Furious and unfocused expansion has got many companies into an unnecessary lather. As is said, it is not the size of the dog in the fight, it is the size of the fight in the dog...and so it is with Indian corporates struggling to come to terms with harsh economic realities. last week, we looked at Jyoti Structures from the EPC space. This week, we examine another top notch engineering, procurement and construction major Punj lloyd which finds itself in a hole. All of its own making. The urge to fly in his own jet airplane tripping Punj lloyd chairman Atul Punj. As of March 31, 2015, it had gross borrowings of Rs 7141 crore, which rocketed further to Rs 7800 crore as of December 31, 2015. In FY 2014-15, the company incurred its highest ever loss of Rs 1154 crore, its reserve and surplus was a paltry Rs 900 crore in March, 2015 (down to Rs 730 crore as of Dec 31, 2015) while the net worth of its overseas subsidiaries was completely eroded (i.e accumulated losses of Rs 2543 crore). Its combined losses from FY 2012-13 to FY 2014-15 - Rs 1827.15 crore. Barring FY 2008-09, it has consistently been making losses (sounds eerily familiar).
In such an exacting environment, how can Punj lloyd effect a turnaroundIJ And with banks universally struggling to recover their dues, at what exact stage are the company’s recast plans if anyIJ When The Pioneer posed this question to Punj lloyd, its answers were banal and blasé: “The high level of debt and resultant losses arising out of this is an Industry wide phenomenon. The entire sector is facing a similar situation. Delay in settlement of our legitimate claims and invoices by clients in addition to the global slowdown in oil & gas sector has adversely impacted this year’s result. We are in the process of settling and realising a few large claims in the current financial year. Settlement of these claims shall result in reduction in overall debt and will also help us in improving profitability. Additionally, the company has been booking several large key orders during the previous year. With the current order backlog, we are confident of achieving a marked increase in revenue and performance this year. “ Taking refuge behind tight liquidity conditions and an industry caught in the headlights doesn’t wash. Simply because unnecessary overseas expansion plans have poleaxed the parent company’s financials.
Banking sources revealed that money loaned by Indian Public Sector Banks like SBI, Bank of Baroda, ExIm Bank, lIC, Axis bank among others was splashed in its overseas subsidiary companies either as loans or as equity aggregating to Rs 2052 crore, defying all performance yardsticks. Of the total borrowings of Rs 7140 crore as on March 31, 2015, borrowings from banks included:
*Secured long term loan - Rupee term loan Rs 507.82 crore/Foreign currency term loans Rs 729.61 crore
*Unsecured long term loan - foreign currency term loan Rs 8.97 crore
*Secured short term loan -Working capital loan repayable on demand Rs 3880.85 crore
*Unsecured short term loan Rs 182.47 crore
TOTAl -Rs 5309.72 crore
The unrelated overseas expansion has turned into its ugly underbelly, more so when it included the acquisition of a Gulfstream jet and a coal mine. Things came to a head earlier this year when Punj lloyd ltd’s Singapore units filed for judicial management on February 17 after creditors rejected one of two subsidiaries’ debt restructuring plans, as some oil and rail projects bled losses and attempts to diversify into other business areas backfired. Unsecured creditors would get zero to half-a-cent on the dollar recovery based on liquidation scenario analyses on December 22 last year, according to the court documents which were available with Bloomberg suggested. On the status of the liquidation scenario, Punj lloyd’s Vice President and Group Head - Corporate Communications louise Sharma stated that, “We continue making all efforts to revive the business in Singapore. Our application to Judicial Management (JM) is likely to come up for hearing in the near future and we are hopeful that it would be approved by the creditors and the court.” On being asked on the timeline on the recovery plan for creditors and what it entailedIJ Punj lloyd maintained that the ‘application of Judicial Management is proposed to be heard by the Court in Singapore. Proposal on the recovery plan would be finalised by the JM post its hearing.’
Evasive and short on specifics appeared to be Punj lloyd’s method of dealing with The Pioneer’s questions. For when asked specifically on how it intended to restructure $230 million ($163.5 million) of debt owed to banks and unsecured creditors at Sembawang Engineers and Constructors Pte and S$176 million at Punj lloyd Pte, its plain vanilla answer was - As mentioned earlier, creditors form part of the JM, which is due for hearing in the near future. And the reason for that is that in the good times, Punj lloyd was busy splurging on non core items and businesses despite its Singapore operations being under acute stress. Imagine it bought a $55 million Gulfstream G650 jet in 2008 and invested $41 million to develop a coal-mine in Indonesia 2011, both part-funded by loans from the parent company. Of course, when under the cosh, it subsequently sold the aircraft to the parent for S$50 million in late 2014 to settle the loans. Furthermore it is now planning to sell the coal mine to repay debt, but in hindsight these were abominable business decisions which impacted the parent’s financials. To this Punj lloyd was completely apathetic saying, “Both the investments have economic value which would be unlocked in due course.’
Glocal factors being cited for a business downturn is simply not justified nor acceptable given that the purchase of a Gulfstream jet and a coal mine is hardly financial prudence. The questionable business decisions are long and varied. Take the loss of S$20.7 million in Singapore building a petrochemical plant for Jurong Aromatics Corp. for which it was facing late-delivery penalties on subway, waterworks and prison projects due to higher material costsIJ Here again the management chose to ignore the reality by commenting - “Unfortunately for reasons beyond our Control the company suffered losses, however, the company has successfully completed the Jurong Aromatics and the subway projects despite the cost overruns.” Small mercies!
Back home, the beleaguered company entered into an agreement to kickstart a corrective action plan which entailed lenders providing it a fresh window for working capital requirements, last May it began to look at fresh credit lines amounting to Rs 3000 crore though some of the banks were not in agreement with the proposal. Mercifully, this was negotiated by the management and Punj lloyd has ‘implemented the CAP with the support of all the banks.’ Though this comes with a caveat. The group of lenders placing restrictions on Punj lloyd’s investments to monitor its cash flow under a ‘corrective action plan’IJ Punk lloyd accepts that, “Any fresh investments to its downstream would require lenders’ approval under the “corrective action plan”
Here is another case study of binging during the good times using public sector bank cash and then holding up a neon sign blaming things on an industry wide phenomenon. Banks and domestic financial institutions are busy holding the baby and the bathwater, unsure on what to do with both.