Retail investors and professional fund managers are not the only ones looking for good investment opportunities. Companies rich in cash too are on the prowl. They have been using weak equity markets to pick up stakes in listed companies, often in unrelated businesses.
These investments seem to be motivated by the prospect of quick gains or diversification of earnings from a risky core business.
All for the return
Take Piramal Healthcare. Ever since it signed the Rs 17,600-crore deal with Abbott Labs for sale of its domestic formulations business, investors have been worrying over how it will deploy this cash. After putting through a buyback and paying out a special dividend, the company still had Rs 7,654 crore (cash plus general reserve at the end of FY11) in its kitty.
It has been investing this cash to generate quick returns. It has already purchased a 5.5 per cent stake in telecom major Vodafone for Rs 2,856 crore and sought shareholder approval to enter as many as seven new businesses from financial services to packaging. The Vodafone stake, Piramal Healthcare hopes, will deliver 17-20 per cent return over a 24-30 month period, especially if the latter makes a public offer for shares.
“Low valuations have been a key trigger for such deals,” says Mr Sandip Sabharwal, CEO, PMS, Prabhudas Lilladher group. “Over the last one-and-a-half years, stocks across the spectrum have seen a sharp sell-off in the broader markets.” Buying low offers an opportunity to make quick returns.
From oil to hotels
With its oil and petrochemical businesses churning out plenty of cash, Reliance Industries has been playing the white knight in the last two years. In August 2010, the company invested Rs 1,021 crore in EIH to help the Oberoi group ward off a takeover threat. The investment entails no change in control. Recently, the company committed Rs 1,700 crore as an initial investment to acquire an indirect stake in the debt-laden TV18 group. Reliance still has Rs 74,000 crore in its kitty, part of which it is using to buyback shares.
Such deals are basically a diversification move from a core business which is cyclical. “It is not as if they are doing it at the cost of investing in their own businesses,” reasons Mr Sanjay Sakhuja, CEO, Ambit Corporate Finance.
Apart from the low valuations, some companies are picking up equity stakes, anticipating favourable policy changes or likely PE investments in the target company, reasoned the Managing Director of an investment bank.
Short-lived
The trend, however, may not last very long, say market players. For one, India Inc's large cash coffers are partly due to companies putting off investment plans in their core business, due to policy uncertainty or high interest rates. Two, a decline in interest rates or improvement in equity markets may also make promoters more reluctant to sell.
Latest balance sheets from 430 leading companies show that they were sitting on combined cash balances of nearly Rs 3.3 lakh crore as of end-September 2011. That was a 30 per cent jump over two years ago.