Emergence of strong companies on clearing of regulatory overhang, capital-raising and restructuring
The June
2020 quarter sharpened Corporate India’s fault lines by separating companies into
three categories. Essential services providers did not have to shut down. Nevertheless,
volumes and the margins contracted on a sudden slump in demand, with
export-oriented pharmaceutical producers and tech solutions providers being the
exceptions. In the middle were a majority, with no output in April and a
gradual recovery from May to about 80% capacity utilization by June. Some of
them put up a decent show by restricting the fall in the margins due to soft input
costs and dip in fixed overheads on reduced operations. Rural consumption partially
compensated the absence of urban buyers. The worst of the lot were those who
had to bear the full weight of social distancing and included malls,
multiplexes, airlines and tourism- related services. A common thread binding all
is the focus on survival rather than growth. Capital expenditure is the
casualty as cash is stocked up.
Going beyond
the headline numbers, three trends became visible, reaffirming the assumption
that a downturn is the time for new beginnings. First is the clearing of the overhang
of past issues that had spilled over from the pre-covid-19 period. The pullback
of Yes Bank from the brink is a stunning example of how a crisis can be
converted into an opportunity by taking advantage of the cheap liquidity looking
for deployment. The risk-takers, the clutch of public and private lenders pooling
in Rs 10000 crore by subscribing to the shares at Rs 10 mid-March,
had made a notional profit of 50% on their investment in five months, giving an
annualized return of 120% when real interest rates are negative. Besides
returning to profitability after reporting losses in the past three quarters, Q1
showed sequential improvement in operating parameters. Customers repaid almost
50% of their overdue position, enabling repayment of 35% of the Rs 50000 crore
borrowed from the Reserve Bank of India. Credit ratings on foreign and Indian currency
borrowings have been bumped up. The regulator’s nod for a new top boss of HDFC
Bank and Bandhan Bank coming out of restrictions on branch opening since September
2018 after promoters brought down their stake by half to around 21% contributed
to the rerating of the banking sector that got a further boost after the
central bank allowed one-time restructuring of loans outstanding in March. The turnaround in sentiment was also
an extension of the record Rs 56500-crore capital-dilution by Yes Bank, ICICI
Bank, HDFC and Axis Bank as India was unlocking. IT, real estate, auto and
pharma players, too, are tapping the equity and debt markets. Shares are being offered
at a discount to the current prices, off their yearly highs, leaving scope for
appreciation once spends on growth resume. Sovereign funds besides venture
capitalists are taking exposure. The exercise offers clues to the shape of the issuer.
Private placement indicates the support price for the stock. Retail investors through
FPOs can enter at levels lower than those of institutional investors. Rights
issues usually imply lukewarm reception from new investors. At the same time, they
demonstrate promoters’ commitment. Debt implies short-term need for money. Several
companies are accessing credit at a coupon of around 8%, implying real borrowing
cost of 1% considering consumer price inflation is a tad below 7%.
Change in ownership
is another offshoot of any churn in the market. The amalgamation of 10 public sector banks into
four from 1 April, at hindsight, preempted what would have been inevitable in
the post-pandemic era. The merger between ICICI Lombard General Insurance
Company and Bharti Axa General Insurance Company is a forerunner to the consolidation
in the financial services segment, just like in the telecom space, where only
three participants remain. A shakedown in the distressed realty sector will
leave only companies enjoying investor confidence. The Embassy group’s friendly
takeover of Indiabulls Real Estate was not surprising. A 10% equity stake was
divested to the new promoter last year as part of the effort of the troubled group
to clean up the balance sheet in the run-up for approval to combine the financial services arm
with Laxmi Vilas Bank that is now not happening. Economic turmoil is the right
time for unwieldy conglomerates to become lean. The hiving of the non-airport
businesses by GMR Infrastructure was in response for pure play to assign proper
discounting. Privatization and connectivity in the civil aviation sector is one
of the thrust areas of the Modi government. Investors can, thus, look forward
to a fitter Corporate India readying to take off.
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