Essar Oil Deal Significant For Indian Banking Sector: Kotak Institutional Equities
Rs 1.84 lakh crore in asset sales announced since 2013
The sale of Essar Oil to Rosneft and a consortium led by Trifugra will allay the market’s concerns about Indian banks’ exposure to Essar Group, said Kotak Institutional Equities in a research report on Monday.
The sale is a “very significant event” said the brokerage house while adding that the deal shows that banks are being very forceful in resolving the bad loan problem and that promoters may have no option but to sell profitable assets to reduce debt.
The Rs 85,000 crore transaction will release Rs 45,000 crore of cash (Kotak estimate) for Essar Group, which can be potentially used to (1) repay debt of Rs 23,500 crore in Essar Global Holdings and (2) reduce debt in financially stressed entities such as Essar Steel and Essar Power.
According to Kotak, the Essar group may use the cash available from the stake sale to reduce debt particularly in the global holding company. While the Essar Group management did not share details, they indicated that the transaction will help reduce overall group debt by 50 percent.
If Essar chooses to retire the debt in the global holding company, Axis Bank, ICICI Bank and Standard Chartered Bank would be the prominent lenders to benefit, said Kotak. Shares of ICICI Bank gained nearly 7 percent in trade on Monday while Axis Bank shares closed marginally lower. The Indian depository receipts of Standard Chartered Bank gained 2.5 percent.
In addition, the sale of Essar Oil may allow the promoters to infuse equity in Essar Steel and Essar Power to help deleverage those companies too, said Kotak.
The formal announcement of the deal at the BRICS summit, in the presence of Indian and Russian political leaders, suggests a high degree of government involvement in the deal. Moreover, Ravi Ruia and Shashi Ruia seem to have limited options other than selling profitable assets to reduce their debt as they have been doing, the report points out.
Bank Clean-Up Underway
Kotak Institutional Equities added that the Essar Oil deal also shows that the bank clean-up is well underway. The group is not the only one resorting to selling its units to get its debt under control.
In 2016, eight deals have been announced where prominent companies have sold their core or non-core assets to service debts, as per the report. This includes companies like Tata Steel Ltd., GVK Power and Infrastructure Ltd., Jaiprakash Associates Ltd. and Jindal Steel and Power, among others.
We believe the combined and coordinated efforts of the Indian government, RBI and banks will likely result in manageable levels of loss-given default (LGD) despite likely high NPLs (non performing loans) in the Indian banking system. Indian companies have limited options but to sell assets to reduce debt. We have already seen several large transactions in the past two years and the recent Essar Oil one is the biggest one by far.Kotak Institutional Equities
According to data compiled by the research house, Rs 1.84 lakh crore in asset sales have been closed or announced since the start of 2013. This is still a fraction of the Rs 6.3 lakh crore in loans classified as non performing assets by the banking sector till the end of June.
