Reliance Power’s proposed acquisition of the Jaypee Group’s entire hydel portfolio, comprising three projects with capacity aggregating 1,800 MW, is a sign of concerted efforts at asset divestiture by debt-laden corporates. The announcement of the deal comes only four months after Jaypee had signed an agreement with an Abu Dhabi-based utility — now called off — to sell two out of the three plants for about ₹10,000 crore. No less significant is the fact that the buyer group in this case — Reliance ADA — has its own problem of companies with high debts and struggling operations. Yet, what is important is the need for asset sales that have totalled an estimated ₹80,000 crore in the last year-and-a-half. It is not a bad thing if we have more such deals enabling corporates that have taken on too much debt for funding projects to deleverage and focus on their core businesses. This is painful but necessary restructuring.
The good thing is that investor sentiment and market conditions are much more favourable for asset/stake sale transactions than they were a few months ago. The promise of policy reforms from a stable government at the Centre makes it possible for prospective buyers to take a more long-term view and sellers to expect better valuations for their assets. Besides, there may be more lenders and private equity firms willing to fund such acquisitions in the expectation of an economic turnaround resulting in improved cash flows from the assets in question. As asset sales gain momentum, the leverage and debt/EBITDA ratios of stressed firms will come down to manageable levels. In due course, they will hopefully also be able to take advantage of the economic upturn to undertake fresh investments.
The flip side, however, is that this process of deleveraging may not happen as fast as one would like. An analysis by this newspaper of companies that have declared their results for the April-June quarter has shown lower year-on-year growth in net sales than the corresponding increases in the preceding two quarters. This suggests some disconnect between stock price movements and actual performance. The market rally we have seen in the past few months is clearly predicated on expectations of improved corporate performance in the quarters ahead. Sustaining these expectations is important, if only to make it easier for companies to raise cash through placement of equity and asset divestment. But the key to all this is a government seen to be taking policy initiatives on critical areas such as land acquisition, environmental clearances, coal linkages for power plants, bidding norms for highway projects and implementation of a nationwide goods and services tax. The capacity of this government to deliver on these is something that is bound to come under test in the coming months.