IL&FS Crisis explained
Whether the Holding firms in key sectors should remain listed on not? Whether Government should bail out IL&FS or not? Whether LIC, SBI, HDFC should infuse more funds in IL&FS or not? Whether NHAI should pay it’due to IL&FS to give it some relief? Whether IL&FS should sell its assets to fight liquidity crisis?
Whether Investors should remain invested in NBFCs or not? Whether it’s a right time to invest in NBFCs and HFCs? Is IL&FS Crisis equivalent to Lehman brothers of 2008? There are many questions raised in the minds of Investors today. Therefore it becomes very important now to understand what is IL&FS Crisis in detail.
In this post we will discuss the profile of IL&FS, What is IL&FS Crisis? Is it really as big as Lehman Brothers crisis? What are the effects of IL&FS mess? What is the solution taken by the Government? What should Investors do about IL&FS and other NBFC shares now? etc.
Profile of IL&FS
Name: Infrastructure Leasing and Financial Services (IL&FS)
Industry: Infrastructure development and finance/ Non-Banking Financial Company (NBFC)
Founded by: IL&FS was formed as an ‘RBI Registered Core Investment Company’ by three financial institutions namely, Central Bank of India, Housing Development Finance Corporation (HDFC) and Unit Trust of India (UTI) to provide finance and loan for major infrastructure projects.
Headquarters: Mumbai, Maharashtra, India
Tagline: Partnerships, Innovation and Empowerment for sustainable infrastructure development
Total Subsidiaries: 256
Major Shareholders: Life Insurance Corporation of India, State Bank of India, ORIX Japan, ADIA
Well known projects: 9.28 km long Chenani-Nashri tunnel located at NH44 in J & K, GIFT City Gujarat
Total Assets: Rs. 1.15 Lac Crores
What is IL&FS Crisis?
Defaults on loans and bonds by IL&FS in July to September 2018:
Two of the Subsidiaries of IL&FS defaulted on payment obligations of the loan (including interest), inter-corporate deposits, term deposits, short-term deposits to other lenders and failed to meet the commercial paper redemption obligation due on 14th September.
On 27th September one of the subsidiaries of IL&FS defaulted on repaying of Rs.450 Cr worth of inter-corporate deposits to Small Industries Development Bank of India (SIDBI). IL&FS is unable to pay short-term loan worth Rs. 1000 Cr given by SIDBI.
Accumulation of very high debts:
IL&FS is funding the long-term Inftrasture project of durations 20-25 years by taking loans of duration 8-10 years from its lenders. Most of the projects funded by IL&FS are Government Projects because of which they normally get delayed, the cost escalates and there is a delay in receipt of payment too. This systematic investment error has increased a debt-to-equity ratio of IL&FS to 18.7. Due to the 2013 Land acquisition bill, many of the projects funded by IL&FS became unviable. The group IL&FS is sitting on Rs. 91000 Cr debt through its 24 direct Subsidiaries, 134 indirect subsidiaries, six joint ventures, and fours associate companies.
IL&FS Credit rating affected adversely:
On 27th September 2018, IL&FS informed the BSE that it has defaulted on repayment of short-term deposits of Rs. 52.4 Cr and term deposit of Rs. 104 Cr. Consequently, rating agency ICRA degraded credit rating of IL&FS from AA to Junk. This jeopardized the Investors of the IL&FS and other NBFCs.
Domino Effect of IL&FS Crisis:
Holding Firm IL&FS Group is not listed in Market. It’s subsidiaries IL&FS Networks Ltd, IL&FS Investment Managers and IL&FS Engineering and Construction companies are listed in the market. On 14th Sept. all the three shares fall to their 52 Week Low and since then they are making new lows every week. Investors reduced their positions in SBI, HDFC, LIC subsidiaries, exited NBFCs and also booked profits in Housing Finance Companies after they came to know about IL&FS Financial Crisis. We saw Nifty coming down by almost 600 points after they realized how NBFCs and Banks are inter-linked.
The government decided that it won’t bail out IL&FS as it is a Private company. It also questioned why Regulators and Investors didn’t question Managing Committee of IL&FS when they came to know about increasing debts of IL&FS Group companies. The domino effect of IL&FS Crisis is not good for Indian Economy which is already suffering from external factors like increasing crude prices and global economic slowdown which is depreciating the Indian Rupee.
Is IL&FS Crisis as big as Lehman Brother Crisis?
The panic created by IL&FS Crisis has made Investors compare it with Lehman Brothers Crisis of 2008. We must understand that IL&FS Crisis is not an Insolvency Crisis, it is Liquidity Crisis. So, comparing it with Lehman Bros. crisis is absolutely wrong.IL&FS has assets worth Rs. 1.25 Lac Crores vs Debt of 91,000 Cr. Out of which 60,000 Cr worth debt is from the projects like Road, Water and Electricity which directly or indirectly depend on decisions of Government like Land Acquisition etc.
As Government knows how ‘Domino Effect can harm the entire Indian Economy. Therefore Government has assured that it will help IL&FS wherever possible. IL&FS is facing a liquidity crunch which can affect its day to day operations. It is not good for investors too. Major Investor like LIC will definitely bailout IL&FS after IL&FS agrees to sell some of its assets first. IL&FS Crisis is really big but it is definitely not as big as Lehman Brothers Crisis.
Solutions to IL&FS Crisis:
IL&FS has identified 25 projects for sale. The company has already received some 14 offers for same. Key Investors has more than Rs 4500 Crore rights share for sale. In 18 months IL&FS can reduce its debt from 91000 Cr to 30,000 by implementing the Assets Sale Plan. LIC may infuse fund in IL&FS to take care of its day to day operations once this Assets Sale Plan is executed.
NCLT has replaced the existing board of Directors of IL&FS by appointing new BoDs in their place. The new board consists of Kotak Mahindra Bank Director Mr. Uday Kotak, Former IAS officer and Tech Mahindra Boss Vineet Nayyar, Former SEBI Chief G.N.Bajpai, Former ICICI Bank Chairman G.C. Chaturvedi, Former IAS officers Nand Kishore and Malini Shankar.
They are expected to study the case. Find out the culprits who were responsible for lapses in payment. Find out why Lavish Managerial Salaries and Dividends etc were not stopped even after knowing the burden on Financials. It is expected from the new board to make a plan to revive IL&FS, the way India revived Satyam in past.
What should Investors do in NBFCs and HFCs now?
The panic selling which took place after Investors came to know about IL&FS Crisis brought down all the NBFC and HFC shares to very cheaper valuations. Investors should stay away from companies which have a very high debt-to-equity ratio. Credit ratings of other NBFCs will also be downgraded in future if they too get exposed like IL&FS soon. The cascading effect of IL&FS on the financial sector will definitely affect rate-sensitive sector stocks.
Therefore, it is better to stick to only Market leaders and quality companies in these sectors. Investors who invest for the very long term have good opportunity to accumulate these stocks at lower valuations. Short-Term Investors too will get good risk-to-reward in some of the well-researched names from NBFCs and HFCs sectors. But Ultra short-term traders should avoid taking any exposure or trades in these companies. Every bad news will trigger your Stop Loss as these companies can fall by 5-10% intraday destroying the wealth of Investors.
(Disclaimer: Stocksbaazigar Mr Deepak Doddamani is NSE’s Certified Investment Analysis Professional and NSE’s Certified Marketing professional level – 4. He isn’t SEBI Registered Financial Advisor. So kindly, consult your Financial Advisor before taking any Investment decisions. This is an educational post and it should not be considered as Recommendation. Thank You.)