Bet on stocks that are selling non-core assets

Many companies are jettisoning their unprofitable businesses and selling non-core assets. Find out how this can clean up their balance sheets and could make them potential winners for investors.

    Just a few years ago, corporate India was on a shopping spree, acquiring assets in India and abroad as economic growth fuelled business optimism. Firms did not hesitate to leverage themselves to the hilt to expand their balance sheets. All that has changed and companies now appear keen to get back into shape. A weak business environment and debt overhang are forcing companies to shed excess flab. They are selling noncore assets and diverting resources to core activities and pay off debt. How will this fitness drive impact these businesses? Here is how investors should interpret the biggest asset sale in recent times. 
Why companies are shedding flab 
The economic growth has slowed down, and with interest rates still at high levels, companies are hesitant to expand operations. High costs are putting pressure on margins. To tide over the rough weather, companies are moving out of the businesses that are a drag on profitability. Many have reviewed their operations and decided to divest their non-core businesses. Dipen Shah, senior vice-president (private client group research), Kotak Securities, feels these steps are in the right direction. "Non-core assets do not add much value to the company. It is better to cash out of these businesses and utilise the funds to repay costly debt," he says. For many highly leveraged corporates, asset sale is the only option because equity markets are not vibrant and restructuring their existing debt is proving difficult. Says market analyst Ambareesh Baliga: "The companies faced with funding constraints are left only with this option. The primary reason is to retire debt, not because the company is getting any lucrative deal." Many infrastructure companies, which aggressively bid for projects earlier, are looking to divest completed projects to fund new and ongoing ones. 
    What does this fitness drive mean for investor? Shah believes it is a good sign as it sharpens the focus on the company's core business and resources are freed up for more profitable activities. However, this should be restricted to non-core assets only. "If they start clamping down on core activities, it would be a bad signal for investors," he says. Baliga agrees 
    that selling unwanted assets will ease the 
    woes of companies to some extent, but 
    he questions the rationale for their 
    acquisition in the first place. "Just because money was easily available, these companies undertook unrelated diversification and acquired assets. Now that they are caught in a debt spiral, the same assets are being sold off as 'non-core' assets," he says. This cycle often repeats itself, and investors need to be more circumspect when the next phase of aggressive expansion begins. Here are a few companies that are currently active in this space. 
Pantaloon Retail 
Retail baron Kishore Biyani is showing the way for companies saddled with huge debt. The Future Group had been in an aggressive expansion mode a few years ago, but eventually ran into a crisis with a consolidated debt of 7,800 crore that weighed on its profitability. Recently, the group pared as much as 6,000 crore of this debt when it sold two businesses, Pantaloons and Future Capital Holdings, thus deleveraging its balance sheet significantly within a short span of time. In May, the Future Group sold a majority stake in Pantaloons departmental chain to AV Birla Group's Aditya Birla Nuvo for 1,600 crore. Then in June, the Future Group announced the sale of its 53.67% stake in Future Capital Holdings to the US-based private equity firm Warburg Pincus for 4,250 crore. This deal is a part of the group's intention to exit from non-core businesses of Pantaloon Retail (India) Ltd. Now that the debt crisis has been sorted, Biyani wants to focus on building the core food and grocery retailing business. He plans to sell more non-core assets in a bid to make Pantaloon Retail debt-free by March 2013. This will involve offloading stake in the group's insurance (Future Generali) and stationery joint ventures, as well as the consumer electronics chain (eZone) and home furnishing network (Home Town). Analysts say these developments are positive for the company. 
Lanco Infratech 
Lanco Infratech, a builder of power plants and roads, with nearly 23,000 crore of long-term debt, is among the many infrastructure companies whose business plans have gone astray due to problems with fuel supply and unpaid dues. Shortage of fuel means lower capacity utilisation at its power plants, which is a strain on its cash flow. Lanco is reportedly in talks with investors to sell a minority stake to raise $600-750 million to fund its expansion. While it is a good sign that the debt-heavy company plans to deleverage its balance sheet by raising funds through a stake sale, transactions are not easily forthcoming in a market where investor optimism is considerably low. Lanco has also started selling electricity on the power exchange, realising cash and aggressively following up with Power Trading Corporation for realisation. Faced with idling power plants, the company is also negotiating with banks for an extension of its loan tenure and lowering of interest cost. 
Jaiprakash Associates 
The diversified conglomerate is on the verge of selling its stake in a group company to retire debt. With a total debt of 45,000 crore, it is selling a majority stake in its cement operations. It has reportedly reached an understanding with Irelandbased building material major CRH to sell 51% stake in its Gujarat cement facility for 4,200 crore. The Jaypee Group is the country's third largest cement maker, with an installed capacity of 33.5 million tonnes, of which 23.7 million tonnes comes under Jaiprakash Associates. The operations in Gujarat and Andhra Pradesh, having a total capacity of 9.8 mtpa, are under the aegis of Jaypee Cement Corporation, which was recently hived off for selling the stake. While the majority stake is being sold in the Gujarat facility, the Jaypee Group seems to have changed earlier plans and may retain the Andhra Pradesh plant 4.8 million tonnes. 
DLF 
The cash-strapped real estate developer is actively looking for asset sale opportunities. Staring at a humongous 22,680 crore debt pile-up, the company is keen to get rid of this burden and focus on its property development business by exiting some of its noncore operations in the hospitality and wind energy business. The company, which had already raised 1,774 crore through asset sales in 2011-12, recently divested subsidiary Adone Hotels & Hospitality, which helped it realise 369 crore and reduce its debt by 45 crore. DLF further expects to close the sale of three non-core assets—which would pare its debt by about 5,000 crore—by the end of 2012-13. It has sought buyers for Aman Hotels & Resorts, an overseas acquisition carried out just before the subprimecrisis five years ago. The slowdown in home sales and costly debt has hurt the firm's financials, with DLF reporting an 18.29% year-on-year drop in consolidated net profit for the April-June quarter, even as the finance cost for the quarter rose 25.6% to 623 crore compared with 496 crore during the same period last year. The real estate sector is likely to remain under pressure for some time due to the high interest rates. 
L&T 
The infrastructure major wants to sell its stake in individual projects, but unlike other companies which are selling non-core assets to pare down debt, its plans are aimed more at reducing its portfolio size as well as generating funds for new projects. The company plans to sell its stake in some port, road, power and metro rail projects to unlock shareholder value. Although it has scrapped the IPO plans of its infrastructure development arm L&T Infrastructure Development Projects, the company wants to raise 2,850 crore through private equity investment in the company. The subsidary handles infrastructure assets worth 45,000 crore, including 19 road projects, three ports and a metro rail project in Hyderabad. The management says it won't hesitate to dilute the stake if it is asset-heavy and sell small companies to unlock value and concentrate on core businesses. L&T has also announced it will sell its plastics machinery business to Japan's Toshiba Machine as part of its strategy to exit noncore businesses. Despite the slowdown, L&T's order-book size remains healthy. With an inflow of orders worth 70,574 crore in 2011-12, its unexecuted order book position touched an all-time high of 1,45,723 crore at the end of March this year. In the first quarter of 2012-13, L&T reported a better-than-expected 26% growth in sales to 11,956 crore, compared with 9,482 crore in the same period last year.