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Last Updated : Jun 23, 2017 06:08 PM IST

Are there good apples in the dirty dozen? Investors may be hard pressed to find any

The belief that assets could be sold at a fair price and some of these dead cats could actually walk again has whetted investors’ appetite, too. But such a belief could be misplaced.

 
 
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RBI recently identified 12 large stressed accounts including Bhushan Steel, JP Infra, Era Infra, Lanco Infra, Amtek Auto and others, as eligible for insolvency proceedings. Cumulatively, these 12 accounts constitute a quarter of the total stressed loans in the system.

The belief that assets could be sold at a fair price and some of these dead cats could actually walk again has whetted investors’ appetite, too. Share prices of Bhushan Steel, Electrosteel, Amtek and a few others have seen a huge spurt in the past few days.

Although the market is betting on a debt turnaround, these expectations seldom make money. If you have little clue about what you are buying into, the probability of getting it right is even remote.

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Replacement Value

One common theme that is doing the rounds amongst investors is that these stocks are trading below their replacement value. Amtek Auto has grabbed attention, after the media reported that private players are looking for a stake.

The three large auto ancillaries (Bosch, Sundaram Clayton and Motherson Sumi Systems) on a combined sales turnover of Rs 61,000 crore are having an enterprise value of Rs 1,51,000 crore. Effectively, they are currently valued at 2.5 times their enterprise value to sales. Applying the same matrix on Amtek Auto's conservative normalised annual sales of Rs 10,000 crore (pre-crisis sales Rs 15,000 crore, current sales Rs 6,000 crore), enterprise value works out to Rs 25000 crore. After deducting current debt of Rs 14,000 crore, the value of equity comes close to Rs 11,000 crore as against its current market capitalisation of mere Rs 700 crore.

But wait. While there may be value in its assets there are many moving parts, which may not be within the control of investors. Most of these cases are better understood by the private investors who can make the physical assessment of the assets and do their due diligence.

Debt: Too Heavy to Lift

What is appearing in the books may not even be worth a look for the lender, forget about the equity investors.

Alok & Lanco – you got to be lucky?

To put it in perspective, companies like Alok Industries has negative equity of Rs 244 crore and is sitting on close to Rs 20,000 crore debt as against a book value of tangible assets pegged at Rs 8000 crore. In March 2017 quarter, it made a loss before interest and tax of Rs 609 crore. At this rate, within a couple of years even the assets that are appearing in the books will have very little realisable value.

The loans, which were given for working capital requirements, for running day-to-day businesses, will have very little assets to back them. This is particularly true for EPC construction companies, which use these funds for the execution of projects. In that case, it would be hard to get a fair deal as a lot of money is already spent on businesses without creating any asset.

Lanco Infra, for instance, is sitting on loans of close to Rs 50,000 crore as against the net fixed asset value of about Rs 20,000 crore. Lanco Infra may still have some hard assets but a pure EPC player like JP Infra and Era Infra will have very little hard assets to support debt. For instance, Era Infra is having a debt of close to Rs 10,000 crore as against the depreciated value of fixed assets at around Rs 1200 crore.

There is very little left even for the bankers as they will have to take huge hair-cuts which may be as high as 50-60 percent. In that case also, the core business (excluding interest cost) has to be on a solid ground backed by assets and earnings.

Bhushan Steel – Better off

Compared to companies like Lanco and Alok Industries, Bhushan Steel is in a better place. Bhushan Steel has got a steel manufacturing capacity of close to 6 million tonnes, which, on the basis of the replacement value of about Rs 6000 crore per tonne, would be valued at around Rs 36000 crore. Adding another Rs 3,000 crore of capital work-in-progress and around Rs 4,000 crore or 50 percent of net current assets, replacement value comes close to Rs 43000 crore as against debt at around Rs 45000 crore. Moreover, in the March FY17 quarter it made a profit before interest depreciation and tax of Rs 460 crore on an interest charge of Rs 830 crore.

Hypothetically, even if 20 percent of this debt is converted into equity, at 12 percent per annum, it will save close to Rs 1,100 crore of annual interest. This is substantial and enough to bring back the company into profits considering that in FY16 it incurred an interest cost of Rs 2500 crore on an income before interest, depreciation and tax of Rs 2,900 crore. But this will lead to huge equity dilution. Our calculations (dilution at Rs 80 per share as against current market price of Rs 68 a share) suggest that promoter’s stake will fall close to 10 percent as against 58.60 percent they currently own. But, in this case, with fresh equity from the external investor, it is possible to come back.

But in cases like Lanco Infra and Alok Industries, it is going to be even more difficult to salvage the situation. Consider this: at Rs 2 a share (current market price 1.3 a share), Lanco Infra will have to issue 5000 crore shares on current outstanding equity shares of 331 crore leading to 94 percent dilution for the existing investors.

While the list is long, it is hard to fathom if investors can actually make money in most of these turnaround cases barring a few exceptions. At best it would be great to see if bankers are able to recover their money. If not the assets will have to be liquidated in part or full. In that case, equity investors, who are the last ones to get paid in the liquidation process, will have little or nothing to cheer.



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First Published on Jun 23, 2017 06:06 pm
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