27 AUG, 2012, M V RAMSURYA & CR SUKUMAR, ET BUREAU
MUMBAI/HYDERABAD: A handful of Indian companies that had together invested over $10 billion in acquiring 14 coal mines abroad are now worried after coal prices have dropped 40% in two years to about $80 a tonne.
For example, GVK Power and Infrastructure pumped in $1.3 billion to buy an Australian coal mine less than a year ago when coal prices were at $124 a tonne and Adani Enterprises put $2.7 billion on the table two years ago to buy another mine in the country when prices were at $95.5 per tonne.
These deals were done at a time when several new and coal-hungry steel, power and cement projects were underway, GDP growth was still strong at 8.2% and Coal India was struggling to keep pace with demand. The deals were aimed at securing fuel needed by these companies to race ahead with their growth plans. But they are now threatening to become dead weight instead.
Falling coal prices — 15% drop since January — have raised questions over the timing and prudence of these acquisitions and likely returns. Bankers are questioning the companies' ability to service the debt raised. Auditors are also saying the fall could force companies to write down the value of these acquisitions in their books.
"Most Indian companies had bought mines at very high premiums and are set to suffer steep fall in margins due to the falling global coal prices," says Nama Nageswar Rao, chairman, Madhucon Group, a company with interests in construction, coal, power and sugar. "Apart from shrinking profit margins, they will end up incurring losses after servicing the debt raised at high interest rates."
Not everyone thinks the outlook is so bleak, but most concede companies will feel the squeeze in their balance sheets. "As we speak today, we are not seeing good times for coal globally," admits Lanco Infratech chairman L Madhusudan Rao. The Hyderabadbased builder of roads and bridges, which paid $750 million to acquire Australia's Griffin Coal in December 2010, has Rs 32,000 crore in debt and posted a Rs 442-crore loss last quarter. It is looking to sell non-core assets to lighten its debt burden.
"Of course, we will be worried if the stressed cycle (of low price and demand) continues," adds Rao. "If the situation persists for the next four to five years, then it's not a good situation to be in. Our view is that the current situation may probably last for the next 14-15 months." Bankers are anxious too. "Profits of Indian companies have been falling sharply, increasing defaults. Now, if large mining companies face losses in their acquisition transactions, the situation will worsen," says a senior official at a state-run bank who asked not to be named.
"It can be a cause for concern for bankers as the stakes are too high," says Seshagiri Rao, joint managing director and chief financial officer (CFO) with the JSW Group. "If the ability to repay is reduced, bankers will resort to extreme steps to cover losses. But most such deals have covenants built in, that protect them (bankers) in the event of a major downside (in prices)," he adds. Typically, banks press for shares in parent companies as acushion in the event of an acquisition going wrong.
The clause can be invoked if the price falls below an agreed level. Auditors are also raising alarm bells. "Companies may try and mask the decline by saying that the fall is temporary and may likely revive. But a trigger is needed to initiate an impairment exercise," says Amarjit Chopra, former president at the Institute of Chartered Accountants of India.
"In this case, the sharp fall in coal prices can be considered (as a trigger)." The ICAI can ask the companies to report the change. Companies argue that prevailing coal prices are not the only measure of the success of such buyouts. Mine life and related infrastructure also count in the long run. Moreover, companies using global mines for captive purposes and those that have an integrated plan to use the coal may be better off.
MUMBAI/HYDERABAD: A handful of Indian companies that had together invested over $10 billion in acquiring 14 coal mines abroad are now worried after coal prices have dropped 40% in two years to about $80 a tonne.
For example, GVK Power and Infrastructure pumped in $1.3 billion to buy an Australian coal mine less than a year ago when coal prices were at $124 a tonne and Adani Enterprises put $2.7 billion on the table two years ago to buy another mine in the country when prices were at $95.5 per tonne.
These deals were done at a time when several new and coal-hungry steel, power and cement projects were underway, GDP growth was still strong at 8.2% and Coal India was struggling to keep pace with demand. The deals were aimed at securing fuel needed by these companies to race ahead with their growth plans. But they are now threatening to become dead weight instead.
Falling coal prices — 15% drop since January — have raised questions over the timing and prudence of these acquisitions and likely returns. Bankers are questioning the companies' ability to service the debt raised. Auditors are also saying the fall could force companies to write down the value of these acquisitions in their books.
"Most Indian companies had bought mines at very high premiums and are set to suffer steep fall in margins due to the falling global coal prices," says Nama Nageswar Rao, chairman, Madhucon Group, a company with interests in construction, coal, power and sugar. "Apart from shrinking profit margins, they will end up incurring losses after servicing the debt raised at high interest rates."
Not everyone thinks the outlook is so bleak, but most concede companies will feel the squeeze in their balance sheets. "As we speak today, we are not seeing good times for coal globally," admits Lanco Infratech chairman L Madhusudan Rao. The Hyderabadbased builder of roads and bridges, which paid $750 million to acquire Australia's Griffin Coal in December 2010, has Rs 32,000 crore in debt and posted a Rs 442-crore loss last quarter. It is looking to sell non-core assets to lighten its debt burden.
"Of course, we will be worried if the stressed cycle (of low price and demand) continues," adds Rao. "If the situation persists for the next four to five years, then it's not a good situation to be in. Our view is that the current situation may probably last for the next 14-15 months." Bankers are anxious too. "Profits of Indian companies have been falling sharply, increasing defaults. Now, if large mining companies face losses in their acquisition transactions, the situation will worsen," says a senior official at a state-run bank who asked not to be named.
"It can be a cause for concern for bankers as the stakes are too high," says Seshagiri Rao, joint managing director and chief financial officer (CFO) with the JSW Group. "If the ability to repay is reduced, bankers will resort to extreme steps to cover losses. But most such deals have covenants built in, that protect them (bankers) in the event of a major downside (in prices)," he adds. Typically, banks press for shares in parent companies as acushion in the event of an acquisition going wrong.
The clause can be invoked if the price falls below an agreed level. Auditors are also raising alarm bells. "Companies may try and mask the decline by saying that the fall is temporary and may likely revive. But a trigger is needed to initiate an impairment exercise," says Amarjit Chopra, former president at the Institute of Chartered Accountants of India.
"In this case, the sharp fall in coal prices can be considered (as a trigger)." The ICAI can ask the companies to report the change. Companies argue that prevailing coal prices are not the only measure of the success of such buyouts. Mine life and related infrastructure also count in the long run. Moreover, companies using global mines for captive purposes and those that have an integrated plan to use the coal may be better off.
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