21 October 2015 Asia Pacific/India Equity Research Regional Banks (Diversified Financials IN (Asia)/Insurance IN (Asia)/Banks IN (Asia))
House of Debt Research Analysts Ashish Gupta 91 22 6777 3895
[email protected] Kush Shah 91 22 6777 3862
[email protected] Prashant Kumar 91 22 6777 3942
[email protected]
SECTOR REVIEW
Still in the Woods Figure 1: ~20-90% debt with House of Debt groups under high stress Low Stress
Moderate Stress
High Stress
100% 90% 80% 70% 60% 50% 40% 30%
20% 10% 0% Lanco Group
Jaypee Group
GMR Group
Videocon Group
GVK Group Essar Group Adani Group
Reliance ADAG
JSW Group
Vedanta Group
Source: Company data, Credit Suisse
■ Degree of financial stress rising. Three years since our first 'House of Debt' report, we find that despite attempts at deleveraging, financial stress at these groups has intensified further. All the groups saw further rises in debt in FY15, which is now up 7x over past eight years to ~12% of system loans. Their interest cover dropped to 0.8x vs 0.9x in FY14 and debt/EBITDA rose to 7x. Moreover, while their loans are still "standard" at the banks, in past few weeks ~35-65% of debt of four groups (Jaypee, Lanco, Essar, and GMR) has been downgraded to default by rating agencies. ■ De-leveraging hasn’t yielded results. Even as some groups cut back on capex and looked to sell assets (JPA and GMR), their debt/EBITDA have deteriorated further as the relatively better assets (contributing to as much as 70% of EBITDA) were sold. Many of their projects now have 20-70% cost overruns pushing their capital costs even above replacement costs. With a significant (30-60%) capacity still under construction, a large (15-170% of P&L interest) is still being capitalised. ■ High forex and commodity exposure weigh on the outlook. Most of the groups have high exposure to commodities and downswing here adds to their stress. Few groups (GVK, Adani and Lanco) also made debt-funded international coal mine acquisitions. In addition, with 15-60% of their debt being in foreign currency, their debt servicing outlook continues to be of concern. We estimate that 20-90% of debt (aggregate US$48 bn, equivalent to ~100% of system GNPAs) for some of these groups is now facing severe stress. Including this, total stressed loans of Indian banks would be at ~17%. We therefore continue to prefer consumer lenders over corporate lenders. Our preferred banks are HDFC Bank and IndusInd. We remain cautious on SBI (N), ICICI (N), PNB (U), and BOI (U). DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
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21 October 2015
Focus table and charts Figure 2: Debt servicing ratios have deteriorated for most groups Rs mn
Gross Debt FY13
EBITDA
FY14
FY15
FY15
Adani Group Essar Group* GMR Group GVK Group Jaypee Group JSW Group Lanco Group Reliance ADAG Vedanta Group Videocon Group
811,220 844,404 960,313 986,448 999,497 1,014,646 408,249 450,459 479,766 269,640 310,268 339,332 636,541 729,792 751,637 461,180 530,278 581,715 410,844 440,824 471,024 1,135,439 1,218,940 1,249,564 996,108 1,012,272 1,033,404 407,681 N/A 454,055
Total
6,523,349 6,944,415 7,335,456
EBIT
PAT
FY15
Int cover (x)
Debt/EBITDA (x)
Debt/equity (x)
FY15
FY14
FY15
FY14
FY15
FY14
FY15
123,704 83,709 25,546 7,397 61,383 130,257 16,939 165,027 231,954 (1,127)
88,485 19,481 28,360 (7,877) 7,421 (27,333) 341 (8,347) 44,511 (17,272) 88,015 31,461 5,802 (20,367) 112,611 45,435 107,601 (234,837) (16,492) 51,196
1.1 0.3 0.4 0.5 0.8 2.0 0.1 1.2 1.6 (0.3)
1.3 0.8 0.2 0.0 0.6 1.9 0.2 1.3 1.3 (0.3)
7.3 11.1 16.0 21.7 11.1 4.1 24.6 7.4 1.8 285.5
6.5 8.5 16.8 32.0 11.9 4.2 23.1 6.8 2.3 N.M.
2.9 4.6 5.4 7.4 6.9 1.8 16.1 1.2 0.4 8.4
3.1 3.9 7.1 12.2 7.1 1.8 43.8 1.1 0.7 3.8
844,789
466,654 (168,461)
0.9
0.8
6.8
7.0
1.9
2.1
Source: Company data, CS *Essar P&L numbers are for FY14, debt is based on data available for FY15 rest assumed to be same as FY14
Figure 3: High share of debt rated as default 65%
600
Debt rated as default (Rs bn)
Figure 4: Debt to market cap increased for all companies
% of total group debt
70% 60%
500 36%
400
38%
37%
30.0
FY14
Debt to Market cap (x)
FY15
25.0
50%
20.0
40%
15.0
30%
10.0
20%
5.0
300 200 100
10%
-
Jaypee Infra
0% Jaypee
Essar
GMR
Lanco
Adani Power
GMR Infra
Videocon JP Power
GVK Power
JP Ass
Source: Company data, CARE, ICRA, CRISIL, Credit Suisse
Source: Company data, Credit Suisse
Figure 5: Large cost overruns in multiple projects
Figure 6: Debt/EBITDA to rise post asset sales
80%
% increase in project cost
70%
70.0
60%
FY15 Debt/Ebitda (x)
Lanco Infra
FY15 Debt/Ebitda post asset sale (x)
60.0
50%
50.0
40%
40.0
30% 20%
30.0
10%
20.0
0%
10.0
JP Power
Lanco Infra
Source: Company data, Sigma Insights, Credit Suisse
Source: Company data, Credit Suisse
Figure 7: Debt levels haven't come down, despite asset sales
Figure 8: Total stressed loans for Indian banks at ~17%
GMR Infra
Videocon
Total system problem loans (%) 2.2%
150
110 429 355
398
4.5%
390
16.6%
5.4%
4.5% FY13 Net Asset sales FY15 Net Debt Debt
Source: Company data, Credit Suisse
House of Debt
Jun-13 NetAsset salesDec-14 Net Debt Debt
Gross NPAs
Restructured ex Stressed House SEBs of Debt
Steel & Others
Total Problem Loans
Source: Company data, Credit Suisse
2
21 October 2015
House of Debt Degree of financial stress rising Three years since our first 'House of Debt' report, we find that despite attempts at deleveraging, financial stress at these groups has intensified further. All these groups saw further rises in debt in FY15 (up 7x over the past eight years to ~12% of system loans). The overall interest cover for the House of Debt companies is now at 0.8x vs 0.9x in FY14. About 80% of the debt is with groups that had debt/EBITDA>6x in FY15 and nearly half with groups where IC<1. While interest cover is less than 1, a large 15-170% of P&L interest) is still being capitalised. The rising stress on 'House of Debt' groups is visible in multiple instances of default over the past year. For four of the groups (Jaypee, Lanco, Essar, and GMR), ~40-65% of group debt has already been downgraded to default ("D" rating) by rating agencies. There have been instances of visible default (Jaypee Group FCCB) and cases of some banks classifying loans as NPAs (Essar Steel and GVK coal mines acquisition debt). Auditor reports have also highlighted eight 'House of Debt' groups instances of delays in payments on ~US$16 bn of loans (~15% of group's debt) overdue of more than 90 days.
De-leveraging hasn’t yielded results Even as some groups cut back on capex and looked to sell assets (JPA and GMR), their debt/EBITDA have deteriorated further as the relatively better assets (contributing to as much as 70% of EBITDA) were sold. In groups like GMR and Videocon the absolute level of debt has continued to rise despite the asset sales on account of ongoing capex and operational losses. Debt levels have continued to rise even as groups have significantly cut back on capex (20-70%) due to a lack of funds. Lanco has seen negligible capex over the past two years even with ~57% of its total planned power capacity still under construction. The increase in debt has outpaced the rise in capex by a margin (120195%). Many of their projects now have 20-70% cost overruns pushing their capital costs even above replacement costs. With a significant (30-60%) capacity still under construction, a large (15-170% of P&L interest) is still being capitalised.
High forex and commodity exposure weigh on the outlook Most of the groups have high exposure to commodities and any downswing here adds to their stress. Few groups (GVK, Adani and Lanco) also made debt-funded international coal mine acquisitions. In addition, with 15-60% of their debt being in foreign currency, their debt servicing outlook continues to be of concern. We estimate that 20-90% of debt (aggregate US$48 bn, equiv to ~100% of system GNPAs) for some of these groups is now facing severe stress. Including this, total stressed loans of Indian banks would be at ~17%. We therefore continue to prefer consumer lenders over corporate lenders. Our preferred banks are HDFC Bank and IndusInd. We remain cautious on SBI (N), ICICI (N), PNB (U), and BOI (U). Previous reports House of Debt House of Debt – Revisited
House of Debt
3
House of Debt
Valuation summary Figure 9: Valuation Summary CS Rating
CMP Rs
Mkt cap (US$ bn)
P/B (x) FY16E FY17E
P/Adj B (x) FY16E FY17E
EPS growth (%) FY16E FY17E
P/E (x) FY16E FY17E
ROE (%) FY16E FY17E
P/PPoP (x) FY16E FY17E
Axis HDFC Bank ICICI Kotak Mahindra Yes Bank J&K Bank IndusInd Public Sector
O O N N N O O
507 1,096 287 657 770 91 962
18.6 42.5 25.7 18.5 5.0 0.7 8.8
2.3 3.8 1.8 3.6 2.4 0.7 3.3
2.0 3.3 1.6 3.1 2.0 0.6 2.9
2.4 3.8 2.0 3.6 2.4 0.8 3.3
2.0 3.3 1.8 3.1 2.1 0.7 2.9
18 21 21 9 23 51 24
23 24 17 39 21 23 26
14 21 12 30 13 6 23
11 17 11 22 11 5 18
18 19 16 13 20 12 18
19 20 17 15 20 13 17
8 13 9 21 8 3 15
7 10 7 18 6 2 11
Bank of Baroda Bank of India PNB SBI Union Bank IOB Non-bank fin
N U U N O U
175 142 137 255 174 37
6.2 1.7 4.1 30.4 1.8 1.0
0.9 0.3 0.6 1.1 0.6 0.3
0.8 0.3 0.6 1.0 0.5 0.3
1.3 0.7 1.1 1.5 0.9 0.9
1.0 0.6 0.9 1.3 0.8 0.8
48 (10) 37 26 24 nm
27 60 23 21 25 94
8 6 6 9 5 15
6 4 5 7 4 8
12 6 11 12 12 2
14 9 12 13 14 4
4 2 2 5 2 2
3 1 2 4 2 2
Bajaj Finance HDFC IDFC Indiabulls LIC Housing Fin L&T Finance M&M Finance SCUF Shriram Transport SKS Microfinance Core Business
N O O N O U O N N O
5,013 1,315 60 744 478 69 235 1,857 968 449
4.3 32.0 1.5 5.0 3.7 1.8 2.1 2.0 3.4 0.9
3.4 6.1 0.5 3.4 2.6 1.4 1.9 2.6 2.1 4.4
2.8 5.4 0.5 2.9 2.2 1.2 1.6 2.2 1.8 3.4
3.6 6.1 0.5 3.5 2.7 2.1 2.1 2.7 2.2 4.4
3.0 5.4 0.5 3.0 2.3
41 19 10 28 38 32 34 23 16 37
20 30 6 13 14 15 10 17 14 22
14 25 6 10 10.1 12 8 14 12 16
21 22 8 28 20 9 20 16 16 22
22 23 9 30 23 11 23 17 16 24
20 4
17 3
6
5
1.8 2.4 2.0 3.4
39 17 (15) 17 23 13 40 27 53 36
6
5
ICICI HDFC
N O
227 695
20.3 16.9
1.7 4.3
1.5 3.7
1.8 4.3
1.6 3.7
15 16
20 19
12 19
10 16
15 24
16 25
7 9
6 7
Private Sector Banks
Source: Company data, Credit Suisse estimates 21 October 2015
4
21 October 2015
Degree of financial stress rising The ten 'House of Debt' groups saw debt levels increase further +5% in FY15 and up 12% since our last edition in 2013. Debt for these groups is now up 7x over the past eight years (now equivalent to ~12% of system loans). The overall interest cover for the House of Debt companies is now at 0.8x vs 0.9x in FY14. About 80% of the debt is with groups that had debt/EBITDA>6x in FY15 and nearly half with groups where IC<1. While interest cover is less than 1, a large 15-170% of P&L interest is still being capitalised. The rising stress on 'House of Debt' groups is visible in multiple instances of default over the past year. For four of the groups (Jaypee, Lanco, Essar, and GMR), ~40-65% of group debt has already been downgraded to default ("D" rating) by rating agencies. There have been instances of visible default (Jaypee Group FCCB) and cases of some banks classifying loans as NPAs (Essar Steel and GVK coal mines acquisition debt). Auditor reports have also highlighted eight 'House of Debt' groups instances of delays in payments on ~US$16 bn of loans (~15% of group's debt) overdue of more than 90 days. Figure 10: Debt levels for the 'House of Debt' companies have increased further 8,000 Borrowings of 10 corporate groups (Rs bn) 7,000
6,523
6,000
6,944
7,335
5,548
5,000 3,773
4,000 2,820
3,000
2,242
2,000 1,000
1,465 1,004
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Source: Company data, Credit Suisse
Debt levels up 7x over the past eight years The ten 'House of Debt' groups saw debt levels increase further +5% in FY15 and up 12% since our last edition in 2013. The pace of debt increase has moderated in the past couple of years as they have pulled back on capex and some groups have sold assets to bring down debt levels. The rise in debt of the top ten groups has now slowed to industry loan growth in FY15 and the share of these groups debt with remains high at 12% of banking sector loans (27% share of corporate loans).
House of Debt
5
21 October 2015
Figure 12: …share within system remained high at ~12%
Figure 11: Loan growth has slowed to system levels… 60%
Top 10 groups loan growth (% yoy)
Industry loan growth (% yoy)
14%
13%
Share in system loans (%)
13% 12%
12%
12%
50%
10% 10%
9% 8%
40% 8% 7%
30% 6%
20%
6%
4%
10%
2% 0%
0%
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY07
FY15
Source: Company data, Credit Suisse
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Source: Company data, Credit Suisse
Over the past two years, all the 'House of Debt' companies have seen their debt levels rise. Figure 13: Debt levels for all the 'House of Debt' companies have increased in FY15 1,300 FY13
Gross Debt (Rs bn)
FY14
FY15
1,100 900 700
500 300 100 Reliance ADAG
Vedanta Group
Essar Group*
Adani Group
Jaypee Group
JSW Group GMR Group
Lanco Group
Videocon GVK Group Group
Source: Company data, Credit Suisse
Adani (+14% YoY) and Videocon (+11% YoY) have seen the largest increases in debt levels. Adani's debt increase has been on account of its acquisitions and is likely to go up further in FY16 as it is consummates couple of other acquisitions currently under way. Figure 14: Adani and Videocon have seen the largest increases in debt levels in FY15 16% 14%
Increase in gross debt in FY15
14%
11%
12%
10%
10%
9%
8%
7%
7%
6% 4%
3%
3%
2%
2%
2%
0% Adani Group
Videocon JSW Group GVK Group Group
Lanco Group
GMR Group
Jaypee Group
Reliance ADAG
Vedanta Group
Essar Group*
Source: Company data, Credit Suisse
House of Debt
6
21 October 2015
Debt servicing ratios continue to worsen While the increase in debt levels has slowed in FY15, these companies have seen profitability weaken, as a result of which debt servicing ratios have deteriorated over the past year. Interest cover for the group has fallen further to 0.8x, while debt/EBITDA is up to ~7x and debt to equity has increased to 2.1x. Figure 15: Debt servicing ratios have worsened for most groups Rs mn
Gross debt FY13
FY14
EBITDA FY15
FY15
Adani Group Essar Group* GMR Group GVK Group Jaypee Group JSW Group Lanco Group Reliance ADAG Vedanta Group Videocon Group
811,220 844,404 960,313 986,448 999,497 1,014,646 408,249 450,459 479,766 269,640 310,268 339,332 636,541 729,792 751,637 461,180 530,278 581,715 410,844 440,824 471,024 1,135,439 1,218,940 1,249,564 996,108 1,012,272 1,033,404 407,681 N/A 454,055
Total
6,523,349 6,944,415 7,335,456
EBIT
PAT
FY15
Int Cover (x)
Debt/EBITDA (x)
Debt/Equity (x)
FY15
FY14
FY15
FY14
FY15
FY14
FY15
123,704 83,709 25,546 7,397 61,383 130,257 16,939 165,027 231,954 (1,127)
88,485 19,481 28,360 (7,877) 7,421 (27,333) 341 (8,347) 44,511 (17,272) 88,015 31,461 5,802 (20,367) 112,611 45,435 107,601 (234,837) (16,492) 51,196
1.1 0.3 0.4 0.5 0.8 2.0 0.1 1.2 1.6 (0.3)
1.3 0.8 0.2 0.0 0.6 1.9 0.2 1.3 1.3 (0.3)
7.3 11.1 16.0 21.7 11.1 4.1 24.6 7.4 1.8 285.5
6.5 8.5 16.8 32.0 11.9 4.2 23.1 6.8 2.3 N.M.
2.9 4.6 5.4 7.4 6.9 1.8 16.1 1.2 0.4 8.4
3.1 3.9 7.1 12.2 7.1 1.8 43.8 1.1 0.7 3.8
844,789
466,654 (168,461)
0.9
0.8
6.8
7.0
1.9
2.1
Source: Company data, Credit Suisse; *Essar P&L numbers are for FY14, debt is based on data available for FY15 rest assumed to be same as FY14
Overall interest cover for the 'House of Debt' companies is at 0.8x vs 0.9x in FY14 and about half of the debt is with the groups that had IC<1 in FY15. While IC is less than 1, a large amount of interest (15-170% of P&L interest) is being capitalised. Figure 16: Interest cover declined for most companies…
Figure 17: …despite a large portion of interest being capitalised
2.5 2.0
180%
FY14
FY15
1.5
1.0 0.5
(0.5)
% of int capitalised
160% 140% 120% 100%
80% 60%
-
171%
40%
81%
79%
50% 34%
29%
20%
28%
22%
17%
16%
16%
0%
Source: Company data, Credit Suisse
House of Debt
Source: Company data, Credit Suisse
7
21 October 2015
5-65% of some group's debt now downgraded to default Five 'House of Debt' groups have had multiple instances of default across various group companies. Rating agencies have now assigned the default "D" rating to ~5-65% of debt for these groups. For Jaypee Group, almost two-thirds of the group debt is now in the default category including standalone parent company debt. Other groups have also seen multiple defaults at the SPV level for power and road projects. Figure 18: 5-65% of debt with 'House of Debt' companies in default 600
65%
Debt rated as default (Rs bn)
% of total group debt
70% 60%
500
50%
400 38%
37%
36%
40%
300 30% 200
20%
100
5%
-
10% 0%
Jaypee
Essar
GMR
Lanco
GVK
Source: Company data, CARE, ICRA, CRISIL, Credit Suisse
Figure 19: Overall 73% of HoD company debt has been downgraded Company name Adani Enterprises Adani Ports & SEZ Adani Power Essar Steel Essar Oil Essar Shipping GMR Infra GVK Power & Infra JP Associates JP Power Jaypee Infratech JSW Steel JSW Energy Lanco Infra Reliance Infra Reliance Power Reliance Comm Reliance Capital Vedanta Resources Vedanta Ltd
Previous rating
Current rating
A AABBB C AA BBB ABB BBBBB AA AABB AAA- * AAA+ BBAA+
A* AA+ BBB * D A BB BBBBBB+ D D D AA AA- * D A+ * AAAAA BB- * AA
Date of last rating change 23-Mar-15 3-Aug-15 20-Feb-15 19-May-15 3-Sep-15 15-Jan-14 28-Sep-15 12-Dec-13 23-Jul-15 6-Oct-15 25-Sep-15 17-Oct-14 27-Oct-14 23-Oct-12 28-Mar-15 5-Feb-15 28-Dec-12 13-Aug-13 9-Sep-15 6-Aug-15
Source: Company data, CARE, ICRA, CRISIL, Credit Suisse
House of Debt
8
21 October 2015
Multiple instances of visible default Two-thirds of JPA Group debt in default category JP Group has had multiple instances of default in 2015 with the pressure on debt servicing intensifying. In Feb-15, JP Power defaulted on repayment of its US$200 mn FCCB and had to renegotiate with the debtors on terms of repayment. JP Power's standalone rating was downgraded to "D" from BBB+ at the start of 2015 on account of frequent delays in servicing of term loans related to Nigrie projects (link) and also weak liquidity and impending large repayment obligations for its corporate term loans. Rating agencies also downgraded JP Associate's standalone debt to default (D rating) in Jul-15 (link). Essar Steel classified as NPA by few banks Essar Steel was classified as NPA during the 4Q15 results by HDFC Bank and was sold to asset reconstruction companies after taking a 40% haircut. Similarly, Bank of India also classified the account as NPA. Among other 'House of Debt' companies, some of the exposures to Lanco and GVK have also been classified as NPAs by the banks. Exposure to GVK Australian coal mine "Hancock" has been classified as NPA by Syndicate Bank in its 1Q16 results.
Auditors highlight delays in debt servicing as well Going through the annual reports available for 'House of Debt' companies, we find instances where auditors have highlighted that the company has been in default for a period of up to 360 days. According to their auditors report, eight of the ten 'House of Debt' groups were in default last year. Total debt with these companies in default was at US$53 bn (~48% of total debt with the groups) of which US$37 bn were reported to be in default for 0-90 days by the auditors. While some of these accounts are "restructured" at the banks, most of them continue to be classified as "standard". Figure 20: Auditors report also highlight default to lenders Company (Rs mn) Videocon* Essar Oil GMR Infra Lanco Infra Essar Ports Essar Shipping R Infra# Essar Steel# GVK Power Adani Power Jaypee Power Jaypee Infra Total Total - overdue less than 90 days
Total debt Default during Default at BS (Rs bn) the year date 460 18,204 271 16,301 104 480 12,452 2,240 400 N/A 10,352 65 8,545 1,420 53 2,593 4,178 258 3,708 3,016 363 N/A 6,295 252 4,584 641 449 3,000 322 N/A 2,276 91 N/A 1,623 3,457 69,387 32,145 2,466
49,957
Default days 1-88 days N/A N/A N/A 0-211 days 0-360 days 0-90 days 0-141 days 5-288 days 30-53 days 1-59 days 1-88 days
Jun-15 Int cover (x) 0.7 2.0 0.4 0.2 1.5 (0.5) 0.8 N/A 0.4 0.7 1.0 1.1
16,595
Source: Company data, Credit Suisse; # - default is for associate or JV company; * year ending December 2014
House of Debt
9
21 October 2015
De-leveraging hasn’t yielded results Even as some groups cut back on capex and looked to sell assets (JPA and GMR), their debt/EBITDA have deteriorated further as the relatively better assets (contributing to as much as 70% of EBITDA) were sold. In groups like GMR and Videocon the absolute level of debt has continued to rise despite the asset sales on account of ongoing capex and operational losses. Debt levels have continued to rise even as groups have significantly cut back on capex (20-70%) due to a lack of funds. Lanco has seen negligible capex over the past two years even with ~57% of its total planned power capacity still under construction. The increase in debt has outpaced the rise in capex by a margin (120195%). Many of their projects now have 20-70% cost overruns pushing their capital costs even above replacement costs. With a significant (30-60%) capacity still under construction, a large (15-170% of P&L interest) is still being capitalised.
Debt/EBITDA levels have continued to rise Primarily operational assets generating healthy EBITDA have found buyers and consequently debt/EBITDA levels have deteriorated post sale. Jaypee group has been most active in selling assets and will realize Rs220 bn from these asset sales. It has sold 8.4MT of cement capacity for Rs50 bn and firmed up sale of another 4.9MT for Rs54 bn. Its power venture is also selling 1,391 MW of hydro plants to JSW Energy that will bring down debt levels by ~30%. However, as these plants contributed 59% to FY15 EBIT and the debt/EBITDA would rise post sale. The group is also in talks to sell its 500 MW Bina project, post which residual capacity PLF is just 35%. Figure 21: JPVL debt/EBITDA to increase post asset sales
Figure 22: JPVL remaining power projects facing challenges
Debt (Rs bn)
350
Debt/EBITDA (x)
300
30 25
250
20
200
Project
Capacity Fuel (MW) Source
Project Cost
Remarks
Nigrie
1320
Coal
102,380
Downgraded to default
Bina I
500
Coal
34,700
Looking to sell the asset
Vishnu Prayag
400
Hydro
16,698
Bara I
1980
Coal
138,700
15 150 10
100
5
50 -
33% cost overrun; FSA challenges
FY15A
FY15 (ex-hydro assets sold)
Source: Company data, Credit Suisse
FY15 (ex-hydro assets sold & Bina)
Source: Company data, Credit Suisse
Similar, Lanco has in Apr-15 completed sale of its 1,200 MW Udupi power plant to Adani that will help reduce debt levels by 15%. However, as this project contributed 69% of its FY15 EBITDA, post-sale debt/EBITDA would rise sharply. PLF for its residual operational capacity is just 40%.
House of Debt
10
21 October 2015
Figure 23: Lanco's debt/EBITDA to increase on sale of
Figure 24: Udupi contributed 69% of Lanco's FY15
Udupi
EBITDA and 15% of debt Debt
400
Debt/EBITDA (x)
Lanco Infra - Contribution to FY15 EBITDA
70 60
375
50
Ex-Udupi 31%
40
350 30 20
325
Udupi 69%
10 300
0 FY15A
FY15 (ex-Udupi)
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse
Despite asset sales, debt levels have continued to rise GMR and Videocon, even with large asset sales, have seen their debt levels go up. The increase in debt has significantly outpaced capex and helped fund operational losses. In case of GMR, most of the power projects left continue to face operational challenges and would be hurdle to further de-leveraging through asset sales. Videocon as well, even post the sale of its 10% stake in the Mozambique asset, hasn’t seen any reduction in debt levels. Figure 25: GMR's debt has continued to increase even
Figure 26: All of GMR's larger operational power projects
with asset sales
facing challenges Capacity Fuel Revised (MW) cost (Rs mn) Kamalganga-I 1050 Coal 65,190
GMR Infra 69
114
110
EMCO 429
245
Asset sales Net Debt between post asset FY13-15 sales
245
Capex incl capitalised interest
Source: Company data, Credit Suisse
House of Debt
Others
FY15 Net Debt
Downgraded to default rating*
39,480
Downgraded to default rating
1370 Coal 120,110
Downgraded to default rating
360
355
FY13 Net Debt
Chattisgarh
600 Coal
Comments
Kakinada
220 Gas
14,190
Low PLF on lack of gas availability
Vemagiri I
370 Gas
11,530
Low PLF on lack of gas availability
Rajahmundry
768 Gas
40,600
Low PLF on lack of gas availability
Source: Company data, Credit Suisse; * for delays in repayments
11
21 October 2015
Figure 27: Videocon—debt levels haven't come down
Figure 28: Videocon continues to make EBIT losses
even with large asset sales 25 EBIT (Rs bn)
20
Dec-14
15
89
150
Jun-13
10
53
5
398
390 248
248
-
301
(5)
(10) (15) Jun-13 Net Debt
Asset sales
Net Debt post asset sales
Capex
Others
Dec-14 Net Debt
Source: Company data, Credit Suisse
(20)
Consumer Oil and Gas Elec
Telecom
Power
Others
Total
Source: Company data, Credit Suisse
Debt-to-market cap reflects rising stress The continued sharp contraction in their market cap reflects the pressure on the financials of these groups. While debt levels are up to 2-17% over the past year, debt-to-market cap has increased by 20-150% for a large number of the companies. Debt-to-market cap for some of the groups is now 15-30x. Figure 29: Debt-to-market cap has increased for most companies 35.0 30.0
Debt to Market cap (x)
FY14
FY15
25.0 20.0 15.0 10.0
5.0 -
Source: Company data, Credit Suisse
Large cost overrun threat to project viability A large number of projects especially from power and road sectors have seen delays in completion which has led to cost overruns. Some of the projects now have reported cost overruns of 20-70%. Notably, the capex cost for a few of these projects is now higher than the post overrun is now higher than normative replacement.
House of Debt
12
21 October 2015
Figure 30: Cost overrun of 20-80% for under construction
Figure 31: Project cost higher than replacement cost in
projects
many cases
300
Original Cost
Revised Cost
% increase in project cost (RHS)
160
80%
250
100
50%
150
80
40%
60
30%
100
40
20% 50
20
10%
-
Replacement cost
120
60% 200
Cost per MW
140
70%
-
0%
Source: Company data, Sigma Insights, Credit Suisse
Source: Company data, Sigma Insights, Credit Suisse
Debt increase continues to outpace capex In our previous edition (House of Debt – Revisited), we stated that 2014 would be the year of reckoning as a large amount of capacity was to come on stream. However, many of these projects continued to be delayed and most groups have pulled back on capex given their high leverage. However, the increase in net debt for these groups has outpaced the amount spent on capex in FY15. Figure 32: The increase in net debt…
Figure 33: …is outpacing capex spends in FY15
20%
250%
18%
17%
16%
% Increase in net debt in FY15 16% 15%
14%
200%
14%
Increase in net debt as a % of capex (%) 193%
181% 157%
12%
12%
150% 121%
10% 8%
8%
118%
111%
100%
6% 4%
50%
2% 0%
Source: Company data, Credit Suisse
House of Debt
0%
Source: Company data, Credit Suisse
13
21 October 2015
Figure 34: Rise in net debt has outpaced capex incurred FY15 Increase in net debt
50
FY15 Capex
45 40 35 30
25 20 15 10 5 Rs bn
JP Power
R Power
R Infra
Adani Ports GVK Group
Essar Oil
Essar Ports Jaypee Infra Lanco Group
Source: Company data, Credit Suisse
While some of these groups still have a large percentage of capacity still under construction, capex spends have declined YoY due to a lack of funds. Lanco Infratech has ~57% of capacity still under construction, but capex during the past two years has been close to nil and there has been no progress on under-construction projects. Figure 36: …while capex declined due to a lack of funds
Figure 35: Large capacity still under construction… 70%
30%
65%
20%
% of capacity under construction 57%
60%
Decrese in capex spends (YoY % )
10% 0%
47%
50%
17% 15%
-10%
42%
-20%
40%
30% 30%
29%
-40% -50%
20%
-17%
-30%
-60%
-32% -32% -44% -46% -48% -50% -51%
-70%
10%
-80%
-67%
-71%
0% Reliance Power
Lanco Group
JP Power Venture
Source: Company data, Credit Suisse
House of Debt
Essar Group GVK Group GMR Group
Source: Company data, Credit Suisse
14
21 October 2015
High forex and commodity exposure weigh on the outlook Most of the groups have high exposure to commodities and any downswing here adds to their stress. Few groups (GVK, Adani and Lanco) also made debt-funded international coal mine acquisitions. In addition, with 15-60% of their debt being in foreign currency, their debt servicing outlook continues to be of concern. We estimate that 20-90% of debt for some of these groups now faces severe stress. We therefore continue to prefer consumer lenders over corporate lenders.
High commodity exposure adding to stress The profitability of commodity sectors, especially steel and coal, is under significant pressure resulting in deterioration debt servicing ability. Many of these groups have ~1095% of debt linked to their commodity exposures. Of the groups, JSW and Essar have significant exposure to the steel sector (~70-80% of group debt). Adani, GVK and Lanco have significant exposure to coal mining (10-22% of group debt). Figure 37: Large part of debt exposure of the groups linked to commodities 100%
Debt linked to commodities sector
% of total
1,200
Rs bn
1,000
80%
800
60% 600 40% 400 20%
200
0%
0 Vedanta
JSW
Essar
Videocon
Adani
GVK
Lanco
Source: Company data, Credit Suisse
The steel sector has been one of the worst performers with a sharp squeeze on the profitability. As shown in Fig 31, EBITDA per tonne are near its historical lows and would squeeze overleveraged firms like JSW and Essar Steel. Figure 38: Historical low EBITDA per tonne to put significant pressure on leveraged firms 1,000
EBITDA per tonne (USD)*
350
Selling Price per tonne (USD)
300
900
250
800
200 700 150 600
100
500
50
400
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
Source: Company data, Credit Suisse estimates; * avg for Tata, JSW and SAIL
Vedanta has also seen a sharp drop in realisation from other metals like aluminium and copper.
House of Debt
15
21 October 2015
Figure 39: Sharp drops in realisations for Al and copper…
Figure 40: …to affect Vedanta's profitability as well
3,400
Copper US$/T 12,000
LME Aluminium Cash ($/t)
3,000
10,000 2,600
8,000
2,200
6,000
1,800
4,000 2,000
1,400
1,000 Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Jan-08
Jan-11
0 Oct-07
Jan-14
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Dec-08
Feb-10
Apr-11
Jun-12
Aug-13
Oct-14
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Mine acquisitions also at risk Three of the groups, i.e. Adani, Lanco and GVK, made coal mine acquisitions in Australia between 2009 and 2011. For Adani and GVK, mines production is unlikely to start in the foreseeable future and needs large additional capex while offtake for Lanco Griffin continues to be much lower than earlier estimates.
Adani Carmichael coal mine: Adani Group acquired Abbot Point port terminal for US$2 bn in 2011 and Carmichael coal mine for another US$1 bn. The project requires further investments of ~US$7 bn for extraction and transportation of coal to ports. Has been delated due to environmental clearances.
GVK Hancock mine: GVK acquired Hancock coal mines in US$1.3 bn transaction in 2011. The project requires investments of ~US$7 bn as well for it to take off. Similar to Adani coal mines, it is stuck on account of environmental issues.
Lanco Griffin: Lanco acquired Griffin coal mine for US$720 mn in 2011. The offtake from the mine (~2.4MT) continues to be much lower than its earlier estimates. The company has deferred expansion plan amid falling coal prices.
With coal prices now at almost eight years low, these acquisitions combined ~US$5 bn worth of investments is now at risk. Figure 41: Significant investments in coal mines at risk Investment in coal mines
Investments (Rs bn)
140
Figure 42: As coal prices are down ~60% from 2011 levels
% of group debt* 20%
120 16%
160
Coal prices ($ Tn)
120
100 12%
80 60
80
8%
40
40 4% 20 0
0% Adani Carmichael
GVK Hancock
Lanco Griffin
Source: Company data, Credit Suisse; * assuming investment to be 80% debt funded
0 Apr-10
Jan-11
Oct-11
Jul-12
Apr-13
Jan-14
Oct-14
Jul-15
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
High forex debt poses additional risk For some of these companies, a large share of their debt is forex denominated. This also has been one of the reasons for the sharp cost overruns in some of the projects.
House of Debt
16
21 October 2015
Indian banks also report their exposure to companies vulnerable to currency depreciation in their annual reports. These highlight that the bank's exposure to vulnerable corporate (>80% impact on EBITDA for peak currency volatility in the past ten years) is at 15-57% of their net worth. Figure 43: Large forex debt to hurt companies
Figure 44: Banks' exposure to high risk corporates at 15– 57% of net worth High risk unhedged foreign currency exposure*
70% 60%
% of foreign currency debt
59% 58%
60%
48% 47%
50%
50% 41% 40% 38%
40%
34%
30%
44%
42%
40%
31% 31%
32% 25%
20%
As a % of networth
57%
22%
30%
20%
29% 22%
15%
20%
10%
16%
16%
15%
14%
BOI
BOB
SBI
HDFCB
10%
0%
0% YesB
Source: Company data, Credit Suisse
Indus Canara Axis
ICICI
PNB
Source: Company data, Credit Suisse
Significant amount of debt due within a year Some of the companies have 5-50% of long-term debt (~US$15 bn) maturing within the next year and would need refinancing. Also, 5-37% of their debt is short term (~US$20 bn) that needs to be rolled over. Figure 45: Large share of debt falling due over the next 12 months 60% As a % of total debt
Long term debt due in 1 year
Short term debt
50% 40% 30% 20% 10% 0%
Source: Company data, Credit Suisse
Some good assets within each group… Most of these groups, there are some assets that have been generating healthy cash flows. In particular group assets in Airports, refining, ports and cement have been showing steady performance.
House of Debt
17
21 October 2015
Figure 46: Some good assets within each group Group
Key assets
Remarks
Adani Group Essar Group GMR Group GVK Group Jaypee Group JSW Group
Adani Ports Essar Oil & Essar Ports Airports Airports Cement Energy
Vedanta Group
Hind Zinc & Cairn
Ports profits > group profits Businesses with debt/EBITDA <6x Contributed 67% of group EBITDA Only business with EBITDA>interest Cash positive business Healthy profitability; diversification against high commodity exposure Cash rich companies with healthy EBITDA generation
Source: Company data, Credit Suisse
….but~20-90% of group debt under high stress However, with pressure on the steel and power businesses, 20-90% of debt (aggregates ~US$48 bn, equivalent to 100% of system GNPAs) for some of these groups. Lanco and Jaypee have the highest share of stressed loans (at ~80-90%) while GMR, GVK, Essar and Videocon have close to two-thirds of their debt under stress. Figure 47: Large share of debt is facing high stress Low Stress
Moderate Stress
High Stress
100% 90% 80% 70% 60% 50% 40% 30%
20% 10% 0% Lanco Group
Jaypee Group
GMR Group Videocon GVK Group Essar Group Adani Group Reliance Group ADAG
JSW Group
Vedanta Group
Source: Company data, Credit Suisse
We have classified debt as high stress based on 1.
If debt has been downgraded to "D" by rating agencies
2.
Power projects:
3.
o
if operational project is at debt/EBITDA >12x or
o
an under construction has had more than 35% cost overrun, or
o
it is a gas-based projects or
o
operating at PLF of less than 40%
Commodity exposure – If debt/EBITDA > 12x
House of Debt
18
21 October 2015
Figure 48: Large share of debt is in "high stress" bucket Share of debt with groups Adani Group
Low Stress 377,313
Adani Power
Moderate High Stress Comments Stress 250,797 318,196 250,797
Abbott Point Terminal Adani Ent
200,000
Adani Ports
177,313
Essar Group
383,256
-
Essar Steel
363,032 Debt to EBITDA at 16.6x 383,256
Low risk
Essar Shipping GMR Group
53,383 Debt to EBITDA at 23x 158,847
-
GMR Energy
GMR Male Others GVK Group
10,000 68,847 120,060
219,272 115,213 Gas based capacity of ~900MW; ~50-70% overrun in coal & hydro plants.
GVK Hancock
65,345 Coal mines delayed on environmental concerns 120,060
Airport EBITDA>interest cost
Roads & Others Jaypee Group
38,706 Negligible EBITDA generation -
115,490
JP Power
91,018 Rating downgraded to D on delay in debt servicing
Jaiprakash Associate
252,800 Standalone debt downgraded to "D" rating
Others
115,490 92,941
JSW Steel JSW Energy Lanco Group
488,774
-
Debt to EBITDA 2.1x 30,421
39,000 Lower than expected offtake and profitability
EPC & others
30,421 360,820
R Infra
655,940
232,804
257,660 99,430
R Comm
Debt to EBITDA >7x 232,804 Ex- Rosa and Butibori, rest of the projects facing challenges. Sasan PPA tariff low, Chitrangi has seen 35% cost overrun
398,280 261,390
Vedanta Resources Videocon
440,603 294,158 Anpara downgraded to D; Amarkantak low tariff; Under construction projects (Vidarbha & Babandh) seeing 60-70% cost overrun; 35,445 Operating at sub-optimal PLF
Griffin coal mine
R Capital
FY15 Debt/ EBITDA 5x, rose to 7.2x in Jun-15
92,941
Power - Gas based
R Power
-
488,774
Power - coal based
Reliance ADA Group
539,147 195,329 Standalone rating downgraded to D; Nigrie rated D; Bara overrun ~33%
Jaypee Infra
JSW Group
Project contract cancelled by the government
90,000
Power Projects Airports
320,919 274,209 All major coal based projects in default; Gas based capacity of ~1.3GW operating at low PLF 36,711 Debt with highway projects already default rated
Highways Airport
678,091 214,976* Power business – 1.5GW is gas based, 1.8GW has seen 40% cost overrun
Essar Power Essar Oil, port & others
198,196 Tiroda, Kawai are re-financed under 5:25, classified as moderate stress; Rest primarily linked to Mundra 120,000 Australian coal mine project stuck on environmental as well as viability concerns
965,018 113,514
45,406
Commodity exposure; moderate pressure on sharp correction in commodity prices 295,136 Telecom and Oil & Gas exposure stressed
Source: Company data, Credit Suisse;*based on FY14 numbers
House of Debt
19
21 October 2015
Increasing risks for corporate focused lenders The corporate banks are already trading at multiples that are at a discount to the consumer lenders on account of the large reported differential in their asset quality trends over the past three years. However, debt for these groups is still "standard" in books of the banks, The rising intensity of stress for these borrowers and downgrades from rating agencies, increases the possibilities of these slipping to NPLs. The share of stressed loans with these groups is equivalent to ~4.5% of system loans (equiv to ~100% of current reported Gross NPAs). Including this, total system impaired loans would be at ~17% of system loans. As the pace of NPA recognition accelerates, it will pose risk to management's guidance and market expectations of impaired asset formation over the next 12-18 months. We remain cautious on corporate lenders, in particular the state-owned banks, as they are under-provisioned and undercapitalised. Figure 49: Exposure to at-risk sectors at 100-350% of networth for corporate lenders Funded Exposure to "at-risk" sectors (% of networth) 350 300 250 200 150 100 50 0 Canara
Union
OBC
SBI
BOI Power
PNB
BOB
Other Infra
Yes
ICICI
Axis
HDFCB
Steel
Source: Company data, Credit Suisse
Figure 50: Incl stressed "House of Debt" loans, total system stressed loans at ~17% Total system problem loans (%) 2.2%
4.5%
16.6% 5.4%
4.5%
Gross NPAs
Restructured ex SEBs Stressed House of Debt
Steel & Others
Total Problem Loans
Source: Company data, Credit Suisse estimates
House of Debt
20
21 October 2015
Adani Group The Adani Group has interests in mining, ports and the power sector. Adani Enterprise has coal mines in India, Australia and Indonesia with reserves in excess of 10 bn t. Adani Power has India's largest private sector power capacity with 11,040 MW of operating capacity (including acquisitions). Adani Ports has seven operating ports handling 145MT of cargo. While most other groups have been looking to deleverage, Adani has acquired port assets (in FY15) and two power plants (in FY16). Its debt levels in FY15 therefore went up another 16% to Rs840 bn and will increase further in FY16. Within the group, Adani Ports is well placed operationally and has healthy debt servicing ratios. This, however, accounts for only 20% of the group debt. Adani Power even prior to the recent acquisition accounts for >50% of group debt and has been incurring losses for the past four years. Most of its capacity is already commissioned and operating at a reasonable 67% PLF, despite which it continues to have interest cover <1. Moreover, as 38% of EBITDA being recognised is "compensatory tariff", the company has seen 10-25% cost escalations in most of its power projects. With ~44% of the company's power capacity lacking domestic fuel linkage, the company acquired a coal block in recent auctions, which will result in escalation in fuel cost. The profitability is also impacted owing to low tariffs, (especially for its Mundra Project) despite booking compensatory tariffs. Adani Enterprises has also been facing issues at its US$4.2 bn Carmichael mine, as the environmental clearance had been delayed. As a result of the delay in obtaining clearances, the company has seen project costs rise 20%. Post Mar-15, Adani Group has restructured its holdings, post which Adani Enterprise is not the holding company for Adani Power and Adani Ports, and the promoter holding has fallen to 58.1% and 56.3%, respectively. Figure 51: Adani Group structure post recent re-structuring
ADANI GROUP (New structure - Jun-15) Figures in bold indicate total promoter group holding Figures in red ( ) indicate % of holding that is pledged
Abbott Point, Australia 120 bn
Corporate Guarantee USD 800 mn
Adani Port & SEZ ~180 bn
Estimated Group Debt – Rs 1,000bn 100%
56.3%
Gautam Adani & promoter groups
75%
Adani Transmission ~45 bn
58.1%
Adani Power ~445 bn
75% (15.7%)
Adani Enterprises Ltd ~200 bn
100%
Adani Mining Pty, Australia
100%
Adani Global Pte Ltd Singapore
Source: Company data, BSE, Credit Suisse
House of Debt
21
21 October 2015
Adani Enterprises has seen its debt increase 16% in FY15 to Rs840 bn. With acquisition of two power projects it has another Rs100 bn of commitments in FY16. Figure 52: Debt levels continued to rise, up 16% YoY in FY15 Gross debt
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Adani Enterprise
61,041
120,842
174,389
331,013
692,011
691,220
724,404
840,313
Adani Ports Adani Power
20,655 10,112
28,957 49,897
37,062 105,855
35,953 245,027
175,678 360,053
114,308 409,011
129,340 443,969
177,313 448,993
Source: Company data, Credit Suisse
Profitability of the port has remained robust aiding overall interest cover up to 1.3x vs 1.1x in FY14. However, with Adani Power continuing to incur losses, overall group level debt/EBITDA remains high at 6.5x. Moreover, stripping the "compensatory tariff" being recognised debt/EBITDA would be even higher at 7.9x. Figure 53: Debt servicing ratios saw slight improvements in FY15
Adani Enterprise Adani Ports Adani Power (pre-acq)
Gross Debt
Equity
EBITDA
840,313 177,313 448,993
257,278 107,679 57,246
123,704 39,023 58,365
EBIT
PAT
88,485 29,906 37,759
Interest cover (x)
19,481 23,143 (8,156)
Debt/EBITDA (x)
D/E (x)
FY14
FY15
FY14
FY15
FY14
FY15
1.1 2.3 0.7
1.3 2.5 0.8
7.3 4.3 8.7
6.5 4.3 7.5
2.9 1.4 6.6
3.1 1.6 7.6
Source: Company data, Credit Suisse
Figure 54: Adani Group structure prior to re-structuring
ADANI GROUP (Old structure) Figures in bold indicate total promoter group holding Figures in red ( ) indicate % of holding that is pledged
Abbott Point, Australia 120 bn
Estimated Group Debt – Rs 950bn 100%
Gautam Adani & promoter groups
75% (15.7%)
Corporate Guarantee USD 800 mn
Adani Enterprises Ltd 840 bn (725 bn)
75% (7.8%)
Adani Port & SEZ 180 bn (130 bn)
69% (42.1%) 75% (42%)
Adani Power 448 bn (443 bn)
100%
100%
Adani Mining Pty, Australia
Adani Global Pte Ltd Singapore
Source: Company data, BSE, Credit Suisse
Operations Adani Power's had 9,240 MW of operational capacity (excluding acquisitions), which operated at ~68% PLF in FY15, with EBITDA increasing 17%. Though debt/EBITDA improved, it remained elevated at 7.5x. Interest costs rose 23% YoY and therefore despite operating at a reasonable PLF interest cover was 0.8x and company reported Rs8.2 bn
House of Debt
22
21 October 2015
loss in FY15. The 4,620 MW Mundra project was bid at a low tariff and in 2013 CERC allowed compensatory tariff. However, the SC has put a stay on the interim order received from APTEL allowing compensatory tariff. The company continues to book compensatory tariff for its Mundra, Tiroda and Kawai project power sales, despite which it reported losses in FY15. Excluding the compensatory tariff, Adani Power interest cover was at 0.3x and debt/EBITDA 12.1x in FY15. Adani Power has also completed the acquisition of the 1,200 MW Udupi power plant from Lanco Infra w.e.f., 20 April 2015, though it still saw a loss in 1Q16. Debt levels Adani Enterprise's debt levels increased 16% YoY to Rs840 bn. While Adani Power debt remained flat at ~Rs450 bn, it entered into a binding agreement to acquire a 600 MW power plant from the Avantha Group in Mar-15 for Rs42 bn. It also completed acquisition of the 1,200 MW plant from Lanco Infra in Apr-15 for Rs63 bn on account of which the debt would increase further. Adani Ports' debt increased 37% to Rs177 bn on account of the acquisition of Dhamra Port for Rs55 bn. Asset sales After hiving off Abott Point to the promoters, the company has not looked to reduce debt through asset sales, and acquired capacities in the power sector. Future expansion Adani Power plans to set up two coal-fired plants with a capacity of 1,600 MW in Bangladesh with a capital cost of ~US$1.5-2 bn. Its objective is to reach 20 GW of capacity by 2020. Adani Enterprises reportedly needs to spend ~US$7.7 bn over the next three years at Carmichael Mine, ~US$4.2 bn (up from US$3.5 bn) to get the mine operational and another US$3.5 bn to set up the rail link to Abbott Point and set up a terminal to transport 60MTPA of coal once the mine is operating at full capacity. The project has been delayed for environmental issues. With the fall in coal prices from US$130/t to US$50/t over the past three years, the pace at which these projects are now undertaken is uncertain. Adani Power has entered into an agreement with the government of Rajasthan, to set up a 10 GW solar power park. The estimated investment is ~US$9 bn, in a 50:50 JV with the govt. Adani Enterprises has also entered into an MoU with the Chattisgarh government to invest Rs250 bn (US$4 bn) in the state to set up two projects. Debt servicing Adani Power has had IC<1 for the past 15 consecutive quarters. According to news articles (link, link), Adani Power has reportedly refinanced Rs190 bn of debt under the 5:25 scheme for its Rajasthan and Maharashtra plants; the interest rate has remained the same at 12%, while the tenure has increased from 10 to 19 years. The companies would also get an 18-month moratorium towards repayment of principal. Adani Enterprise also has ~Rs90 bn of long-term debt (11% of total debt) up for repayment in FY16E, along with Rs195 bn of short-term debt. Figure 55: Adani Group—project details Project
Capacity (MW) Kawai 1,320 Mundra 4,620 Tiroda 3,300 Udupi (acquired from Lanco) 1,200 Korba (acquired from Avantha) 600
Est. CoD Operational Operational Operational Operational Operational
Power source Coal Coal Coal Coal Coal
FY15 PLF FY16 PLF YTD 68.0% 66.6% 75.0% 85.2% 57.0% 70.2% 61.0% 74.0% N/A N/A
Project original 70,290 191,060 155,520 51,340 N/A
Cost revised 80,000 207,950 184,941 63,000 42,000
Cost per MW 61 45 56 53 70
PPA 91% 74% 93% 100% 35%
Source: Company data, Credit Suisse, Sigma Insights
House of Debt
23
21 October 2015
Figure 56: Debt levels continue to rise as IC remains low Adani Group
900
Gross Debt (Rs bn)
IC (x )
2.2 2.0
850
1.8
800
1.6
750
1.4
700
1.2
650
1.0
600
Figure 57: Net debt-to-equity has increased to 3.1x 850
Net Debt (Rs bn)
Adani Group
Debt/Equity (x )
3.3
800
3.2
750
3.1
700
3.0
650
2.9
600
2.8
0.8
550
0.6
500
0.4 FY12
FY13
FY14
FY15
550
2.7 FY12
FY13
FY14
FY15
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse
Figure 58: >50% of FY15 group debt is with Adani Power
Figure 59: Large share of foreign currency debt
Adani Trans 5%
50%
% of Foreign currency debt
% of debt due in 1 year (RHS)
45%
14%
40%
Adani Ent 23%
Adani Ports 21%
12%
35%
10%
30% 25%
8%
20%
6%
15%
Adani Power 51%
16%
4%
10%
2%
5% 0%
0% Adani Ports
Adani Ent
Adani Power
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse
Figure 60: Excluding the compensatory tariff,
Figure 61: Project cost has gone up, while tariff were bid
debt/EBITDA would be at 10.7x
aggressively
70,000
Adani Power
EBITDA (Rs mn)
Debt/EBITDA (x) (RHS)
60,000
13.0
25%
% Increase in project cost
Levelised Tariff's
3.5
12.0
3.0 20%
50,000
11.0
40,000
10.0
30,000
9.0
20,000
8.0
10,000
7.0
2.5 15%
2.0 1.5
10%
1.0
-
0.5
6.0 FY15
FY15 (excl compensatory tariff)
Source: Company data, Credit Suisse
House of Debt
5%
1Q16
1Q16 (excl compensatory tariff)
0%
Udupi
Tiroda
Kawai
Mundra
Source: Company data, Credit Suisse
24
21 October 2015
Essar Group The Essar Group has interests in steel, power, ports, refining and shipping. Among these, Essar Oil (Refining) and Essar Ports, which account for one-third of group debt are well placed, with operational performance in FY15 remaining stable. Essar Oil has 20MT of refining capacity and Essar Ports has 104MMTPA of capacity, with plans of increasing it to 196MMTPA. While, debt levels increased, interest cover is relatively better at 1.6x. Essar Steel has 10MT of capacity and accounts for ~36% of group debt. It continues to remain under stress, as utilisation remains low (35% in FY15 and YTD FY16), pricing is under pressure and even as EBITDA improved in FY15, its interest cover is well below 1x. Moreover, ~40% of its debt is in foreign currency. The account slipped to NPL at a couple of banks in FY15.As per news reports, other banks have refinanced the loans under 5:25. Essar Power (20% of group debt) has 3.9 GW of operating capacity and has another 2.8 GW under construction, most of which is expected to be commissioned in FY18. Of its operating capacity, one-third is gas-based and stranded (0% PLF). Of its coal-based capacity, its plant at Salaya (saw a 37% cost overrun) is based on imported coal and operating at 63% PLF. Its Mahan plant (had a 48% cost overrun) that saw its coal block being cancelled last year operated at 9% PLF in FY15. It won the Tokisud North coal block in recent auctions, agreeing to pay a royalty of Rs1,110/t which would push up fuel costs further. It expects the mine to be operational by Sep-15. Additionally, the group may have seen debt at the holding company level go up over the past year as it undertook delisting of Essar Energy Plc. The group is also reportedly in talks with Rosneft for selling a 50% stake in Essar Oil to pare down this debt. Figure 62: Essar Group's structure and debt
ESSAR GROUP Figures in bold indicate total promoter group holding Figures in red ( ) indicate % of holding that is pledged
Estimated Group Debt – Rs 1,000bn Essar Global Ltd
Essar Energy Plc, UK N/A (500 bn)
72.5% (71.5%)
Essar Steel Holdings Ltd
Essar Power Ltd
Essar Oil 271 bn (238 bn)
Essar Port Holdings Mauritus Ltd
Essar Projects Ltd
13.18% (99%)
Essar Steel Ltd 363 bn (383 bn)
61.2% (100%) 75% (99.7%)
Essar Ports Ltd 65 bn (60 bn)
60.6% (100%) 75% (100%)
Essar Shipping Ltd 53 bn (56 bn)
0.6% (100%)
Source: Company data, BSE, Credit Suisse; *group debt is calculated assuming Essar Energy debt to be same as FY14
House of Debt
25
21 October 2015
As Essar Energy has been delisted its debt details are unavailable, as also for the holding company. Essar Oil and Essar Ports saw FY15 debt levels increase YoY by 14% and 9%, respectively, while Essar Steel saw FY15 debt fall by 5% YoY on account of capital infusion by the promoters and asset sales/sale and lease back undertaken during the year. Figure 63: Debt levels remained largely flat Gross debt
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Essar Energy Plc Essar Steel Essar Oil Essar Ports Essar Shipping
170,374 62,581 98,153 41,701
134,613 74,764 100,317 67,389
170,995 184,014 103,537 75,075
247,368 267,626 145,469 44,815 49,891
420,558 319,164 177,244 55,051 56,376
523,974 351,809 247,419 57,370 53,295
500,130 383,346 238,454 59,699 56,322
N/A 363,032 271,266 65,290 53,383
Total
274,655
276,765
430,084
609,699
851,148
986,448
999,497
N/A
Source: Company data, Credit Suisse
While debt servicing ratios improved for the group, on account of improvement in performance of Essar Oil and profit on sale/sale and lease back booked by Essar Steel, they continued to remain elevated, with debt/EBITDA at 8.5x and debt equity at 3.9x. Figure 64: Debt servicing ratios remained high, with debt/EBITDA at 8.5x Gross debt
Equity
EBITDA
EBIT
PAT
Interest coverage (x) FY14
FY15
Debt/EBITDA (x) FY14
FY15
D/E (x) FY14
FY15
Essar Energy Plc Essar Steel Essar Oil Essar Ports Essar Shipping
N/A 363,032 271,266 65,290 53,383
N/A 38,682^ 39,118 34,197 68,801
N/A 21,160 47,349 12,930 2,270
N/A 12,045 39,778 10,537 (1,970)
N/A 4,665 15,270 3,912 (4,590)
0.8 (0.1) 0.8 1.6 0.1
N/A 0.3 1.6 1.6 (0.4)
8.5 68.1 5.1 4.8 10.4
N/A 16.6 5.0 4.9 23.3
2.8 16.0 8.0 1.9 0.8
N/A 9.1 6.1 1.9 0.8
Total
752,971
180,798
83,709
60,389
19,258
0.3
0.8
11.1
8.5
4.6
3.9
Source: Company data, Credit Suisse * group numbers for FY14 & FY15 are arrived excluding Essar Energy to ensure comparability ^ excluding revaluation reserves
Operations Essar Steel's production remained relatively weak in FY15, producing 3.3MT of capacity and has maintained a similar rate in 1Q16. Essar Oil has seen an improvement in performance with the expansion in global refining margins. Essar Power's plants continue to operate at low PLF’s on account of the unavailability of fuel. Debt levels While details are unavailable for Essar Energy, debt levels for the rest of the group companies have been largely flat (+2% YoY). Essar Steel has managed to bring down nominal debt levels aided by the sale and lease back of its slurry pipeline. Essar Oil and Essar Ports saw debt levels increase YoY. Both Essar Steel and Essar Oil have also been converting INR debt to foreign currency debt to lower the P&L interest burden and now 40% of Essar Steel and 60% of Essar Oil debt is in foreign currency. Asset sales Essar Steel has entered into a sale and lease back transaction, selling its Orissa slurry pipeline for Rs40 bn, earning a profit of Rs28 bn on the transaction. It has entered into a take-or-pay contract for 20 years, agreeing to pay Rs7.2 bn each year. The company has also sold its oxygen plant for Rs8.5 bn and is looking to sell its Vizag slurry pipeline and coke oven plant for Rs36 bn each over the coming year to help bring down debt levels (link). Essar Steel Holdings also infused capital of Rs13 bn in FY15 in Essar Steel which helped improve gearing for the company.
House of Debt
26
21 October 2015
Future expansions Essar Power is currently working on developing ~2,790 MW of power capacity. The company has shelved plans of further expansion of ~3 GW. The 1,800 MW under construction Tori plant has also seen some delays, since the mines were de-allocated in Aug-14 (link). The company is also looking to convert the Hazira and Bhander plants from gas-based to coal-based on account of a lack of gas supplies. Essar Steel has completed its expansion of its steel plant to 10MT and has some expansion left for increasing capacity of its pelletisation plant in Orissa from 6MT to 12MT and setting up of a coke oven plant which together would need a capex of ~Rs12 bn. Debt servicing Since Sep-12, the group has raised ECBs amounting to ~US$1.5 bn, of which ~US$1 bn has been used towards refinancing of existing loans. Essar Steel and Essar Oil have converted close to half their debt to USD-denominated debt. Essar Steel is also looking to refinance loans under the 5:25 scheme. Essar Steel has also been recognised as NPA with HDFC Bank and Bank of India, post which, Essar Steel's debt has been downgraded to 'D' by CARE. Figure 65: 3,910 MW of operating capacity, with another 2,790 MW under construction Project
Capacity
Status
Fuel Source
FY15 PLF
515 500 120 380 510 85 1,200 600 600 270 120 1,200 600
Operational Operational Operational Operational Operational Operational Operational Operational FY16 FY16 FY16 FY18 FY18
Gas Gas Mix Gas Coal Gas Coal Coal Coal Gas Coal Coal Coal
0%
Hazira Bhander Vadinar Vadinar P1 Vadinar P2 Algoma Salaya I Mahan I Mahan II Hazira II Paradip Tori I Tori II
63% 9% N/A
Project cost Original Revised
48,220 48,594
56,996 23,293
PPA
FSA
14,330 Captive Captive Essar Steel Captive Essar Oil Captive Essar Oil Captive Captive 66,000 83% Imported coal 72,000 0%
83,080
62% 40%
No Fuel No Fuel
Source: Company data, Sigma Insights, Credit Suisse
Figure 66: Steel and power account for 56% of group debt
Ports 6%
Shipping 5%
Gross Debt (Rs bn)
780
Others * 6%
Steel 36%
Oil 27%
Power * 20%
Source: Company data, Credit Suisse *Power & Others debt is based on FY14 numbers
House of Debt
Figure 67: While IC has improved, it remains below 1x IC (x )
1.2
750
1.0
720
0.8
690
0.6
660
0.4
630
0.2
600
-
570
(0.2) FY12
FY13
FY14
FY15 *
Source: Company data, Credit Suisse * Data for Essar Energy Plc has been excluded to ensure comparability
27
21 October 2015
GMR Group In the past two years, GMR has sold about 23 assets to raise ~Rs110 bn (link), but debt levels have continued to rise, up 18% over the period. The company intends to raise a further Rs40 bn over the next 12 months through assets and equity issuance to reduce debt. GMR Infra has 4.6 GW of operating power capacity with another 830 MW under construction. 1,358 MW (~30% of operating capacity) is from gas-based plants that operated at 0% PLF in FY15. With the recent allocation of subsidised gas this should see some improvement in FY16 but will still be well below 50%. The 1,650 MW of thermal power capacity operated at ~50% PLF in FY15. In addition, the recently commissioned 1,370 MW Chhattisgarh plant has seen a 45% cost overrun. The company has also acquired two coal mines in recent auctions, as a result of which fuel costs are likely to rise sharply. The company currently has PPA for only 35% of the capacity, and if the additional costs not allowed to be passed on, profitability will be depressed. ICRA has also downgraded credit rating of the project to D. The company also has two airports, nine road projects and coal mine investments in Indonesia. During FY15 the airport segment reported a loss, as EBITDA declined 13% YoY. The road segment saw EBITDA decline 20% YoY in FY15, and interest cost continued to be higher than EBITDA. With stress remaining elevated, debt servicing ratios worsened further in FY15. As a result of which, the company saw credit rating for six of its subsidiaries being downgraded to default in FY16. Four of its six operational power plants are now rated 'D', along with two of its road projects, resulting in ~40% of its debt having a 'D' rating. Figure 68: GMR Group's structure and debt
GMR GROUP Figures in bold indicate total promoter group holding Figures in red ( ) indicate % of holding that is pledged
GMR Holdings Private Limited 20 bn (10 bn)
Estimated Group Debt – Rs 500 bn
52.0% (82.0%) 67.8% (64.6%)
GMR Infrastructure Ltd 480 bn (450 bn) 100% 100%
97.1%
GMR Renewable Energy Limited GMR Highways Limited
GMR Airports Limited
92.6%
GMR Energy Limited 100%
52.5%
90% 47.2%
GMR Kishangarh Udaipur
GMR Hyderabad Vijayawada
GMR Power Corporation
92.6%
GMR Vemagiri Power
77.8%
61.2%
92.6%
GMR Kamalanga Energy Ltd
EMCO Energy Ltd
Delhi International Airport
GMR Hyderabad Intl Airport
Source: Company data, BSE, Credit Suisse
House of Debt
28
21 October 2015
Debt levels continue to rise up 7% YoY and up 18% since FY13. Figure 69: Gross debt has continued to increase GMR Infrastructure
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
79,769
125,004
211,713
244,296
360,289
408,249
450,407
479,766
Source: Company data, Credit Suisse
Profitability continued to remain under pressure, with the company reporting a loss in FY15. P&L interest costs were up 20% YoY, as a result of which interest cover was lower at 0.2x in FY15 vs 0.4x in FY14. Debt servicing ratios remain stretched, with debt-toEBITDA at 16.8x and debt equity at 7.1x. The company reported an EBITDA of Rs25 bn against P&L interest expense of Rs36 bn (capitalised interest was Rs12 bn in FY15). Figure 70: Debt servicing ratios have worsened further Gross debt GMR Infrastructure
Equity
479,766
60,203
EBITDA 25,546
EBIT
PAT
7,421 (27,333)
Interest coverage (x) FY14 FY15 0.4
0.2
Debt/EBITDA (x) FY14 FY15 16.0
16.8
D/E (x) FY14 FY15 5.4
7.1
Source: Company data, Credit Suisse
Operations During FY15, the airport segment for GMR Infra also turned loss making, with revenue for the airport segment down 16% YoY. In Feb-15, the airport regulator has via its draft order planned to reduce the airport charges by ~78% for the period 2014-19 for the Delhi airport, as against an increase of 43% requested by GMR (link). This would put further pressure on profitability for the segment, even as energy and highway segments continue to see pressure on profitability. GMR Infra commissioned all three units of the Kamalanga power plant as planned in FY14, but PLF remained low and was at 53% in FY15, while project cost overrun was ~44%. Of its gas-based plants, both Vemagiri and Kakinada are not producing any power on account of a lack of gas supply. Its Vemagiri and Rajahmundry plants have received gas in recent auctions and would be able to operate at 30% PLF from Jun-15 to Sep-15 and at 50% PLF for the six months from Oct-15 to Mar-16. The recently commissioned 1,370 MW Chhattisgarh plant has seen a 45% cost overrun; with the cost now at Rs88 mn per MW, it is well above replacement cost. The project has also bid aggressively for two captive coal mines, (paying a royalty of Rs478/t and Rs704/t) as a result of which fuel costs are likely to increase sharply. The company has entered into a PPA for only for 35% of the capacity, and with the additional royalty cost not allowed to be passed on, profitability is likely to remain stressed. Debt levels While the company is focussed on asset sales to bring down debt, net debt levels have continued to increase up 21% over the past two years. Gross debt is up 6x over the past seven years, while gross fixed asset (including CWIP) is up 5.3x. Asset sales In the past two years, GMR has sold about 23 different assets to raise close to Rs110 bn, but debt levels have continued to rise, up 18% over the past two years. The company intends to raise Rs40 bn over the next 12 months through divestment of assets. It has put a freeze on capital expenditure for the next 2-3 years. The company had done a rights issue of ~Rs15 bn, which could help bring down debt marginally, but with market cap at Rs60 bn, capital raises are unlikely to meaningfully bring down debt levels. The company has also filed the DRHP for an IPO of GMR Energy Ltd.
House of Debt
29
21 October 2015
Future expansions One unit of the Chattisgarh plant was commissioned in FY15, while the second unit has been commissioned in 1Q16. The 768 MW Rajahmundry plant that had been suspended on account of a lack of gas availability has been commissioned post winning the gas in the reverse auction. Work is under way at the Bajoli Holi plant and is expected to be commissioned by FY18, while the Alakananda plant is still in early stages. The company also has another 1,725 MW of hydro plants which are in early stages of development and unlikely to be commissioned over the next couple of years. Debt servicing With Rs480 bn of domestic debt, the company would need to make an EBITDA of ~Rs50 bn just to meet interest expense. The company also has ~Rs58 bn of long-term debt due in FY16. The company has had IC<1 for every quarter since Mar-10 (22 quarters). Even based on EBITDA, IC<1 is below 1x. While the parent company, GMR Infra, has a credit rating of BBB, debt at many of its subsidiaries has been downgraded. Rs110 bn of loans for the Chattisgarh and Kamalanga projects was downgraded to D from BB rating in Apr-15 (link). Debt of ~Rs18 bn at GMR Hyderabad-Vijayawada Expressway was also downgraded to D by CARE in Sep-15 (link) on account of default. The company is looking to refinance the Rs45 bn loan under the 5:25 scheme for its Kamalanga project and is looking for additional funding of Rs4 bn to meet cash flows. Earlier, GMR had refinanced the Rs30 bn loan for EMCO Energy, with SBI taking the largest exposure of Rs13 bn. GMR Holdings received structured long-term financing of Rs10 bn from KKR in Sep-14 (link). Figure 71: Majority of power capacity is now operational Project Kamalanga - I EMCO Kakinada Vemagiri I Chennai Raikheda Rajahmundry Bajoli Holi Alaknanda
Capacity Operational Fuel / CoD source 1,050 Operational Coal 600 Operational Coal 220 Operational Gas 370 Operational Gas 200 Operational Diesel 1,370 Operational Coal 768 Operational Gas 180 FY18 Hydro 300 FY18 Hydro
FY15 PLF 52.7% 53.0% 0.0% 0.0% 32.9% N/A N/A N/A N/A
1H16 Original Revised Cost per PPA PLF MW 63.1% 45,400 65,190 62 87% 75.1% 34,800 39,480 66 92% 0.0% 6,030 14,090 66 100% 16.8% N/A 11,530 31 100% 0.4% 8,250 9,800 49 100% N/A 82,900 120,100 88 35% N/A 32,500 40,600 53 N/A N/A N/A 22,050 123 N/A N/A N/A 21,000 70 N/A
Source: Company data, Sigma Insights, Credit Suisse
Figure 73: …while debt/EBITDA has increased to 16.8x
Figure 72: Interest cover now down to 0.2x… Gross Debt (Rs bn)
GMR Infra
500
IC (x )
0.8
30
GMR Infra
Ebitda (Rs bn)
Debt/Ebitda (x )
20.0
0.7 450
0.6
25
18.0
20
16.0
15
14.0
0.5 400
0.4 0.3
350
0.2
0.1 300
FY12
FY13
Source: Company data, Credit Suisse
House of Debt
FY14
FY15
10
12.0 FY12
FY13
FY14
FY15
Source: Company data, Credit Suisse
30
21 October 2015
Figure 74: Interest cost greater than EBITDA for all
Figure 75: Gas-based power accounts for 35% of capacity
segments (ex-airports) 25,000 FY14 EBITDA
FY14 Interest
FY15 EBITDA
Others 5%
FY15 Interest
20,000
15,000 Gas 35%
10,000
Coal 60%
5,000
Airports
Energy
Highways
Others
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse
Figure 76: Despite asset sales, debt continues to rise
Figure 77: Power projects have seen large cost overruns Cost per MW
GMR Infra 69
114
110
429
360
355 245
245
FY13 Net Asset sales Net Debt Capex incl Debt between post asset capitalised FY13-15 sales interest
Others*
FY15 Net Debt
Source: Company data, Credit Suisse; * working capital and operating losses
House of Debt
% increase in project cost
100
50%
90
45%
80
40%
70
35%
60
30%
50
25%
40
20%
30
15%
20
10%
10
5%
-
0% Raikheda
EMCO
Kamalanga
Rajahmundry
Source: Company data, Sigma Insights, Credit Suisse estimates
31
21 October 2015
GVK Group GVK Group is infrastructure sector-focussed with interests in power and airports. It has 1,244 MW of operational power capacity, of which 914 MW is gas-based that operated at just 7% PLF in FY15. The company in Jun-15 commissioned a 330 MW hydro project which had seen a 75% cost overrun. It also has a 540 MW coal-based capacity under construction, which has seen a 55% increase in estimated cost. The company has another 4,100 MW of power capacity under development at early stages of capex. The group has three road projects (of which one is operational) and has three airports (two are operational). It has been looking at listing of its airport division to prune debt levels. In 2011, the company acquired coal mines in Australia with a capacity of 80 MTPA for US$1.26 bn, of which US$560 mn was deferred (link). The project is estimated to require additional ~US$10 bn. However, GVK Hancock is yet to receive the mining permit. GVK Power has a 10% stake in GVK Coal Developers, which is the holding company for the Australian projects. Loans for this acquisition were reportedly downgraded to NPA recently by one of the state-owned banks. Profitability at GVK Power remains weak, with EBIT ~zero and the company making losses for the past three years. Debt/EBITDA has increased to 32x, while debt equity is now at 12.2x. Figure 78: GVK Group's structure and debt
GVK GROUP Figures in bold indicate total promoter group holding
Estimated Group Debt – Rs 340 bn
Indira Krishna Reddy
14.6% 54.3%
GVK Power & Infrastructure Ltd 250 bn (225 bn)
74%
GVK Power Goindwal Sahib 26 bn (24 bn)
74%
Alaknanda Hydro Power 40 bn (36 bn)
10%
GVK Coal Developers (Singapore) Pte Ltd
100%
47%
51%
Mumbai Intl Airport Pvt Ltd 81 bn (76 bn)
GVK Gautami Power Ltd 11 bn (10 bn)
Bangalore Airport & Infra Developers Pvt Ltd
43% 100%
79%
79%
49%
Hancock Galilee (Kevin’s Corner coal project)
Hancock Coal (Alpha coal project)
Hancock Alpha West (Alpha west coal project)
GVK Galilee Infra (Rail and Port projects)
Bangalore International Airport Limited
Source: Company data, BSE, Credit Suisse
House of Debt
32
21 October 2015
Debt levels have seen a continuous rise, up 10% in FY15 and up 5x over the past four years. Figure 79: Debt levels up another 11% in FY15 GVK Power & Infra *
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
12,910
29,798
50,577
62,458
209,574
269,640
310,268
339,332
Source: Company data, Credit Suisse *incl debt with the Australian asset
Profitability worsened with interest cover close to nil in FY15. The company incurred a loss of Rs8.3 bn in FY15 and saw significant erosion of equity on account of consistent losses in the past three years. As a result D/E has increased to 12x; debt/EBITDA stands at 32x. Figure 80: Debt servicing ratios worsened sharply, with interest cover down to 0x and debt EBITDA up to 32x Gross debt GVK Power & Infra
Equity
251,988
EBITDA
EBIT
PAT
Interest coverage (x) FY14
19,387
7,397
341
(8,347)
FY15 0.5
Debt/EBITDA (x) FY14
0.0
21.7
FY15 32.0
D/E (x) FY14 7.4
FY15 12.2
Source: Company data, Credit Suisse
Operations Of the operational power plants, Jegurupadu operated at 15% PLF in FY15, while Gautami operated at 0% PLF during the year. The airport segment continued to make losses in FY15, which the company expects to break even in FY16, with both Mumbai and Bangalore airports now operational. Debt levels GVK Power saw a 10% increase in debt in FY15, with net debt up 12% to Rs236 bn, while total gross debt (including Australian assets) is up 9% to Rs340 bn. Asset sales GVK also sold 1.16 mn sq ft of land development rights near Mumbai airport for Rs5.8 bn in Aug-14. The company is looking to increase asset sales to help bring down debt levels. Future expansions GVK has two projects under construction, of which the Alaknanda Hydro Power plant has been commissioned in 1Q16. The project has seen a three-year delay and a 75% increase in expected capex. The company's 540 MW coal-based plant has also seen a three-year delay and a 55% cost increase and is expected to be commissioned in FY16. The company has 4.1 GW of power projects under planning, which are unlikely to be operational over the next couple of years. Debt servicing Interest cover declined sharply in FY15, to 0.02x, as the company's EBIT was down 93% YoY and interest cost increased 55% in FY15 on account of the completion of the Mumbai airport. Interest costs are likely to increase further in FY16 with the commissioning of its two power projects. Capitalised interest was high in FY15 at 85% of P&L interest (Rs12bn, 45% of total interest cost), despite which the company has had IC <1 for 14 consecutive quarters. The company has interest of Rs1.9 bn of loans due but not paid as of Mar-15, compared with Rs960 mn due last year, with interest overdue for more than 90 days in most cases. The company has also defaulted on its principal repayment in certain cases. With debt-to-market cap at ~20x, equity raising is unlikely to help bring down debt levels meaningfully and the company would need to accelerate its asset sales. The company has ~Rs55 bn of debt due within the next 12 months.
House of Debt
33
21 October 2015
Figure 81: PLFs remain low for the operational assets on account of a lack of gas supply Project
Capacity
Jegurupadu Gautami Power Alaknanda Goindwal Sahib
445 469 330 540
Operational / CoD Operational Operational Operational FY16
Fuel source Gas Gas Hydro Coal
FY15 PLF 14.7% 0.0% N/A N/A
1H16 Original Revised Cost per PLF MW 20.2% N/A 19,186 43 13.0% N/A 17,980 38 N/A 26,977 47,236 143 N/A 29,638 45,730 85
Original
Revised
PPA
N/A 4Q06 FY12 FY13
1Q10 1Q10 1Q16 FY16
93% 80% 100% 100%
Source: Company data, Sigma Insights, Credit Suisse
Figure 82: Investments in various segments Project
Capacity
Est. CoD
Remarks/ issues
Airport Mumbai Airport Bangalore Airport Indonesia Airport Road Jaipur-Kishangarh Deoli – Kota Bagodara – Vasad Resources Alhpa & Kevin Coal
45mn 20mn
Operational 60-year concession period Operational 60-year concession period FY16
542kms 332kms 611kms
Operational 20-yr concession period incl construction of 30 months. FY16 26-yr concession period incl construction of 30 months. FY16 27-yr concession period incl construction of 30 months.
80bn tonnes
80 bn t of reserves and capacity of 80MTPA.
Source: Company data, Credit Suisse
Figure 84: …while debt-to-EBITDA has increased to 32x
Figure 83: Interest cover has fallen to 0x… Gross Debt (Rs bn)
GVK Power
IC (x )
GVK Power
Ebitda (Rs bn)
Debt/Ebitda (x )
1.0
10
260
0.8
9
31.0
220
0.6
8
27.0
180
0.4
7
23.0
140
0.2
6
19.0
-
5
300
100 FY12
FY13
FY14
15.0 FY12
FY15
35.0
FY13
FY14
FY15
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse
Figure 85: Share of gas based capacity high at 73%
Figure 86: Net debt increase continues to outpace capex 50,000
Capex incurred
45,000 Hydro 27%
Increase in net debt
40,000 35,000 30,000 25,000 20,000
Gas 73%
15,000 10,000 5,000 FY13
Source: Company data, Credit Suisse
House of Debt
FY14
FY15
Source: Company data, Credit Suisse
34
21 October 2015
Jaypee Group Jaypee Group has interest in power, cement, real estate, roads and EPC. It now has 2,220 MW of operational power capacity (post asset sales) and another 1,980 MW under construction, while 3 GW is under the planning stage. It has residual ~20.2 MTPA of cement capacity, post sales which are under progress, and would fall to 17MT if the sales that are in talks are completed. The group has been aggressive in selling assets to prune its debt over the past two years and will realise about Rs220 bn from these asset sales. Jaiprakash Associates has already concluded sales of 8.4MT of cement capacity for Rs50 bn, but debt levels are estimated to be still up 18% over the past two years. It has already firmed up sale of another 4.9MT of cement capacity for Rs54 bn, which is expected to be concluded later this year, once clarity emerges on the transfer of the mines linked with the plant. Jaiprakash Power has also sold two hydro plants of 1,391 MW capacity for Rs93 bn and is in talks for sale of its 500 MW Bina project. However, as the 1,391 MW hydro plants contributed 59% of FY15 EBIT, the loss of EBITDA from these projects would result in debt-to-EBITDA moving up further. The two residual thermal plants at JP Power have been operating at low ~35% PLF. Moreover, post its mine getting cancelled by the government, the group had acquired mines in the recent auction (paying royalty of Rs712/t and Rs2,505/t) which will be a drag on their profitability. Owing to cost overruns of 25-32% the capital cost of these plants are also now high at Rs70 mn per MW. Jaypee Infratech has also been facing liquidity crunch even post completion of its expressway project owing to its real estate exposure. The company has over the past few weeks witnessed downgrade of its debt to D by the rating agencies. Many of group's other subsidiaries and the parent have also defaulted on their debt obligations and already 65% of group's debt is classified as D by the rating agencies. Figure 87: Jaypee Group's structure and debt
JAYPEE GROUP Figures in bold indicate total promoter group holding Figures in ( ) indicate previous year holding % Figures in red ( ) indicate % of holding that is pledged
Estimated Group Debt – Rs 750 bn JP Infraventures Private Limited 28.3% (32.7%) 39.4% (45.1%)
Jaiprakash Associates Ltd 750 bn (730 bn)
71.64% (93.3%)
Jaypee Infratech Ltd 91 bn (86bn)
Jaypee Ganga Infrastructure Corporation Ltd
100%
100%
Jaypee Cement Corp Ltd
2.9% (4.3%)
90.5%
60.7% (99.8%) 63.6% (95.2%)
JPSK Sports Pvt Ltd
Jaiprakash Power Ventures Ltd 322 bn (275 bn)
Source: Company data, BSE, Credit Suisse; * Jaiprakash Associates FY15 Annual report isn't out, assumed proportionate increase in current maturities
House of Debt
35
21 October 2015
Debt levels have continued to rise, up 3% YoY in FY15 despite significant asset sales. Figure 88: Debt levels continue to rise, despite asset sales FY08 JP Associates JP Power Venture Jaypee Infratech
FY09
FY10
FY11
FY12
FY13
115,832 194,788
352,711
444,450
535,878
636,541
729,792 751,637*
68,660 57,232
133,459 63,321
165,173 76,562
230,149 81,032
275,029 86,743
9,001 2,000
9,889 20,154
FY14
FY15 322,329 91,018
Source: Company data, CS; *FY15 AR is not out, assumed proportionate increase in current maturities
With debt levels rising and profitability declining further, interest cover declined to 0.6x in FY15. Debt/EBITDA and debt/equity also increased further to 11.9x and 7.1x, respectively. Loss for the year more than doubled in FY15 to Rs17 bn. Figure 89: Debt servicing ratios worsened further, with IC at 0.6x and debt equity at 7.1x Gross debt JP Associates JP Power Venture Jaypee Infratech
Equity EBITDA
EBIT
PAT Interest coverage (x)
Debt/EBITDA (x)
D/E (x)
FY14
FY15
FY14
FY15
FY14
FY15
751,637
102,422
61,383
44,511 (17,272)
0.8
0.6
11.1
11.9
6.9
7.1
322,329 91,018
64,107 63,465
27,790 13,368
22,610 13,065
1.0 1.4
1.0 1.5
13.3 6.4
11.3 6.7
4.2 1.4
4.9 1.4
1,511 3,504
Source: Company data, Credit Suisse
Operations The company's three operational power plants operated at low PLFs (30-55%) in FY15. Profitability for Jaypee Power improved in 1Q16, but with the sale of plants effective 25 Jun-15, profitability is likely to be impacted for the remainder of the year. Debt levels Debt levels increased 3% YoY, despite asset sales of Rs65 bn being completed. The company is likely to receive Rs150 bn from asset sales (1,391 MW of hydro plants and 4.9MTPA of cement capacity) during the current year, which should help bring debt levels down in FY16. However, the company has sold a third of its operational power capacity and is likely to result in sharp decline in profitability in FY16. Asset sales The company has been looking to aggressively sell assets in order to bring down debt levels. The company sold its cement plant in Gujarat in FY14 for Rs38 bn and two of its cement plants in MP and HP for Rs54 bn to Ultratech in Dec-14; the deal is yet to be completed, as the company awaits clarity with regards to the transfer of the mines. JP Power also sold two operating hydro power plants of 1,391 MW for Rs93 bn to JSW Energy in Feb-15. While debt levels could come down by ~30%, they contributed ~59% of FY15 EBIT and debt/EBITDA is likely to go up post the sale of these assets. The company would have reported a loss of Rs3 bn vs the reported profit of Rs1.5 bn in FY15 if we were to exclude these two assets. The company is also in talks to sell its 500 MW Bina plant for a reported valuation of Rs35 bn. Future expansion While the company has been selling assets, there are projects that are currently under construction. The company is in the process of setting up ~2 GW of power capacity, with another 4 GW under different stages of development and 5MT of cement plants. Debt servicing Jaiprakash Associates' debt was recently downgraded to default status by CARE, as the company defaulted on repayment of a bond. Jaypee Infra was looking to refinance Rs103 bn of debt for its Yamuna Expressway project under the 5:25 scheme, but the company has defaulted on repayment of its loan, and has been downgraded to D by CARE. The company has had IC<1 for the past nine consecutive quarters. With debt-to-market cap at ~22x, capital raising is unlikely to help bring down debt levels meaningfully.
House of Debt
36
21 October 2015
Figure 90: Post-cost escalations, cost per MW is higher than replacement cost Project
Capacity
Status
Fuel Source
1,320 500 400 1,980
Operational Operational Operational FY16
Coal Coal Hydro Coal
Nigrie Bina I Vishnu Prayag Bara I
FY15 YTD16 PLF PLF 30% 56% 52% N/A
Project cost Cost per COD MW Original Revised Original Revised
33% 11% 40% N/A
81,000 27,500 N/A 104,500
102,380 34,700 16,698 138,700
78 69 42 70
3Q14
2Q15
PPA
4Q15 4Q13 FY07 3Q16
38% 70% 100% 100%
Source: Company data, Sigma Insights, Credit Suisse
Figure 91: Company has undertaken significant asset sales over the past couple of years Date
Company
Asset
Sep-13 May-13 Mar-14 Jul-14 Aug-14 Dec-14 May-15 Jun-15 Sep-15
JPA Jaypee Infra JPA JPVL JPA JPA JPA JPA JPVL
4.8mt cement capacity in South India 300 acres of land along the Yamuna Expressway 74% of 2.1MT bokaro cement JV with SAIL 1,091 MW Karcham and 300MW Baspa hydro projects 1.5MT grinding capacity at Panipat Two cement plants with 4.9MT capacity in MP 2.2MT plant in Bhilai 1MT cement unit in Sikandarabad 500 MW Bina power plant
Enterprise value 38,000 15,290 8,510 97,000 3,600 54,000 20,000 5,000 35,000
Total
Buyer
Status
Ultratech Cement Gaursons Dalmia JSW Energy Shree Cement Ultratech Cement Ultratech Cement Heidelberg JSW Energy
Completed Completed Completed Completed, post FY15 Completed Awaiting approvals In talks In talks In talks
276,110
Source: Company data, Credit Suisse
Figure 93: …as debt-to-EBITDA has increased to 12x
Figure 92: Interest cover has declined steadily… Jaypee Group
800
Gross Debt (Rs bn)
IC (x )
1.6
750
1.4
700
1.2
650
1.0
600
0.8
550
0.6
70
Jaypee Group
Ebitda (Rs bn)
Debt/Ebitda (x )
13.0 65
12.0 11.0
60
10.0 9.0
55
500
0.4 FY12
FY13
FY14
FY15
350
Debt (Rs bn)
7.0 50
6.0 FY13
FY14
FY15
Source: Company data, Credit Suisse
Figure 94: Debt/EBITDA will rise post asset sale JP Power
8.0
FY12
Source: Company data, Credit Suisse
14.0
Debt/EBITDA (x)
300
250
Figure 95: PLF for operating projects falls further in FY16 30
60%
25
50%
20
40%
15
30%
FY15
YTD FY16
200 150 10
100
5
50 -
FY15A
FY15 (ex-hydro assets sold)
Source: Company data, Credit Suisse
House of Debt
FY15 (ex-hydro assets sold & Bina)
20% 10% 0% Nigrie
Bina I
Vishnu Prayag
Source: Company data, Credit Suisse
37
21 October 2015
JSW Group JSW Steel has a capacity of 14 MTPA, JSW Cement has 6MTPA and JSW Energy has 3,140 MW of operational capacity with 240 MW under construction. It is in the process of acquiring 1,391 MW of hydro capacity from Jaiprakash Power for Rs93 bn and in talks to acquire its 500 MW Bina project for a reported valuation of Rs35 bn. It has also entered into a non-binding MoU with Monnet Ispat to acquire its 1,050 MW under construction thermal power plant. JSW Steel (84% of group debt) has seen muted operating performance, as revenue increased 3% YoY and EBIT remained flat YoY as interest costs were up 15%, while debt increased 8% YoY resulting in worsening of debt servicing ratios. 1Q16 saw interest cover fall below 1x as the company reported a loss. The weakening in commodity prices is likely to keep profitability under pressure. A large ~40% of its borrowings are in foreign currency. JSW Energy (16% of group debt) is relatively better placed and has seen improvement in the operating performance, with EBITDA growing 11% YoY in FY15. However, it sells 41% of its power through the merchant route and with weakness in power demand, the company has seen a drop in profitability in 1Q16. On account of its low gearing, it's expanding inorganically and with the acquisition of JP Power's hydro plants, its debt equity level will move up ~2x. Figure 96: JSW Group's structure and debt
JSW GROUP Figures in bold indicate total promoter group holding Figures in ( ) indicate previous year holding %
Estimated Group Debt – Rs 580 bn
JSW Group (Sajjan Jindal)
JSW Investments
Sahyog Tradcorp
Danta Enterprises
7.4% 5.6%
5.0% 60.9%
7.4%
2.5%
7.2%
JSW Holding
5.3%
4.3% 40%
JSW Steel 488 bn (430 bn)
15.7% 75%
4.2%
JSW Energy 92 bn (101 bn)
Source: Company data, BSE, Credit Suisse; * JSW Steel debt includes acceptances
House of Debt
38
21 October 2015
Total debt increased by 10% YoY in FY15, with JSW Energy debt down 5% YoY, and JSW Steel debt (including acceptances) up 14% YoY. Figure 97: Debt levels continue to rise up 10% YoY JSW Steel* JSW Ispat JSW Energy Total
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
142,397 72,250 22,727 237,374
220,055 73,558 59,272 352,884
212,228 71,859 78,701 362,789
254,263 69,341 96,380 419,984
282,036 67,878 99,933 449,846
294,120 63,295 103,766 461,180
429,214 N/A 101,065 530,278
488,774 N/A 92,941 581,715
Source: Company data, Credit Suisse * including acceptances
Profitability improved for JSW Energy in FY15, interest cover improved to 2.5x and debt equity reduced to 1x. JSW Steel on the other hand saw profitability remain flat, as debt levels have gone up leading to deterioration in coverage ratios. Figure 98: Debt servicing ratios have seen a marginal worsening
JSW Steel JSW Energy Total
Gross debt
Equity
488,774* 92,941 581,715
230,541 75,180 305,721
EBITDA 94,023 36,234 130,257
EBIT 59,678 28,337 88,015
PAT Interest coverage (x) 17,966 13,495 31,461
Debt/EBITDA (x)
D/E (x)
FY14
FY15
FY14
FY15
FY14
FY15
2.0 2.0 2.0
1.7 2.5 1.9
4.6 2.7 4.1
5.0 2.1 4.2
1.9 1.4 1.8
2.0 1.0 1.8
Source: Company data, Credit Suisse * including acceptances
Operations JSW Steel's debt/EBITDA increased slightly to 5x in FY15. With steel downswing, debt/EBITDA increased to 7.5x in 1Q16 as interest cover fell to 0.8x and the company reported a loss for the quarter. JSW Energy had stable performance in FY15 with debt/EBITDA at 2.1x. However, as it sells 41% of its power through the merchant route, with weakness in power demand, utilisation fell in 1Q16 resulting in a 10% drop in EBITDA and a 20% fall in profits. Debt levels Debt levels were up 10% YoY for the group in FY15 with JSW Steel's debt (including acceptances) increasing 14% YoY. JSW Energy's debt fell 8% YoY in FY15, but this will likely double post acquisition of the hydro plants. It would go up further if the planned acquisition of JP's 500 MW Bina plant or Monnet's 1,050 MW plant go through. Asset sales The company is comfortable with its debt levels, and is not looking to sell any assets. During the year, JSW Energy has acquired two hydro projects of 1,391 MW (300 MW Baspa and 1,091 MW Karcham Wangtoo) from Jaiprakash Power for an enterprise value of Rs93 bn. Future expansion JSW Steel is undertaking brownfield expansion at Dolvi, looking to increase its capacity from 3.3MTPA to 5MTPA, at a cost of Rs33 bn, which is expected to be commissioned in FY16. JSW Cement has 6MTPA of cement capacity in Karnataka, post acquisitions made by JSW Energy, JSW Cement has slowed on its capacity expansion plans. Debt servicing The group has had no trouble meeting its debt obligations so far. However, with the rising stress in the steel sector, interest cover for JSW Steel has fallen below 1x over the past couple of quarters. With the acquisitions being undertaken by JSW Energy, its debt levels are rising and debt/EBITDA could see a further increase (2x in FY15). JSW Energy is also looking to refinance Rs60 bn of debt under the 5:25 scheme (link).
House of Debt
39
21 October 2015
Figure 99: Majority of capacity is operational Project
Capacity
Ratnagiri Raj West Torangallu Imp Torangallu Ext Baspa - II Karcham Wangtoo Kutehr
1,200 1,080 260 600 300 1,091 240
Status
Fuel source
Operational Operational Operational Operational Operational Operational FY17
FY15 PLF
Coal Coal Coal Coal Hydro Hydro Hydro
1Q16 PLF
72.9% 77.8% 97.8% 97.3% 47.9% 48.2% N/A
66.8% 71.8% 92.6% 76.6% N/A N/A N/A
Project Cost Cost per Original Revised MW 45,000 50,750 N/A N/A 68,250 N/A 17,980
54,840 68,688 11,050 18,180 N/A N/A N/A
46 64 43 30 N/A N/A N/A
PPA 25% 100% 0% 0% 100% 12% N/A
Source: Company data, Sigma Insights, Credit Suisse
Figure 100: Interest cover declined, as int cost was up 9% JSW Group
650
Gross Debt (Rs bn)
IC (x )
2.2
Figure 101: Debt/EBITDA increased sharply in 1Q16 JSW Group
150
Ebitda (Rs bn)
Debt/Ebitda (x )
2.0
600
1.8
550
6.0
130
1.6
500
1.4
450
1.2
400
1.0 0.8
350
5.0 110
4.0 3.0
90
2.0
0.6
300
0.4
250
70
1.0
0.2
200
FY12
FY13
FY14
FY15
50
FY12
1Q16 *
7.0
FY13
FY14
FY15
1Q16 *
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse; *1Q16 EBITDA annualised and assuming debt levels as of Mar-15
Figure 102: JSW Steel EBITDA/t has seen a continuous
Figure 103: Post acquisition, 59% of power sale is
decline
through PPAs EBITDA/tonne (USD/t)
160
JSW Energy - 4,531 MW
140 120 100 Merchant 41%
80 60
PPA 59%
40 20 FY11
FY12
FY13
Source: Company data, Credit Suisse
House of Debt
FY14
FY15
1Q16
Source: Company data, Credit Suisse
40
21 October 2015
Lanco Group Lanco Group is primarily focused on the power sector and has some investments in roads. It has 3,450 MW of operational power capacity, of which 1,586 MW is gas-based and 1,800 MW is coal-based, with another 4,636 MW of capacity under construction. The group had also acquired Griffin coal mine in Australia for A$750 mn. 46% of its operating capacity is gas-based that operated at just 9% PLF in FY15. Of its 1,800 MW of coal-based capacity, PLF has been better at 67% in FY15. However, on account of low tariff bids (1,200 MW Anpara project) and a lack of linkage coal (300 MW Unit-II of its Amarkantak project), these plants continue to be loss making. While, the company sold its Udupi plant and will see a cash inflow of Rs63 bn in FY16, its debt/EBITDA levels will only rise further as that plant contributed 70% of FY15 EBITDA. Lanco Infra has seen continued stress on profitability and has made losses for the past four years. Interest cover remains low at 0.2x, even as 33% of its total interest expense is being capitalised. While the company has 4.6 GW of power capacity still underconstruction it has had little capex spend in the past couple of years. On account of the delays, these projects have witnessed a 50-60% cost overrun. Its Australian coal mine (Griffin) was acquired in 2011, and production remains well below its guidance, producing 2.4MT as against the planned 5MT. The company also plans on increasing capacity to 15MTPA by FY18 which is currently in the planning phase. The parent company's debt is currently rated as default by CRISIL. However, most of its loans are still standard at the banks and two of its projects are seeking refinance under the 5:25 scheme. Banks are also looking to take control of 500MW Teesta project under SDR route. Figure 104: Lanco Group's structure and debt
Lanco Group Figures in bold indicate total promoter group holding Figures in red ( ) indicate % of holding that is pledged
Estimated Group Debt – Rs 470 bn
Lanco Group Ltd
55% 100% 68.1% 93%
Lanco Power
100%
Lanco Infratech Ltd 400 bn (375 bn)
100%
79.1%
Lanco Thermal Power
59%
100%
100%
Lanco Hills Technology
26.4%
Lanco Hoskote Highway
100%
100%
Tasra Mining & Energy
Lanco Resources International
26.1%
Lanco Devihalli Highways
100%
Lanco Kondapalli
Lanco Amarkantak
Lanco Anpara
The Griffin Coal Mining Co.
Source: Company data, BSE, Credit Suisse
House of Debt
41
21 October 2015
Debt levels have continued to rise, up 6% in FY15. The company completed sales of its Udupi plant in FY16 for Rs63 bn (15% of FY15 debt) but as that plant contributed ~69% of FY15 EBITDA and debt servicing ratios will further deteriorate. Figure 105: Debt levels up 6% YoY Lanco Infratech
FY08
FY09
FY10
FY11
31,650
55,970
83,614
166,517
FY12
FY13
FY14
FY15
313,934 410,844* 440,824* 471,024*
Source: Company data, Credit Suisse * includes debt for Vidarbha and Babandh projects, which is not consolidated
Interest cover remains low at 0.2x, as the company has not covered interest for the past 18 quarters. On account of continued losses, debt-to-equity increased to 43.8x in FY15. Debt/EBITDA declined marginally, but remained elevated at 23.1x in FY15. Figure 106: Debt servicing ratios remain weak, with debt equity increasing to 43.8x Gross Debt Lanco Infratech
Equity
399,024
EBITDA
EBIT
PAT
Interest coverage (x) FY14
8,914
16,939
5,802 (20,367)
FY15 0.1
Debt/EBITDA (x) FY14
0.2
24.6
FY15 23.1
D/E (x) FY14 16.1
FY15 43.8
Source: Company data, Credit Suisse
Operations The company has 3,450 MW of operational capacity, of which 1,586 MW is gas-based and is operating at 9% PLF in FY15. ~1,100 MW of gas-based capacity has obtained power in recent auctions and would be able to operate at 25% PLF for the period Jun-Sep-15. The company has also won gas in the recent auction and would be able to run the 1,100 MW capacity at 50% PLF from Oct-15 to Mar-16. The non-gas-based projects were operating at ~67% PLF. However, the PPA for its 1,200 MW Anpara project has been bid aggressively and is likely to incur losses. Its 300 MW Unit-1 of its Amarkantak project had a PLF of 86%, while Unit-II did not generate any power on account of a lack of linkage coal. The company also has an EPC division, with an order book of Rs280 bn. However, revenue declined from Rs85 bn in FY12 to Rs15 bn in FY15. The toll collection from its two road projects amounted to US$16 mn in FY15, against a project cost of US$308 mn. Debt levels Debt levels have continued to increase for the company, up 6% YoY to Rs399 bn. While the company will get Rs63 bn from the Udupi sale, it has capex commitments of ~Rs200 bn of which ~Rs160 bn would be debt funded for its 4.6 GW of plants under construction. Asset sales The company has sold its 1,200 MW Udipi power plant to Adani Power at an EV of Rs63 bn, and this would help reduce debt by ~15%. The company has also sold its 70 MW hydropower plant along with two 5 MW plants for Rs6.5 bn. Future expansion The company has pushed back capacity expansion plans by a year for all their projects currently under construction, with no capex being incurred over the past couple of years. The company is expanding capacity, with 4,636 MW of power capacity under construction. For its three larger projects (3,960 MW), the company has obtained approval from banks in Mar-15 for a 50-60% cost escalation, following which work had re-commenced in Apr-15. The company would need further funds of Rs200 bn, of which Rs40 bn is planned via equity while the remaining Rs160 bn would be debt funded. Debt servicing The company has ~Rs22 bn of long-term debt due within the next 12 months, with another Rs45 bn in short-term debt. Interest cover was at 0.2x in FY15, and the company has had IC<1 for the past 18 consecutive quarters. While the sale of its Udupi plant would help
House of Debt
42
21 October 2015
reduce debt by ~15% it would also reduce operating profits. The project had an EBITDA of Rs11.6 bn in FY15, contributing 69% of overall EBITDA for the company. The company is also looking to refinance its loans for the Kondapalli and Amarkantak plants under the 5:25 scheme. Banks have approved strategic debt restructuring (SDR) for its 500 MW Teesta project which is under construction, and would be looking for a buyer for the project. Figure 107: Under construction projects have seen significant delays leading to large cost escalations Project Anpara Amarkanatak I & II Kondapalli I Kondapalli II Kondapalli III Karuppur Budhil Amarkantak III & IV Vidarbha Babandh Teesta Solar Uttaranchal
Capacity
Status
1,200 600 368 366 732 120 64 1,320 1,320 1,320 500 100 76
Operational Operational Operational Operational Operational Operational Operational FY17 FY18 FY18 FY18 FY18 FY18
Fuel Source Coal Coal Gas Gas Gas Gas Hydro Coal Coal Coal Hydro Solar Hydro
Project cost COD 1Q16 Original Revised Cost per Original Revised PLF MW 85.8% 56,400 47 FY11 FY12 40.5% 31,380 52 FY09 FY10 7.0% 33,390 91 FY13 0.0% 18,300 11,884 32 FY10 FY11 0.0% 33,390 46 FY13 73.6% 34.9% N/A 65,000 105,000 80 FY12 FY17 N/A 69,360 105,000 80 FY14 FY18 N/A 69,300 105,000 80 FY13 FY18 N/A N/A N/A
FY15 PLF 79.3% 42.7% 19.0% 0.0% 0.0% 55.4% 37.7% N/A N/A N/A N/A N/A N/A
Source: Company data, Sigma Insights, Credit Suisse
Figure 109: …as debt/EBITDA has increased to 23x
Figure 108: Debt levels continue to rise… Gross Debt (Rs bn)
450
IC (x )
1.4
Ebitda (Rs bn)
30
Debt/Ebitda (x )
26.0 24.0
1.2 400 1.0 350
25
22.0 20.0
0.8
20
18.0
0.6
300
0.4 250
16.0 15
14.0
0.2 200
FY12
FY13
Source: Company data, Credit Suisse
House of Debt
FY14
FY15
12.0 10
10.0 FY12
FY13
FY14
FY15
Source: Company data, Credit Suisse
43
21 October 2015
Figure 110: Capex has come to a halt
Figure 111: No progress on under-construction projects 80%
80 Capex incurred (Rs bn)
% completed as of FY14
70
70%
60
60%
50
50%
40
40%
30
30%
% completed as of FY15
20%
20
10%
10
0%
FY12
FY13
FY14
Amarkantak 3&4 1320 MW
FY15
Teestha 500 MW
Phata Byung 76 MW
Babandh 1320 MW
Vidarbha 1320 MW
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse
Figure 112: Under-construction projects have seen large
Figure 113: Debt/EBITDA will increase post Udupi sale
cost escalations on account of delays Cost per MW
90
% increase in project cost (RHS)
64%
80
62%
70
60%
60
58%
50
56%
40
54%
30
52%
20
50%
10
48%
420,000
Debt
Debt/EBITDA (x)
60.0
400,000
50.0
380,000
40.0 360,000 30.0 340,000
20.0
320,000
-
46% Amarkantak III & IV
Babandh
Vidarbha
Source: Company data, Sigma Insights, Credit Suisse
House of Debt
70.0
10.0
300,000
FY15A
FY15 (ex-Udupi)
Source: Company data, Credit Suisse
44
21 October 2015
Reliance ADA Group Reliance ADA Group has presence in several sectors including infra, power, telecom, and finance. Reliance Infra is involved in power distribution, transmission and trading. It also has cement business (5.8MT operational and 4.5MT under construction), roads (11 projects, of which ten are operational), defence (recently acquired a stake in Pipavav Defence), metros (Mumbai Metro commenced operations in FY15), airports (five operational airports in Maharashtra) and an EPC division (order book of Rs51 bn). It has 50MTPA mining capacity at Sasan and in Indonesia. Reliance Power has an operational power capacity of ~6 GW with another 10 GW under construction. It commissioned its 3,960 MW Sasan plant during the year, which has seen a 47% cost overrun; with an aggressively bid PPA, profitability is likely to be under pressure. For the company despite an increase in operating capacity from 2,500 MW to 5,950 MW over the past two years, profits have remained flat. Work on its residual 10 GW of capacity is progressing slowly and none of the projects are likely to be operational before FY18. Reliance Infra's profitability has also been under pressure and its interest coverage has dropped below 1x. The company is also in the process of acquiring a controlling stake in Pipavav Defence. Reliance Communication has also seen continued pressure on its operating performance. It has therefore been looking to deleverage. A Rs61 bn equity raise in FY15 helped trim debt levels by 5%. It is also looking to sell stake in its tower business and enter spectrum sharing contracts with Rjio to reduce debt levels further. Reliance Capital has been in the process of raising equity by selling a 49% stake in both its asset management and life insurance businesses to Nippon Life. Figure 114: Reliance ADA's group structure and debt levels
Reliance ADA GROUP Figures in bold indicate total promoter group holding Figures in red ( ) indicate % of holding that is pledged
ADA Group Holding Cos
Reliance Project Ventures and Management
40.4% (27.3%) 48.5% (30.5%)
Reliance Infra 258 bn (243 bn)
Reliance Communications Enterprises
19.2% (53.5%)
42.2% (37.5%) 75% (34.8%)
Reliance Power 332 bn (300 bn)
Reliance Wind Turbine Installators Industries
29.1% (34.6%) 59.7% (16.8%)
12.1%
Reliance Comm 398 bn (420 bn)
Estimated Group Debt – Rs 1, 250 bn
Reliance Inceptum Pvt Ltd
38.7% (45%) 52.6% (33.1%)
Reliance Cap 261 bn (256 bn)
Source: Company data, BSE, Credit Suisse
House of Debt
45
21 October 2015
Debt levels for the group have remained largely flat (+3% YoY), as while RComm debt has declined 5%, Reliance Power has seen an 11% YoY increase. Figure 115: Debt levels up for R Infra and R Power, while RComm has seen a decline Reliance Infra Reliance Power Reliance Comm Reliance Capital Total
FY08
FY09
FY10
FY11
59,036 4,483 258,217 93,262 414,998
101,054 13,325 391,623 141,071 647,072
85,839 22,406 297,154 145,193 550,592
123,052 73,348 390,714 201,536 788,650
FY12 FY13 FY14 FY15 182,897 219,762 242,891 257,660 150,650 275,107 300,499 332,234 383,030 415,470 419,780 398,280 198,390 225,100 255,770 261,390 914,967 1,135,439 1,218,940 1,249,564
Source: Company data, Credit Suisse
Interest cover dipped below 1x for Reliance Infra in FY15, on account of an increase in interest costs on commissioning of the Mumbai Metro project, while EBIT declined 10% YoY. RComm has seen an improvement on account of the capital raise which has helped reduce debt and lower interest costs. Figure 116: Debt servicing ratios remain stressed Gross Debt Reliance Infra Reliance Power Reliance Comm Reliance Capital Total
257,660 332,234 398,280 261,390 1,249,564
Equity EBITDA 269,745 206,320 379,360 133,240 988,665
29,106 25,350 71,900 38,670 165,027
EBIT 20,778 20,113 33,730 37,990 112,611
PAT Interest coverage (x) 18,002 10,283 7,140 10,010 45,435
Debt/EBITDA (x)
D/E (x)
FY14
FY15
FY14
FY15
FY14
FY15
1.4 2.3 0.7 1.3 1.2
0.9 1.9 1.2 1.4 1.3
6.9 14.2 6.1 6.3 7.4
7.5 12.3 5.2 5.7 6.8
0.7 1.4 1.3 1.7 1.2
0.8 1.5 1.0 1.7 1.1
Source: Company data, Credit Suisse
Operations R Power has commenced operations at its 3,960 MW Sasan plant, which was operating at 65% PLF in FY15. However, the tariff was aggressively bid, and the company is unlikely to be profitable unless it receives a favourable order from the CERC. The company had bid for the Sasan project, with the expectation of using the excess coal from the captive coal mines at Sasan, for the 3,960 MW power plant being set up at Chitrangi, where power is to be sold at merchant rates. This, however, has faced regulatory hurdles. Despite the new capacity coming on stream, R Power PAT has remained flat over the past two years. Reliance Cement which has 5.8MT of operating capacity has won a coal mine in the auction, having 5.7MT reserves, agreeing to pay a royalty of Rs1,402/t. The group is reportedly looking to sell these plants. Debt levels Debt levels for the group have remained largely flat in FY15. Debt equity is reasonable at 1.1x, while debt/EBITDA remains high at 6.8x. 46% of group debt is in foreign currency. Asset sales RComm plans to reduce debt to Rs20 bn by Sep-16, via asset sales. It is looking to sell stake in its tower company. Reliance Capital has also raised ~Rs64 bn in recent years (Rs18 bn over the past year) by divesting stake in its life insurance (26%) and asset management businesses (49%). Reliance Defence Systems, a subsidiary of Reliance Infra, has acquired a 43% stake in Pipavav defence for ~Rs21 bn. Future expansion Reliance Power has 10 GW power projects under construction, and is planning to set up a 3,000 MW LNG-based combined cycle power plant in Bangladesh at a capital cost of ~US$3 bn over the next three years. The company's Samalkot plant did not take off due to a decline in gas output from the KG D6 basin, and the company is planning on using the equipment procured for the project in Bangladesh (link).
House of Debt
46
21 October 2015
Reliance Power recently terminated its contract for the development of the 3,960 MW Tilaya power plant. It had bid for the project at a tariff of Rs1.77/unit in 2009 and estimated to incur capex of Rs360 bn. The company has also withdrawn from the 7,480 MW gasbased power plant in Dadri, Uttar Pradesh. Debt servicing Reliance Infra reportedly refinanced loans of Rs16.5 bn for its Mumbai Metro project in June, by doubling the tenure of the loan and reducing interest rates by 125 bp to 11.75%. The project commenced operations in Jun-14. R Infra has had IC<1 for the past four quarters. Reliance Power has also reportedly refinanced loans for two of its projects, 600 MW Butibori plant and the 1,200 MW Rosa power plant in an effort to bring down interest costs. It is seeking loan refinancing for the Sasan project as well. Figure 117: Under construction projects have seen significant delays leading to large cost escalations Project
Capacity (MW)
Status
1,200 600 3,960 3,960 3,960 2,620
Operational Operational Operational FY18 FY18
Rosa Butibori Sasan Krishnapatnam Chitrangi Samalkot
Power Source FY15 PLF Linkage Coal Linkage Coal Captive Coal Imported Coal CaptiveCoal Gas
81.7% 69.2% 65.3% N/A N/A N/A
Project Cost Cost per MW Original Revised 51,620 28,100 183,420 165,376 158,420 N/A
60,000 40,630 270,000 195,000 210,000 100,800
COD Original Revised
50 68 68 49 53 42
2Q11 1Q10 1Q14 2Q14 2Q15
4Q12 4Q14 4Q15 FY18 FY18
Source: Company data, Sigma Insights, Credit Suisse
Figure 119: …while debt/EBITDA has is at 6.6x
Figure 118: Interest cover remains low at 1.3x… 1,300
Reliance ADA Group
Gross Debt (Rs bn)
IC (x )
1.5
1,200
1.4
170
Reliance ADA Group
Ebitda (Rs bn)
Debt/Ebitda (x )
7.6 7.4
160
7.2 150
1,100
1.3
1,000
1.2
7.0
140
6.8
130
6.6 6.4
120 900
1.1
800
1.0 FY12
FY13
FY14
6.2 110
6.0
100
5.8 FY12
FY15
FY13
FY14
FY15
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse
Figure 120: R Power projects have seen large escalations
Figure 121: PAT has remained flat despite increase in cap
Cost per MW
75
Cost escalation (%) (RHS)
50%
65
40%
Operational Capacity
PAT (Rs mn) (RHS)
7,000
12,000
6,000
10,000
5,000 55
30%
45
20%
8,000
4,000 6,000 3,000 4,000
2,000 35
10%
2,000
1,000 25
0% Sasan
Butibori
Chitrangi*
Krishnapatnam*
Rosa
Source: Company data, Sigma Insights, CS; * under construction
House of Debt
-
FY12
FY13
FY14
FY15
Source: Company data, Credit Suisse
47
21 October 2015
Vedanta Group Vedanta Resources has interests across oil, zinc, copper, aluminium, iron ore and power. It owns a 60% stake in Cairn India and 65% in Hindustan Zinc. Vedanta’s aluminium operations are spread across Balco (51% stake, 570kt smelter) and Jharsuguda which has a 1.75 mn t smelter capacity. It also has a 1 mn t alumina refinery at Lanjigarh. Vedanta has 3,360 MW of operational power capacity (2,400 MW at Jharsuguda, 660MW at TSPL and 300 MW at Korba), with another 1,520 MW set to be commissioned in FY16 (2x660 MW at TSPL – delayed by two years, 300 MW at Korba). The sharp fall in global commodity prices has adversely impacted Vedanta’s EBITDA. 2015 EBITDA was down 32%/16%/15% for its oil/Zinc International/power businesses. Its Indian Zinc operations registered moderate growth of 7%. While the ramp-up helped EBITDA growth in the Aluminium segment, the sharp fall in both LME prices and physical premiums in the last six months has meaningfully eroded profitability. Vedanta has already put the start-up of additional pots at Balco-II on hold and moderated output of its Lanjigarh alumina refinery given paucity of bauxite from domestic sources and falling alumina prices (external purchase now more attractive). Meanwhile, delays in government approvals (to use power from the 2,400 MW unit at Jharsuguda for the captive smelters) hamper rampup at the more efficient JSG smelters and result in lower PLFs (just 39% last year). Vedanta has plans to incur further ~US$5 bn of capex, of which US$1 bn is scheduled for FY16 (revised down from US$2 bn). Its gross debt has remained largely flat at US$16.7 bn. Figure 122: Vedanta Group's structure and debt
VEDANTA GROUP Figures in bold indicate total promoter group holding
Estimated Group Gross Debt - Rs 1,030 bn Net Debt - Rs 525 bn
Volcan, Bahamas
69.7%
Vedanta Resources Plc Debt 1,033bn (1,012bn) Cash 509 bn (536 bn) 100%
79.4%
Twinstar Holdings
Konkola Copper Mines
43.2% 59.5%
Liberia Iron Ore Assets
Vedanta Ltd Debt 784 bn (812 bn) Cash 451 bn (454 bn)
100%
51%
Bharat Aluminium (BALCO)
Hind Zinc Cash 308 bn (255 bn)
64.9%
Skorpion and Lisheen
100%
74%
Black Mountain
18.7% 59.9%
100%
100%
Talawandi Sabo Power
Australian Copper Mines
Cairn India Ltd Cash 161 bn (181bn)
Source: Company data, BSE, Credit Suisse
House of Debt
48
21 October 2015
The group has managed to keep debt levels largely flat over the past three years. Figure 123: Gross debt levels are largely flat FY08 Vedanta Resources Plc
FY09
FY10
FY11
FY12
FY13
FY14
FY15
163,576 281,320 449,548 536,388 934,725 996,108 1,012,272 1,033,404
Source: Company data, Credit Suisse
While debt levels have remained flat, the group has seen its profitability weaken, leading to declines in debt servicing ratios. Interest cover has declined to 1.3x. The company has reported a large loss during the year (on account of impairment charge on its oil and gas assets) which has led to the erosion of equity resulting in debt equity increasing to 0.7x. Figure 124: Debt servicing ratios have worsened over the year Gross Debt
Equity
Vedanta Resources Plc 1,033,404 Vedanta Ltd 784,045 Hind Zinc Cairn -
EBITDA
EBIT
PAT
Interest coverage (x) FY14
735,444 538,753 433,531 588,702
231,954 220,446 74,196 96,207
107,601 148,854 67,754 59,532
(234,837) (156,458) 81,780 44,796
1.6 2.5 137.4 274.6
FY15
Debt/EBITDA (x) FY14
1.3 2.6 288.2 292.7
1.8 1.8 (3.7) (1.3)
FY15 2.3 1.5 (4.1) (1.7)
D/E (x) FY14 0.4 0.5 (0.7) (0.3)
FY15 0.7 0.6 (0.7) (0.3)
Source: Company data, Credit Suisse
Operations Vedanta Resources saw a decline in profitability in FY15, with EBITDA and EBIT declining 14% and 22%, respectively. This has largely been on account a fall in profitability in their oil & gas business. Cairn has seen EBIT fall 48% in FY15 and is likely to fall further in FY16 unless oil prices were to see a sharp recovery. The company has taken a US$6.6 bn write-off relating to its Rajasthan and Sri Lanka blocks on account of the fall in crude oil prices, resulting in the company reporting losses in FY15. The company has restarted mining operations in Karnataka in Feb-15 and expects to restart mining at Goa in 3Q16. Debt levels Debt levels for the company are reasonable, with Cairn and Hindustan Zinc having zero debt. Most of the group debt, is at Vedanta Ltd. Vedanta India has debt of Rs780 bn, while Vedanta Resources has a gross debt of Rs1,030 bn, while net debt is significantly lower at Rs525 bn. Gross debt levels remained largely flat YoY, while net debt was up 10% YoY. Asset sales The company's debt levels have remained largely flat, with debt servicing ratios relatively healthy, on account of which the company is not looking to sell assets to bring down debt levels. Future expansion The company has spent US$1.5 bn in FY15 and has a capex of US$5.2 bn pending in order to complete its expansion plans of which US$1 bn is scheduled for FY16 (revised down from US$2 bn). Its 1,980 MW Talawandi power plant is close to completion, with Unit-II undergoing trial runs. This project has seen a delay of over two years. Debt servicing In Jan-15, Moody's downgraded Vedanta Resources Plc, from Stable to Negative, while S&P downgraded it from BB to BB- with a negative outlook. Interest cover declined in FY15 to 1.3x.
House of Debt
49
21 October 2015
Figure 125: Interest cover > 1x, but it has been declining... Gross Debt (Rs bn)
IC (x )
Figure 126: ...along with a decline in EBITDA
4.5
450
1,050
4.0
400
1,000
3.5
350
950
3.0
300
900
2.5
250
850
2.0
200
1.5
150
1,100
Ebitda (Rs bn)
Debt/Ebitda (x )
2.0 1.8
1.6 1.4 1.2 1.0
0.8
800 FY12
FY13
FY14
0.6 0.4 FY12
FY15
FY13
FY14
FY15
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse
Figure 127: EBITDA has declined for most segments
Figure 128: Progress on under-construction projects has been slow
USD bn
FY14 Revenue
FY15 Revenue
4,000 3,500 3,000 2,500 2,000 1,500
FY14 EBITDA
FY15 EBITDA
120%
% of capex incurred as of FY14
% incurred in FY15
100% 80% 60% 40%
1,000 500 -
20% 0%
(500)
Source: Company data, Credit Suisse
House of Debt
Source: Company data, Credit Suisse
50
21 October 2015
Videocon Group The group has interests in oil & gas exploration, consumer electronic, telecom and power. The company has interests in oil & gas exploration in Brazil, Indonesia, Australia and East Timor and aims to convert the company from a consumer durable firm to a global oil & gas exploration and production company. The company has spent Rs90 bn in capex in the segment over the past two years, while EBIT continues to remain negative. The group plans to invest Rs160 bn (US$2.5 bn) in the oil & gas sector over the next three years (link). Currently Ravva is the only operational block, in which it has a 25% stake. In 2014, the company sold its interest in the Mozambique asset for US$2.5 bn (Rs150 bn). However, its net debt has remained largely flat (-2% YoY) as it has spent Rs44 bn on oil & gas capex and had a high interest burden of Rs50 bn over the period. The group has now stake in four fields in Brazil in a 50:50 JV with BPCL. These assets were expected to be operational by FY18, but BPCL has been guiding for a delay. Notably, Petrobras, which is the developer of three of these four blocks, has also been facing stress on account of its high debt (link). It is one of the smaller telecom operators in India, operating in six circles with ~7.6 mn customers (<1% market share). It acquired 5Mhz spectrum in the Nov-12 auction in the six circles for ~Rs22 bn. Since then, the company has not incurred significant capex in the telecoms segment and continues to make losses at the EBIT level. Revenues from the oil & gas segment contribute 9% of overall revenue and have declined 4% YoY and likely to decline further, given the sharp decline in crude prices since Dec-14. The consumer electronics segment, which accounts for ~85% of revenues, has grown 5% YoY, with overall revenue growth muted at 8% YoY. Figure 129: Videocon Group's structure and debt
Videocon Group Figures in bold indicate total promoter group holding Figures in red ( ) indicate % of holding that is pledged
Estimated Group Debt – Rs 460 bn
Videocon (Promoter Holding cos) 65.6% (83.1%)
Trend Electronics 7 bn
18.8%
Videocon Industries 454 bn (408 bn)
0.9%
5.0%
Value Industries 11bn
0.1%
50%
25%
100%
Videocon International Electronics
Pipavav Energy Pvt Ltd
92.9%
Videocon Telecommuni cations
100%
100%
Videocon Energy Ltd
100%
Videocon Hydrocarbon Holdings Ltd
100%
Ravva Oil & Gas Field Joint Venture
100%
Videocon Mauritius Energy Ltd
20%
BM-SEAL11-Sergipe
IBV Brazil Petroleo Limitada
Chhattisgarh Power Ventures 10%
12.5%
15%
BM POT-16Potiguar
BM-C-30 Campos
BM-ES-24Esprito Santos
Source: Company data, BSE, Credit Suisse
House of Debt
51
21 October 2015
Despite the sale of assets (Rs150 bn over the past year), gross debt is up ~11% over the past 18 months, while net debt is largely flat at Rs390 bn. Figure 130: Debt levels up 7x over the past eight years Videocon Ind
FY07
FY08
FY09
FY10
FY11
FY12
Jun-13
Dec-14
62,832
69,988
113,852
121,136
144,199
272,834
407,681
454,055
Source: Company data, Credit Suisse
Operating profit of the company continued to remain weak, with interest cover at (0.3x) and EBITDA also turning negative for the 18 months ended Dec-14. Debt to equity has improved to 3.8x on account of a sharp increase in reserves as profit from the sale of 10% in the Mozambique asset resulted in the company booking a profit of Rs139 bn during the year. Figure 131: Operating profitability weakened further in FY15 Gross debt Videocon Ind (18 month)
454,055
Equity 102,052
EBITDA (1,127)
EBIT (16,492)
PAT
Interest cover (x)
Debt/EBITDA (x)
D/E (x)
Jun-13 Dec-14 Jun-13 Dec-14 Jun-13 Dec-14 51,196 (0.3) (0.3) 285.5 (519.5) 8.4 3.8
Source: Company data, Credit Suisse *Debt/EBITDA has been annualised
Operations The company has historically been a consumer appliances company and ~85% of the revenue for Videocon Industries comes from the consumer electronics which saw revenues grow 5% YoY. Oil & gas, which contributes 9% of overall revenues, saw a 4% decline in revenues. Overall EBITDA turned negative for the 18 months ended Dec-14, on account of losses in its oil & gas and telecoms segments. The company reported a PAT of Rs51 bn for the 18 months ended Dec-14, on account of the gain of Rs139 bn on sale of Mozambique block, excluding which it had a loss of ~Rs41 bn. Debt levels Debt levels for the company have continued to rise, up from Rs120 bn in FY11 to Rs450 bn as of Dec-14, with net debt remaining largely flat over the past 18 months (-2% YoY). Asset sales Despite the sale of its stake in the Mozambique asset for Rs150 bn gross debt has continued to rise, up 10% YoY to over Rs450 bn while net debt has remained largely flat at Rs390 bn. Future expansion The company had also planned two 1,200 MW coal-based power plants in Chhattisgarh and Gujarat (Pipavav), but there appears to be little progress on these. In 2010, the company had begun work on setting up the 1,200 MW capacity in Pipavav for Rs60 bn, with land acquisition completed in 2011 and the plant was expected to be operational by FY15. However, progress appears to be slow and the projects are unlikely to be operational soon. Debt servicing The company had negative EBIT for the 18 months ended Dec-14, and has had interest cover less than 1 for the past 13 consecutive quarters. With market cap at ~Rs45 bn, debt to market cap is high at 10x. The company recently took shareholders' approval, allowing lenders to convert a part or entire quantum of loans up to Rs750 bn into equity if they so decide.
House of Debt
52
21 October 2015
Figure 132: Debt continues to rise, while IC is negative Gross Debt (Rs bn)
460
IC (x )
Figure 133: EBITDA has been weak for the past four years
-
Ebitda (Rs bn)
10
Debt/Equity (x )
9.0
5
8.0
-
7.0
(5)
6.0
(10)
5.0
(15)
4.0
(0.2)
420
(0.4)
(0.6)
380
(0.8) FY12
Jun-13
Dec-14
(20)
3.0 FY12
Jun-13
Dec-14
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse
Figure 134: Oil & Gas and telecom remain EBIT negative
Figure 135: Oil & Gas accounted for 83% of FY15 capex
25
80 EBIT (Rs bn)
20
Jun-13
Capex (Rs bn)
Dec-14
Jun-13
Dec-14
70
15
60
10
50
5
40
-
30
(5)
20
(10)
10
(15)
-
(20)
(10)
Consumer Oil and Gas Elec
Telecom
Power
Others
Total
Consumer Oil and Gas Elec
Telecom
Power
Others
Total
Source: Company data, Credit Suisse
Source: Company data, Credit Suisse
Figure 136: Despite asset sales, debt levels remain flat
Figure 137: Operating performance weakens further 60
EBIT
Interest
50 89
150
40
53
30
398
390 248
248
301
20 10
(10) Jun-13 Net Debt
Asset sales
Net Debt post asset sales
Capex
Source: Company data, Credit Suisse
House of Debt
Others*
Dec-14 Net Debt
(20) Rs bn
FY12
Jun-13
Dec-14
Source: Company data, Credit Suisse
53
21 October 2015
Companies Mentioned (Price as of 19-Oct-2015) Adani Enterprises Ltd. (ADEL.BO, Rs93.7) Adani Ports & SEZ (APSE.BO, Rs317.75) Adani Power Ltd (ADAN.BO, Rs28.7) Axis Bank Limited (AXBK.BO, Rs506.7) Bank of India (BOI.BO, Rs141.7) Cairn India Ltd (CAIL.BO, Rs159.9) Essar Oil (ESRO.BO, Rs192.6) Essar Ports Ltd (ESRS.BO, Rs118.2) Essar Shipping (ESPL.BO, Rs20.05) GMR Infrastructure Ltd (GMRI.BO, Rs13.81) GVK Power & Infrastructure (GVKP.BO, Rs8.05) HDFC Bank (HDBK.BO, Rs1096.2) Hindustan Zinc Limited (HZNC.BO, Rs158.4) ICICI Bank (ICBK.BO, Rs287.2) ING Vysya Bank (VYSA.BO, Rs1027.7) Indian Overseas Bank (IOBK.BO, Rs36.65) IndusInd Bank (INBK.BO, Rs962.25) JSW Energy (JSWE.BO, Rs89.3) JSW Steel Ltd (JSTL.BO, Rs890.4) Jaiprakash Associates Ltd. (JAIA.BO, Rs14.31) Jaiprakash Power Ventures Ltd (JAPR.BO, Rs7.3) Jammu and Kashmir Bank (JKBK.BO, Rs90.95) Jaypee Infra (JYPE.BO, Rs13.88) Kotak Mahindra Bank Ltd (KTKM.BO, Rs656.95) Lanco Infratech Ltd. (LAIN.BO, Rs5.14) Nippon Life Insurance (Unlisted) Punjab National Bank Ltd (PNBK.BO, Rs137.1) Reliance Capital Ltd (RLCP.BO, Rs407.5) Reliance Communication Ltd (RLCM.BO, Rs81.95) Reliance Infrast (RLIN.BO, Rs382.05) Reliance Power Ltd (RPOL.BO, Rs48.7) Rio Tinto (RIO.L, 2440.0p) Rosneft (ROSN.MM, Rbl251.5) State Bank Of India (SBI.BO, Rs254.5) Union Bank of India (UNBK.BO, Rs173.5) Vedanta Limited (VDAN.BO, Rs108.2) Vedanta Resources PLC (VED.L, 542.0p) Videocon (VEDI.BO, Rs135.45) Yes Bank Ltd (YESB.BO, Rs770.05)
Disclosure Appendix Important Global Disclosures Ashish Gupta and Prashant Kumar, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 Jul y 2011.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
House of Debt
54
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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sect ors.
Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy* 59% (34% banking clients) Neutral/Hold* 26% (35% banking clients) Underperform/Sell* 13% (23% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other indi vidual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-andanalytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names
The subject company (JSTL.BO, BOI.BO, INBK.BO, VED.L, APSE.BO, HDBK.BO, CAIL.BO, VDAN.BO, JSWE.BO, RLCM.BO, KTKM.BO, RIO.L, ROSN.MM) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (JSTL.BO, INBK.BO, HDBK.BO, JSWE.BO, RLCM.BO, RIO.L) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (KTKM.BO, RIO.L) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (JSTL.BO, INBK.BO, HDBK.BO, JSWE.BO, RLCM.BO) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (JSTL.BO, INBK.BO, HDBK.BO, JSWE.BO, RLCM.BO, RIO.L) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (JSTL.BO, BOI.BO, INBK.BO, VED.L, APSE.BO, HDBK.BO, HZNC.BO, CAIL.BO, VDAN.BO, JSWE.BO, RLCM.BO, YESB.BO, KTKM.BO, RIO.L, ROSN.MM) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (KTKM.BO, RIO.L) within the past 12 months Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (ESRO.BO, VYSA.BO, ESPL.BO, VEDI.BO, GMRI.BO, JAPR.BO, LAIN.BO, RLIN.BO, GVKP.BO, JYPE.BO, JAIA.BO, RLCP.BO, ESRS.BO, ADAN.BO, RPOL.BO, ADEL.BO, JKBK.BO, JSTL.BO, BOI.BO, INBK.BO, AXBK.BO, APSE.BO, HDBK.BO, HZNC.BO, CAIL.BO, IOBK.BO, VDAN.BO, JSWE.BO, PNBK.BO, UNBK.BO, RLCM.BO, YESB.BO, SBI.BO, ICBK.BO, KTKM.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (YESB.BO). For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.
Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
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The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.creditsuisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (RIO.L). The following disclosed European company/ies have estimates that comply with IFRS: (VED.L, RIO.L, ROSN.MM). An analyst involved in the preparation of this report received third party benefits in connection with this research report from the subject company (JSTL.BO) Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (JSTL.BO, INBK.BO, HDBK.BO, JSWE.BO, RLCM.BO, KTKM.BO, RIO.L) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (India) Private Limited................................................................................ Ashish Gupta ; Kush Shah ; Prashant Kumar For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.
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BK2014
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