Today's Economic Times carries the story of a possible stake sale by Tilaknagar Industries (maker of Mansion House, the second best selling Brandy in the world) to retire its debt. Almost everyday, for the past quarter or so, we have seen so many marquee names, opting for asset or stake sale to reduce their debt burden. Yesterday it was IRB Infra, which plans to offload some of its key projects, DLF desperate to sell its Dubai Hotel chain, Suzlon is on the verge of going bankrupt. When there are so many assets on the block, the prices would go down and companies would have to bring in more assets to pay-off debt, leading to a downward spiral and heavy asset depreciation going forward. Conversation with a friend who works in the Asset side of a leading bank reveals the situation on ground is much worse than it appears in news. There is practically very little liquidity with MFIs and loan disbursement is going to dry up due to lack of funds. What adds to the woe is tight monetary policy pursued by RBI to keep the rupee from depreciating further.
In contrast with 2008, one fact which disturbs the most is during that time, markets crashed because of the global factors and lack of 'Investor funds', which were diverted from equity. This time, there seems to be a degradation in business fundamentals itself. Success of the 'India Story' is being questioned - good companies have made suicidal bets by over-leveraging and mismanaging their funds. For example, Financial Technologies, running MCX and NSEL was found running a quasi-ponzi scheme, the rot seems to be prevalent everywhere.
The question, however is, are we heading for a paradigm shift? Is there going to be a change in mindset of Indian Corporate, from high leverage to optimization of balance sheets? Sooner or later, the realization must dawn that borrowing money more than their balance sheet could afford is going to bring doom and lead to a catastrophic end. The policy paralysis, starting with UPA 2 from 2009 onwards is starting to bear fruits now, don't know how deep the rot is going to be. Business, be it manufacturing, tourism, banking carry a mark of pessimism and frustration, because there seems to be no hope, with Government concentrating on more populist policies to appease their vote banks. Seems it is a folly to expect more from the Government, however what businessmen can do is improve efficiency and reduce cost wherever possible. Demand would remain subdued and things don't seem to improve till next year, it is important to stay afloat in this tide. Conservation of capital has to be the key objective, we can afford a slow growth for a couple of years but we can't afford more companies going down. It would lead to a crisis of confidence. What makes matters worse is unlike 2-3 years back, when everyone was buying the emerging markets story, this time with US economy reviving, the FIIs won't waste much time in shunning the Indian markets and park their funds in more lucrative markets and asset classes.
May be things are not as bad as I perceive, still I think Austerity is needed and corporates have already started relooking at their policies. We haven't come across recent buyout deals where the buyer has lavishly overpayed, which was the case earlier. On the contrary, Markets have started punishing companies looking in that direction, as was the case with Indian Hotels' bid for Orient Express or Apollo Tyres' bid for Cooper Tire, both of which being withdrawn. There may be a painful unwinding of Assets going forward, but that would be a good thing, at least the balance sheets would get cleaned up and then the Indian Corporates, with specific advantages of low cost and intellectual capital would be able to prove their mettle in the the global space once again!
In contrast with 2008, one fact which disturbs the most is during that time, markets crashed because of the global factors and lack of 'Investor funds', which were diverted from equity. This time, there seems to be a degradation in business fundamentals itself. Success of the 'India Story' is being questioned - good companies have made suicidal bets by over-leveraging and mismanaging their funds. For example, Financial Technologies, running MCX and NSEL was found running a quasi-ponzi scheme, the rot seems to be prevalent everywhere.
The question, however is, are we heading for a paradigm shift? Is there going to be a change in mindset of Indian Corporate, from high leverage to optimization of balance sheets? Sooner or later, the realization must dawn that borrowing money more than their balance sheet could afford is going to bring doom and lead to a catastrophic end. The policy paralysis, starting with UPA 2 from 2009 onwards is starting to bear fruits now, don't know how deep the rot is going to be. Business, be it manufacturing, tourism, banking carry a mark of pessimism and frustration, because there seems to be no hope, with Government concentrating on more populist policies to appease their vote banks. Seems it is a folly to expect more from the Government, however what businessmen can do is improve efficiency and reduce cost wherever possible. Demand would remain subdued and things don't seem to improve till next year, it is important to stay afloat in this tide. Conservation of capital has to be the key objective, we can afford a slow growth for a couple of years but we can't afford more companies going down. It would lead to a crisis of confidence. What makes matters worse is unlike 2-3 years back, when everyone was buying the emerging markets story, this time with US economy reviving, the FIIs won't waste much time in shunning the Indian markets and park their funds in more lucrative markets and asset classes.
May be things are not as bad as I perceive, still I think Austerity is needed and corporates have already started relooking at their policies. We haven't come across recent buyout deals where the buyer has lavishly overpayed, which was the case earlier. On the contrary, Markets have started punishing companies looking in that direction, as was the case with Indian Hotels' bid for Orient Express or Apollo Tyres' bid for Cooper Tire, both of which being withdrawn. There may be a painful unwinding of Assets going forward, but that would be a good thing, at least the balance sheets would get cleaned up and then the Indian Corporates, with specific advantages of low cost and intellectual capital would be able to prove their mettle in the the global space once again!
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