Why Shapoorji Pallonji Group Is Facing A Tough Time In Credit Markets

Finding capital has turned difficult for developers as non-bank lenders battle a liquidity crunch after a slew of defaults made markets cautious. The first sign that the storied construction group—that built landmarks, including the Reserve Bank of India headquarters and the Taj Mahal Palace hotel’s tower wing in Mumbai—may not be immune to the trouble came when it had to cut the size of the initial public offering of subsidiary Sterling and Wilson Solar Ltd. The IPO barely scraped through in August after the group scaled down the size to Rs 2,850 crore from Rs 4,500 crore.

Then Shapoorji Pallonji and Company Ltd., the holding company for the group’s 350 listed and privately held firms, couldn’t honour its commitment made in the prospectus to repay Rs 2,563 crore worth of inter-corporate deposits to the newly listed subsidiary by Nov. 18, and deferred the payment. Sterling and Wilson Solar’s shares tumbled to half their price in the IPO.

While the company cited adverse market conditions, credit rating agencies have flagged the company’s rising debt, support to group companies and delay in monetising assets.

BloombergQuint looks at the group’s debt, repayments due this financial year and its financials.

Debt And Repayments

Shapoorji Pallonji’s group-level debt increased from Rs 28,000 crore in March to Rs 30,000 crore as on Sept. 30, 2019, CARE Ratings said in a Nov. 26 report. The company’s standalone debt stood at Rs 9,019 crore as of September-end.

About Rs 3,000 crore of Shapoorji Pallonji’s standalone debt, including commercial paper, is due for repayment in the second half of the ongoing fiscal ending March, according to the company’s statement to BloombergQuint and the CARE Ratings report.

At the group level, however, the amount is much higher. While the ratings agency didn’t disclose the consolidated debt coming up for repayment by March-end, a person aware of the details said it was about Rs 7,000 crore. The person didn’t want to be identified as the information isn’t public yet.

Shapoorji Pallonji has yet to respond to a separate query on consolidated debt. But on its standalone burden, the company said it’s looking at refinancing by monetising assets, using existing cash on hand and working capital to meet its obligations.

Ratings agencies, however, remain circumspect.

CARE Ratings downgraded Rs 2,500 crore worth of non-convertible debentures and commercial paper by a notch on Nov. 26 from AA- to A+. While that’s still investment grade, it flagged the following concerns:

• Continued and highly leveraged capital structure at the standalone and consolidated level.
• High collection period and slower-than-expected progress in projects under special purpose vehicles.
• Delay in asset monetisation timelines and moderation in the financial flexibility of the group for its action.

All these factors necessitate substantial refinancing of debt maturities and have increased reliance on promoter funding, the agency said.

In August, ICRA Ratings too had highlighted similar issues about standalone and consolidated debt, slower-than-expected progress on asset monetisation plans that delayed the planned deleveraging of its balance sheet.

Lenders like Aditya Birla Sun Life Mutual Fund, an investor in the non-convertible debentures, hope nothing wrong happens. It has exposure to the group through its Medium Term Plan and Credit Risk Fund.

The mutual fund hopes to exit the SP Imperial project in a month and a half, at least most of it, Maneesh Dangi, co-chief investment officer at the asset manager, said in an investor call. “March 2020 is the put option, but we are hoping that in the middle of January we’re out of it. I hope nothing wrong happens. Right now, there’s nothing that has absolutely gone wrong.”

Dangi said Shapoorji Pallonji is a reasonable group and has paid everyone. “We have a good asset of the port and it’s in advanced discussion to be taken out by someone. Can’t tell you more than that.”

Pledged Promoter Holding

Like a host of promoters in India, Shapoorji Pallonji has offered shares of listed units as a collateral against debt.

About 67.67 percent of the promoter holding in Forbes & Co. Ltd. was pledged to raise Rs 600 crore from non-bank lenders, including JM Financial Products Ltd. and Hero Fincorp Ltd., according to an October stock exchange filing. BloombergQuint awaits a response to queries emailed to the two investors.

Barely a month after listing of Sterling and Wilson Solar, promoters also pledged half of their stake, or 37.24 percent, with Housing Development Finance Corporation Ltd. to raise funds. To be sure, according to the disclosures with the Ministry of Corporate Affairs, promoters had pledged shares previously but revoked the encumbrances ahead of the IPO.

It’s not clear whether the rout in Sterling and Wilson Solar shares necessitated a top-up of shares.

An HDFC spokesperson said: “Our loan to Shapoorji Pallonji is more than fully secured with property and shares and there has never been a default.”

Guarantees To Group Companies

Shapoorji Pallonji has extended credit support to various subsidiaries and associate companies through financial, corporate and debt service guarantees, in addition to performance guarantees.

As on March 31, total contingent liabilities through guarantees stood at Rs 3,635 crore—Rs 2,883 crore towards financial guarantees and the remaining Rs 753 crore towards performance guarantees, according to ICRA’s August report. The ratings agency noted that the company intends to reduce the debt servicing and financial guarantees by nearly Rs 2,600 crore by March 2020.

ICRA had highlighted slower progress in the company’s plans to reduce these liabilities by replacing some of the debt service guarantees with long term project cash-flow- linked debt.

Andhra Pradesh Impact

The group’s current outstanding order book stands at Rs 35,287 crore, of which orders awarded by the erstwhile Andhra Pradesh government stood at Rs 12,480 crore, according to the company’s statement to BloombergQuint. The recent review of projects by the new government in the state led to projects worth Rs 7,448 crore—about 21 percent of the order book—being put on hold or under review.

Operating Performance Strong But…

CARE Ratings acknowledged Shapoorji Pallonji group’s strong performance at the standalone level with its operating income jumping 37 percent year-on-year to Rs 13,206 crore in the year ended March 31.

While its profit margins declined, CARE Ratings said the company has a strong customer base and healthy revenue visibility over the medium-term with a well-diversified order book.

Moreover, it has adequate liquidity in the form of free cash and bank balance of Rs 1,300 crore as on Sept. 30, 2019, along with undrawn fund-based working capital limits of Rs 274 crore, the ratings agency said. Additional promoter infusion of Rs 500 crore is expected to bring immediate liquidity in the holding company, in addition to Rs 370 crore already infused in the first half.

But CARE Ratings reiterated that the timely completion of refinancing and realisation of asset monetisation is crucial.

Shapoorji Pallonji, in its response to BloombergQuint, said that its plan to monetise its assets is on track. Moreover, the group is considering listing its water purifier business Eureka Forbes Ltd.

After the promoters deferred payments to newly listed Sterling and Wilson Solar, investors will be watching.