CHAIRMANS
From the MD’s Desk
Dear Stakeholders,
The issues that were threatening to derail the ‘bounce-back’ in the Global
Economy in 2011 did precisely that. The Sovereign Debt Crisis roiling Europe and the
continuing overhang of ‘toxic assets’ in the European banking system saw policy
makers scrambling with unconventional policy measures to save the day. In the face of
these problems, all major economies including China are forecasted to slow down
considerably in 2012 vis--vis 2010 and 2011. Germany, however, bucked the trend and
continued to hold forth in Europe in terms of, both, economic growth (marginally though)
and reducing unemployment. To add to the silver lining, the US economy held its own,
showing promising signs of recovery – as the Federal Reserve pledged to keep interest
rates at near-zero levels till 2014.
Meanwhile, in India, there was a secular downtrend in GDP growth, as reflected in Q3
GDP growth hitting an 11-Quarter low of 6.1%. The fiscal deficitfigure for FY12 came at
5.9% v/s a target of 4.6% - a significant deviation. Factoring in these dismal figures,
S&P has downgraded India’s credit rating outlook to ‘negative’, while
IMF has forecasted India’s GDP growth to fall below 7% (6.9%). In the face of such
deceleration in GDP growth, the RBI finallyrelented and cut the repo rate by 50bps to
8.00% in April 2012, after cutting the CRR by a cumulative 125 bps in February and March
2012 to combat tight liquidity situation. However, it still has its hands under leash
because, while inflation (WPI) has eased to sub-7% in 2012 from an average of 9.5% in 2010
and 2011, fiscal pressures and expanded government borrowings are expected to deter
aggressive rate cuts and keep bond yields around 8%.
As all these factors played out, Indian companies were squeezed from all directions
while continuing to face high interest rates – and a lot of them gave in. This was
reflected in no better way than by the sheer size of the number and volume of companies
referred to the CDR Forum for Debt Restructuring. High profile cases, such as, GTL Infra,
Bharti Shipyard, HCC, and Hotel Leela, hogged media limelight among CDR cases. As did the
sheer volume of Debt over Rs. 67,000 cr referred to the CDR Forum in a single
financial year. It also points to the sheer number of cases that might be undergoing
bilateral restructuring – the one most exposed to public attention being Kingfisher
Airlines. Keeping with the trend, rising NPA levels reached historical highs in Indian
banks, especially Public Sector banks.
A distinct feature in the Current Crisis is the struggle faced by first time
entrepreneurs. They form the single most vulnerable class of borrowers today. Having
experienced an explosion of opportunity with access to capital in the boom years, they
have been hit the hardest by the multitude of problems confronting today’s economy.
Without the deep relations afforded by the backing of an industrial house or conglomerate,
nor the deep pockets of such an entity, they are at the mercy of circumstances. Many
companies that are run by first time entrepreneurs are fighting for survival, and the
current economic reality means that there can be no viable solution on offer without huge
level of sacrifices from lenders. However, such an approach has never been trodden by the
Indian banking system – which continues to be intent on short-termism and piecemeal
solutions which are, at best, suited to "window dress" balance sheets.
Among the various sectors, we continue to see stress in the Infrastructure sector,
Power sector and also in Metals and Mining sectors. Steel, in particular, saw a number of
companies buckling under the pressure of High Interest burden, scarcity of raw material
(in the face of Iron Ore bans) and government inaction over sanction of mining leases /
allocation of mines etc. Except for large companies and those which have access to captive
mines, the rest found the environment stifling. Likewise, the Infra spaces are beset with
their own challenges and stresses. These sectors are crucial for India to move forward as
an economy because we are lagging way behind the world in per capita steel consumption,
infrastructure facilities and electricity generation to sustain the targeted real GDP
growth of 8% p.a.
We continue to focus as a specialist in ‘Financial Restructuring Advisory’
while offering the full bouquet of ‘financial consulting services’ as per our
client’s needs. This, however, adds many critical risk dimensions to our business
– fee realization, stiff resistance from banks, and unfair competition from bank
sponsored advisory firms, elongated mandate execution cycles and with the sudden expansion
of cases undergoing debt restructuring and the high profile nature of companies’
involved created intense competition in both the top-end and the mid-layer of the advisory
market. A lot of dormant players became active while fresh ones mushroomed as new service
offerings of mid-tier advisory firms who were earlier not in this space. On the whole,
this is complex, challenging, and increasingly, a business with diminishing remuneration.
In the face of these distinct challenges and complexities facing the Advisory Services
business, we are beginning to feel the necessity for a re-orientation of our overall
business from the shareholder’s perspective. Among the options we are considering is
the separation of our treasury/investment arm of our business from the increasingly
volatile and demanding nature of our Advisory business by creating a separate subsidiary
to transfer and independently run the Advisory business. We are also considering the
divestment of our NBFC subsidiary, owing to its small size and lack of scale in operations
which hampers long term returns in this segment. However, suitable diligence and
compliance measures will be put in place to manage the existing investment portfolio in
the company – safeguarding the interest of shareholders.
We believe that these strategic re-orientation efforts and corporate restructuring
would be better alignedPower to the long term interests of shareholders.
SINCERELY,
NIRMAL GANGWAL