India’s nascent and relatively isolated financial markets have been spared the worst of the credit crunch but leading corporates are feeling the squeeze in other ways.
Real estate is one of the sectors that has been hardest hit – rising interest rates haven’t helped, but Indian banks are increasingly chary of lending to a market increasingly viewed as far too risky in an increasingly conservative world.
"Nothing has really changed much for us," says Baba Kalyani, the chairman of Bharat Forge, one of India’s largest auto component makers, with operations in India, the UK, Germany and North America. "The real change has been in areas where the risk levels are higher, particularly mortgages, housing, real estate. Real estate has certainly been hurt harder here."
Saurabh Chawla, a senior vice-president of finance at India’s largest real estate firm, DLF, says that there is a "general shortage of money available [to property firms] these days".
Overpriced and overheated
Once keen to lend to property firms, India’s banks now see the domestic real estate market as overpriced and overheating, and in a globally cautious market are leading the charge away from property firms.
"Today it’s getting harder – it’s getting positively harder to get access to capital," says Dipti Chopra, managing director of Hansuttam Finance, which helps raise capital for corporates across the real estate, infrastructure and construction sectors. "Medium-sized and smaller-level guys, and particularly the fly-by-night pirates, are finding it much harder to get capital, and it’s going to get harder as global credit problems worsen."
He says the woes of smaller market participants will eventually benefit their larger, cash-rich rivals. "Mid-sized real estate firms will fall by the wayside, and then we’ll do some cherry-plucking, buying firms when they go bankrupt or fall on their faces. This is a great story for the larger firms like DLF and Emaar."
Well, maybe not Emaar MGF. The real estate joint venture between India’s MGF and Emaar Properties of Dubai pulled its $1.5 billion IPO on February 8 after failing to subscribe any portion of its offering – one of three Indian stock sales to be pulled in the week to February 11. Capital in general is being sucked out of the Indian market at an alarming rate – foreign institutional investors sold record net holdings of $3.23 billion in January, according to data from the Securities and Exchange Board of India.
Indian corporates are also finding it harder to borrow in foreign currency – another sign of how credit tightening elsewhere is affecting domestic firms. ICICI Bank, the country’s largest private lender, tapped $6.5 billion from the international debt markets in the first nine months of 2007. In the following four months, its overseas borrowing has completely dried up. "High [Indian] interest rates and an appreciating Indian currency haven’t helped, but certainly it has become harder for Indian banks to borrow from the international markets," says Prabodh Agrawal, a banking analyst at Mumbai-based brokerage India Infoline. "That’s bad for any Indian corporate looking for access to foreign currency."
Saroj Datta, executive director at India’s largest private carrier, Jet Airways, contends that the country’s leading corporates remain "largely unaffected" by events elsewhere. "Our normal relations with banks have not been affected at all. Our credit flows are fine; we’re getting letters of payment on time."
Yet despite protestations by large Indian corporations that credit terms haven’t changed, there’s little doubt that the credit crisis is squeezing Indian firms in other ways. Datta notes ruefully that a $400 million rights issue by Jet Airways slated for October 2007 has been delayed several times, and now has no fixed schedule. "Credit terms have changed since the sub-prime issue began, which has made it harder to complete [the rights issue]," says Datta. "There is no pending timetable for it now."
The end of easy credit
The easy credit that fuelled India’s mergers and acquisition boom last year has also evaporated. Indian aluminium company Hindalco leveraged itself up to the hilt in February 2007 to buy US rival Novelis for $6.4 billion. A unit of the sprawling Mumbai-based Aditya Birla conglomerate, Hindalco took on loans worth $2.8 billion from UBS, ABN Amro and Bank of America to complete that deal, including a bridge loan of $1.4 billion with a coupon rate of 7.2%. Two of those foreign financial institutions have since revealed huge sub-prime related losses. "That deal would be almost impossible to do right now," says a leading Indian banker at one of the three institutions. "Certainly we couldn’t afford to do it – we’d never get sign-off."
Other corporations are also feeling the chill. When the UK’s Vodafone bought the 67% stake in Indian mobile carrier Hutchison Essar controlled by Hong Kong-based Hutchison Telecom, the Indian firm briefly contemplated a counter-bid. Essar Group, a Mumbai-based conglomerate controlled by the Ruia family, cast around for capital and Citi rode to the rescue, barely breaking sweat as it offered a $6 billion credit line.
Essar quickly binned its attempt to buy out its former partner, and Citi’s financial largesse is almost unthinkable now. "We couldn’t do that now," a Citi banker told Euromoney on condition of anonymity. "We probably won’t be able to do something like that again for a long, long time."