Bipolar India Inc oscillates between cash-rich idea-less companies and huge debt & losses making companies

MUMBAI: A week ago Piramal Healthcare doubled its stake in telecom operator Vodafone India to 11% for around 3,000 crore. That's one of the avenues for Ajay Piramal to park 17,000 crore the company received after the sale of its branded generics business to US drug maker Abbott Labs. The chairman says the company will stay invested in the local arm of the British telecom giant till it sees an opportunity to use the money in the group's core business of pharmaceuticals and healthcare.

Cut to Great Offshore, a provider of oilfield services, where four directors have left in as many months. This raises concerns about its future against a bleak backdrop of piling debt and shrinking business. The Mumbai-based company's debt was pegged at 3,200 crore in fiscal 2011, which is four times of its net worth, nine times its market capitalisation and 16 times its cash balance.

Piramal Healthcare and Great Offshore are two faces of a bipolar India Inc - one that that's sitting on cash but not quite sure what do with it in an economic landscape dotted with clouds of uncertainty. On the other's face is visible the pain that is the upshot of dollops of debt taken for organic and inorganic expansions; that leverage cannot be eased because of poor demand conditions and, consequently, poor cash flows.

"This polarisation of cash is an evolution of the growth process of Indian companies," said Janmejaya Sinha, chairman, Asia Pacific, of Boston Consulting Group.

Pankaj Ghemawat, professor at IESE Business School in Barcelona, thinks on similar lines. He explained that in the early stages of the India growth story, synchronicity - or the extent to which the stock prices in a particular country tend to move together on a day-to-day basis- was high because the "country effect" dominated "company-level effects." "But that changes as markets develop," added Ghemawat.

At any given time in any given economy, there will always be companies that are cash-rich, and those that are debt-laden. This time around in India, however, the polarisation is starker than ever before, analysts said. The contrast is even more striking because many cash-rich companies, from Piramal to a clutch of public sector undertakings, are sitting on truckloads of moolah with few projects of significance on the drawing board.

As Vijay Govindarajan, professor at Tuck School of Business at Dartmouth College, pointed out, the cash-rich state of a company signals its growth potential but shows its inability to find out the opportunities. On the other hand, those promoters who saw opportunity during better times have been caught out by cycles turning, high interest rates and shrinking liquidity.

"The current situation is a reminder that some of the chest-thumping a few years ago about how Indian companies in general had great liquidity prospects - thanks, in large part to access to global financing - was greatly overdone," added Ghemawat.

JSW Steel is one of many Indian companies on the funds-starved list which also includes Reliance Communications, DLF, Jindal Steel & Power, Jaiprakash Associates, Kingfisher Airlines and GMR Infrastructure, amongst others.

Seshagiri Rao, joint managing director and CFO at JSW Steel, attributed the company's predicament to the nature of its business. He explains that globally companies owning natural resources are funds-flush because of the pricing power they command; but for manufacturers who depend on such resources for raw material - like steelmakers -- the situation is pretty much the reverse. Clearly being cash-rich is a more enviable state to be in.

But as Krishnamurthy Subramanian, finance professor at the Indian School of Business, Hyderabad said, a large idle cash balance does not speak volumes of a management's efficiency in creating shareholder value. In such situations, when companies have money but aren't sure what to do with, a prudent option is to reward shareholders, suggested Subramanian.

This perhaps may not apply to all sectors. Not real estate for sure, said Saumil Daru, CFO of Oberoi Realty, a debt-free company that has parked its entire IPO proceeds of 1,000 crore in banks. With good reason: realty companies are unable to avail of bank loans to purchase land. So the extra cash gives Oberoi an edge on the competition when bidding for property.

"Real estate companies are mostly stressed; they are in the survival mode. But we are in the growth mode, thanks to our strong balance sheet," added Daru.

JSW's Rao said that treasury operations is a better option than keeping money in banks, but he has little doubt about the best place for money: the core business. Treasury operations may generate returnshigher than bank rates, but they are substantially lower than future income from operations, said Rao.

But few infrastructure-related companies are in a position to blueprint future growth plans. That's because this is one sector that's feeling most of the pain. With the country crying out for more roads, highways, ports, airports and electricity, this was one much-touted growth industry during the rah-rah times. But now in a tight liquidity scenario, this capital-intensive sector is feeling the burden of borrowings.

Ghemavat, however, feels that not all infrastructure firms need to be tarred with the same brush. He cited the example of Odebrecht, a family-owned Brazilian business group focused on construction and infrastructure, which trebled revenues in four years to $32 billion in 2010.