year ago, said the company, which is a part of Anil Ambani’s Reliance Group.

The financial services company set aside Rs.111 crore as a special reserve for Reliance Life Insurance Co. Ltd, during the three-month period.

“This is a business reserve due to change in product mix in the life insurance company,” a spokesperson for the company said.

Consolidated revenue in the quarter increased 13% to Rs.2,807 crore from Rs.2,484 crore reported a year ago.

Other income in the quarter dropped to Rs.21 crore from Rs.58 crore a year ago.

As of 31 March 2016, the company’s total assets stood at Rs.67,112 crore, an increase of 40% on a year-on-year basis, it said in a statement.

Group company Reliance Commercial Finance Ltd saw its loan book rise to Rs.10,940 crore, as of 31 March, an increase of 6% from a year ago.

Disbursements for the year were at Rs.8,138 crore, up 17% from last year.

The company’s gross non-performing asset ratio increased to 3.1% of its loan book at the end of the fourth quarter, as compared with 2.6% as on 31 December (marginal rise).

Reliance Home Finance Ltd, a 100% owned subsidiary of Reliance Capital, saw its outstanding loan book increase 34% from last year to Rs.6,792 crore as on 31 March.

For the January-March quarter, the assets under management for Reliance Mutual Fund were at Rs.1.58 trillion, up 16% year-on-year, the company said in its statement.

Reliance Life Insurance reported new business premium worth Rs.1,558 crore, while renewal premium was at Rs.2,840 crore for the year ended 31 March.

For Reliance General Insurance Co. Ltd, the gross written premium was at Rs.2,868 crore, up 4% from a year ago.

As on 31 March, the total investment book was at Rs.5,381 crore, up 7% year-on-year.

Courtesy: Live Mint (edited)

Today's Recommendations

1. Buy Reliance Capital Ltd near the support of Rs.395-396, for a short term target of Rs.414.

The promoters holding in the company stood at 52.13% while Institutions and Non-Institutions held 28.71% and 19.07% respectively.

Reliance Capital, which has completed five years of partnership with Nippon Life, plans to strengthen the association with more products in mutual fund and life insurance spaces going ahead.

Nippon Life’s partnership with Reliance Capital began in 2011 when the Japanese financial services giant picked up 26% stake in Reliance Life Insurance. Subsequently, Nippon picked up 26% stake in Reliance Mutual Fund as well, while the stakes in both the ventures of Reliance Capital have now been hiked to 49% each.

Reliance Capital is a systemically important non-deposit taking NBFC.  Reliance Capital RCL obtained its registration as a Non-banking Finance Company (NBFC) in December 1998.

The company is part of the Reliance group led by Anil Dhirubhai Ambani. It currently operates as the holding company for the group’s entities in the financial services sector.

The book value of the shares of the company is Rs.570.97 and the dividend yield is 2.27%. Its P/E is only 9.11 while the industry P/E 24.10. Hence, a re-rating of the scrip will soon take place, which might take it above Rs.500 in the medium term. 

Max Financial Services Ltd (Rs.484.75) is up 13%, this could have a rub-off effect on all the stocks in this space, including Reliance Capital Ltd.

2. Keep Buying Lanco Infratech Ltd (Rs.4.90) on all declines for targets of Rs.7.5-9. 

3. Buy Adani Power Ltd near the support at Rs.29.80-29.90, SL: Rs.27.50, T: Rs.36.

Rajpura super critical thermal plant owned by Larsen and Toubro is set to have a new owner with Gautam Adani’s Adani Power Limited agreeing to pay Rs.3,300 crore upfront for the 1,400 Megawatt (MW) project and to also bear all loans and debts due on the project.


L&T is one of the largest construction and infrastructure development companies in the country with Adani Power Limited being one of the fastest-growing power generation company.

On a consolidated basis, the company's external debt was Rs.39,000 crore and ICD debt of Rs.6,000 crore. The promoters plan to infuse an additional Rs.1,700 crore in the next one year, which will improve Adani Power's financial metrics.


The Adani Group went on a massive expansion drive in the past two years, buying distressed power plants and ports across India. 

The government of India has recently taken steps to help the companies, who are  having large debts. 

DO YOU KNOW? 

Unlike some investment strategies, value investing is pretty simple. It doesn’t require that you have an extensive background in finance (although understanding the basics will definitely help), sign up for an expensive subscription service or understand how to analyze squiggly lines on charts. If you have common sense, patience, money to invest and the willingness to do some reading and accounting, you can become a value investor.

Photo: Easy Stock Market

Dimensional Emerging Markets Value Fund is one such entity which generally invests in shares, to achieve long-term capital appreciation.

Dimensional Emerging Markets Value Fund which holds 1.09% stake in Unitech Ltd is also holding 1.05% stake in Dishman Pharmaceutical & Chemical Ltd and 1.66% in India Cements Ltd. 

Value investing is always subject to risk, but over a period it gives good returns if right choice is made; while picking up securities, especially in the small and mid cap space.

Once, Kishor Ostwal, chairman and managing director, CNI Research said: “Stock reactions are often a result of the event itself and also speculation by market participants. At times corrections can be steep and the stock price itself falls below the intrinsic value of the business net of the ‘event’ impact. Buying at such low valuations can result in potential multi baggers". 

So, mainly what needs to be looked at, when a corporate disaster strikes a company?

• The first thing to consider is whether, despite going through an extraordinary corporate event, the business has value or not. 
• 2ndly whether the balance sheet of the company will be able to sustain potential losses (penalties and loss of revenue) arising from such an event, and is there enough cash with it,
• Thirdly, what will be the impending impact on future earnings or whether the future looks bright as compared to the present situation.We invest in stocks/shares based on its future growth potential, hence a distant view is more important than past events. 

Thus, while the value in the stock might be attractive, risks to future earnings need to be analysed if you want to buy into it as a long-term investment. 

Brand is perception, and if that is hindered then future sales can suffer. In case of Unitech Ltd (Rs.4.90), the issue is more of its brand getting a hit rather than the debt on the books (which as of now is manageable). But promoters' credibility is slowly limping back to normalcy, after their name came in 2G scam. 

So, what is the land bank of Unitech Ltd? According to an article published in the Business Standard on 8 May, 2014: 

Leading real estate companies like DLF and Unitech, too, have not acquired land for the last five years, though they do not jointly develop housing projects with landowners. They have enough land for new projects over the next 10-20 years, according to experts. These companies have been selling land parcels to reduce their debt.

Developers went on a land buying spree before 2007 during the real estate boom, but the economic slowdown in 2008-09 spoilt their party. DLF has about 10,255 acres of land, mostly in Gurgaon, Bangalore, Chennai, Chandigarh and Hyderabad. Unitech has a bank of 5,500 acres in Delhi-NCR, Chennai, Mohali, Kochi, Kolkata, Hyderabad and Bangalore.

With increasing floor area ratios, many developers are expanding vertically, also reducing their need for land buying.

Photo: Business Standard

The new Land Law is expected to make BUYING LAND, a DIFFICULT PROCESS and joint development might become common.

The passage of the land acquisition Bill is set to make land more coveted. Now, those seeking to buy land and develop it would have to pay at least twice the amount. Analysts say acquisition would become cumbersome and expensive, owing to the passage of the Bill; at the least, the cost of land would rise 30-40 per cent and this might lead to property prices rising two-20 per cent.

The escalating price of land will benefit those Builders/ Real Estate Companies, who have large land banks in Prime Locations, eg. DLF Ltd (Rs.131), HDIL (Rs.95.80), Unitech Ltd (Rs.4.89), Sobha Ltd (Rs.304.15), etc. 

There are also reports that Home Buyers in India are set to get a touch of Chinese realty developers with the country emerging as a major investment destination after government allowed 100% foreign direct investment (FDI) into the real estate industry.

100% FDI in Real Estate sector, will be a positive for developers with existing joint development/investment arrangements with foreign investors — they will gain as their addressable market will expand. Also, developers with large land banks will benefit with potential increase in demand for land.

There cannot be a 2nd opinion, that the scrip of UNITECH LTD (Rs.4.89), is at a deep discount as compared to its Enterprise Value; after a sharp corrections during the last few months, following some extraordinary corporate events - - therefore offers a good VALUE BUY.

Today's Recommendations

1. Buy Union Bank Ltd at Rs.122, T: Rs.130, SL: Rs.118. 

Cabinet today approved a bill seeking to amend the debt recovery laws with an overall objective of improving the ease of doing business. "Cabinet approves ex-facto 'The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions Bill, 2016," an official statement said. Introduced in Lok Sabha last month, the bill seeks to amend four legislations -- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Indian Stamp Act, 1899 and the Depositories Act, 1996. 

2. Buy SAIL at the CMP of Rs.44.70, T : Rs.47-49, SL: Rs.43.5 (strict). 

Prime Minister Narendra Modi's 'Make in India' programme, which has earmarked $87 billion worth of investment in new infrastructure and manufacturing projects over the next five years, will benefit the country's steel and mining companies, a research report says. 

The initiative is likely to translate into meaningful steel demand after a gap of around 18 months, according to a report by research agency S&P Global Platts. 

The domestic steel sector, which has been plagued by low prices, high-level of imports and muted demand growth is showing signs of an early recovery, according to rating agencies and industry analysts.

The signs of a slow revival in the sector’s fortunes come as the Ministry of Steel prepares to submit a draft report on measures to relieve the financial stresses on the industry to the Prime Minister’s Office.


According to Fitch Ratings, even though challenges remain, the steel sector’s fundamentals have started to improve.

Steel imports by India are expected to reduce significantly in the first half of FY2017 at least once the impact of the minimum import price(MIP) starts to be felt, according to rating firm ICRA.

MIP did not have a material impact on the extent of steel imports till March 2016, due to a lead time of about one-and-a-half to two months for the shipment to arrive in India and the same led to a growth in monthly steel imports in February and March 2016, ICRA said.

Bulk quantities ordered in anticipation of MIP, just before its imposition, could also be a reason behind the same. However, with the full effect of MIP setting in from April 2016 onwards and given the firm international prices, ICRA believes that steel imports are expected to reduce significantly in the first half of FY2017 at least.

Post the imposition of MIP, domestic hot-rolled coil (HRC) prices have witnessed a sharp increase of about Rs 6500/MT which, when compared with the price differential between import offers and MIP in the first week of February 2016 of USD 130-200/MT is still on the lower side.

3. Lanco Infratech Ltd: Buy at the CMP of Rs.4.69, T: Rs.9, SL: Rs.4.20. 

Lanco Group has shortlisted four players for selling its power business.

Reports indicated that Tata Power Company, JSW Energy and Piramal Enterprises are among those who are interested in buying Lanco Group's power assets. 

A meeting of the joint lenders forum is scheduled to meet in the next few days to take a decision on the sale of the power business of Lanco Group. As per reports, Lanco Group, has power assets of about 8,000 megawatts (MW), and is seeking about Rs.4.50 crore per MW while buyers are bidding at about Rs 3 crore per MW. Lanco Group's power business' enterprise value is pegged at Rs.45000 crore inclusive of debt, reports suggested.



Lanco Infratech is one of the India's largest integrated infrastructure developers in India. The company has subsidiaries and divisions across a synergistic span of 5 business verticals viz. engineering, procurement and construction (EPC), power, natural resources, solar and infrastructure.

4. Buy Reliance Infrastructure Ltd at Rs.532, T: Rs.544, SL: Rs.520. 

State-owned institutions Life Insurance Corporation (12.3%), New India Insurance (1.5%) and Oriental Insurance (1.3%) are among the top public shareholders in Reliance Infrastructure Ltd. Apart from this, at least 100 foreign portfolio investors and other institutions hold a little over 20% per cent in the Anil Ambani-promoted entity.

Reliance Infrastructure Ltd reported a 43.7% rise in fourth quarter consolidated net profit helped by lower expenses and a one time gain in its EPC (engineering, procurement and construction) business.


The company has shortlisted two international bidders for monetization of its 11 operational roads assets, said Lalit Jalan, who took over Reliance Infrastructure from 1 January as acting chief executive after heading the company in prior stints for over seven years.

The power business contributes 42% of the total consolidated revenue of R-Infra. The company has said the total enterprise valuation (EV) for the business has been assigned at about Rs.12,000 crore (equity Rs.6,290 crore, debt Rs.5,810 crore). This translates into an EV/sales multiple of around 1.5, in line with peers.

R-Infra has three business segments — electrical energy, EPC (engineering, procurement, construction) and contracts, and infrastructure. Under the first one, engaged in generation, transmission, and distribution of electricity, it has a 500 Mw thermal power station at Dahanu, near Mumbai; a 220 Mw power plant at Samalkot (Andhra), a 48 Mw power plant at Mormugao (Goa) and a 7.6 Mw wind energy farm at Chitradurga (Karnataka). Of the Rs.6,290 crore consideration, Rs.5,580 crore is for the Mumbai division, while the Samalkot and Goa facilities are valued at Rs.560 crore and Rs.110 crore, respectively. The windmill was worth Rs.40 crore.

The EPC and contracts segment is engaged in the business of construction, erection, commissioning and contracting. The infrastructure segment develops, operates and maintains toll roads, metro rail transit systems and airports.


In December, the company acquired management control in Pipavav Defence.