With nearly ₹4-lakh crore of new slippages into non-performing assets (NPAs) of banks expected this fiscal, it would be a never-before opportunity for alternative capital and asset investors to make hay.
Impacted by the Covid-19 pandemic and the stress in the industry, this financial year would see a steep rise in the volume of assets being put on the block by lenders.
‘Great opportunity’
“The current stress in the industry is an opportunity to make a contra-cyclical investment rather than staying away from it. It’s a great time for discerning capital to make an entry into the stressed sector at great valuation as when the stress is acute, valuations would be cheap,” Mukund Kannappan, Chief Investment Officer at JM Financial Credit AIF, told
“Once the effect of the pandemic subsides, it will take 12-18 months for the economy to recover. Also, investors need to be patient for a turnaround of the entity and to ride the boom in the next 4-5 years,” Kannappan added.
In a normal year, about ₹1.75-2 lakh crore of standard assets slip into NPAs and this year, heightened by the crisis, the industry is expecting an additional ₹1.75-lakh crore. At the gross level, additional assets available in the market would be about ₹3.5-lakh crore to ₹3.75-lakh crore.
“Over the next few years, investing into the dislocation caused by Covid-19 will be a big theme globally, across public and private markets. Some global firms have raised and several are in the process of raising dislocation funds that can cater to this opportunity,” BV Krishnan, former Partner at KKR, said.
‘Lack of flexible credit’
“While this will also be a theme in India, there are a limited set of India-focused distress funds. So we will need to look at international capital pools for the large part, who will view the risk-reward on a global basis,” he said, adding, “the constraint in India is the lack of consistent availability of flexible credit.”
Certain sectors that are likely to be hit hard by the pandemic are real estate, auto, logistics, manufacturing, aviation, hotel, restaurants, hospitality, malls and movie theatres, among others.
In July 2018, the government unveiled ‘Project Sashakt’ to address the NPA problem, which was quite successful. However, a recommendation in the report to create a marketplace for bad debts is yet to see the light of the day.
“With the debt in markets and number of distressed assets rising, there is scope for turnaround stories and opportunity funds may come in to infuse capital as the valuations are likely to be realistic,” Rajesh Narain Gupta, Managing Partner at SNG & Partners said.
Valuation troubles
“India has a lot of family-owned companies, mostly mid-caps where corporate governance is still a challenge and which cannot be run without the promoters who know their company well. Hence, it may be difficult to acquire such companies absolutely. If such companies adopt excellence in corporate governance and proper succession planning, they may be valued at significantly higher levels,” he added.
However, Gupta is also sceptical. “India has been witnessing very large NPAs for the last few years. So where were all these opportunity funds for the last few years?” he asked.