Shapoorji Pallonji Group’s Debt Crisis Has No End In Sight

The Shapoorji Pallonji Group recently sold its majority stake in Eureka Forbes to Advent International at an enterprise value of Rs 4,400 crore. Eureka Forbes is one of its subsidiaries. It has also been looking to sell its stake in Sterling and Wilson Solar Limited, another group company that specialises in solar EPC projects.

Highly Levered Business

The group is desperately trying to monetise its assets in order to pay back debt obligations worth almost Rs 10,000 crore at a consolidated level, and Rs 5,320 crore at a standalone level in financial year 2021 (FY21).

The Covid pandemic has affected the group quite adversely, evident from the group’s request for a restructuring. In September 2020, it missed payments on commercial papers to Union Bank, but it wasn’t considered a default as the company was undergoing restructuring.

Apart from debt, the company also has several contingent liabilities in the form of guarantees for various group projects. Out of Rs 3,269 crore of contingent liabilities, Rs. 2,332 crore was provided for financial liabilities and Rs. 937 crore for performance liabilities.

Pandemic Aggravated Troubles

The company operates in capital intensive sectors like infrastructure, contracting and real estate. The projects usually have long gestation periods, high working capital requirements, long credit periods and other factors that can cause cash flow mismatches.

The difficulty in collecting payments has further stretched the company’s finances.

“SPCPL had a high collection period of 133 days for the year ending March 31, 2018, which had marginally improved to 117 days for the year ending March 31, 2019, leading to an improvement in the working capital cycle to 33 days (FY19) from 41 days (FY18). However, the collection period increased substantially to 182 days for the year ending March 31, 2020, leading to an increase in the working capital cycle to 52 days in FY2020,” said a credit rating report by CARE Ratings.

The group has even borrowed from subsidiaries including Sterling and Wilson Solar, which is a listed subsidiary. Sterling’s stock price has fallen almost 83 per cent due to the non-repayment of inter-corporate deposits worth Rs 740 crore.

Pledging the Crown Jewel

The Shapoorji Groups’ crown jewel is its 18 per cent stake in Tata Sons Private Limited, which serves as the holding company for the entire Tata Group. With the pressure on its finances, the Shapoorji Pallonji Group has been trying to pledge its stake in Tata Sons, or to sell the stake.

However, so far, it has been unable to do so. The Tata Group has blocked fundraising attempts by the Shapoorji Group. It had filed an urgent application with the Supreme Court to restrain the Shapoorji Group from raising capital by pledging Tata Sons’ shares with Brookfield Asset Management.

The Tata Group claimed its right to buy the shares from the Shapoorji Group at market rates. However, the difference between the Tata offer rate and Shapoorji’s asking rates is quite huge.

According to reports, the Tata Group had offered Rs 80,000 crore, whereas the Shapoorji Group has asked for more than double the offer amount — Rs. 1.7 lakh crore, thus bringing deal talks to a standstill.

The relations between the two groups have been shaky for some time. Cyrus Mistry of the Shapoorji Group had been elected to serve as Chairman of the Tata Group, but was then removed from the position. While he had been a board member since 2006, he took charge of the chairmanship in 2012, and was removed in 2016.

Since then, the two groups had been battling it out in court.

While there are reports that the Shapoorji Group is planning to raise Rs 8,000 crore by pledging a part of the stake in Tata Sons, the question about the move’s legality have been raised, especially in light of the Supreme Court’s previous notice.