There is a spacious apartment on Malabar Hill, Mumbai's toniest address, a three-bedroom hall kitchen affair with a panoramic 20th floor seaview. It costs Rs 1 lakh per square foot. Does it make sense for a person with a monthly income of Rs 2.5 lakh to buy it? More so, if the price of real estate is expected to plummet to Rs 50,000 per square foot within the next month?
India’s emerging 'global' giants have gone and done something very similar. In the last month, India’s biggest, Tata Steel and Hindalco, have made acquisitions of around $ 18 billion, running up huge debts in the process.
Investors have questioned the sagacity of these deals by hammering the stocks of these wannabe MNCs.
“Shareholders will have to bear the brunt of bad balance sheets of these companies in the coming two to three years. This suggests they feel that the price paid was higher than what the companies were worth,” said an investor with holdings both companies.
Since the Corus deal was announced, the Tata Steel stock has lost more than 17 per cent. Hindalco has fallen 23 per cent after the Novelis purchase from its two-week peak of Rs 185.65. The scrip closed today at Rs 142.1.
Valuation is the single largest cause of concern say market-watchers. Even if Tatas manage to secure debts at a low 5 per cent rate of interest, shirt sleeve calculations indicate that they might have to pay close to Rs 2,600 crore as interest alone for the coming years, compared to the total profit of the combined entity at Rs 5,500 crore.
{{/usCountry}}Valuation is the single largest cause of concern say market-watchers. Even if Tatas manage to secure debts at a low 5 per cent rate of interest, shirt sleeve calculations indicate that they might have to pay close to Rs 2,600 crore as interest alone for the coming years, compared to the total profit of the combined entity at Rs 5,500 crore.
{{/usCountry}}Same is happening with the Bharat Forge scrip. Despite rumours of the company being in the race for ThyssenKrupp’s US forging units, the stock has been sharply range-bound in the last two to three quarters. “It is going through what would happen to both Tata and Hindalco scrips,” said a highly placed official in a Mumbai-based stockbroking firm. ThyssenKrupp is one of the world's largest steel firms.
Both Tata and Hindalco acquisitions are in the commodity space, which makes them vulnerable to the swings in the steel and aluminium cycles, he added. “Given that the steel cycle is close to topping out, the market feels that valuations are too high,” he said.
The stock behaviour on these two scrips is nothing new in the global space. Companies including Disney and General Motors have been hammered after making acquisitions that had negative effect on the balance sheet, said Rajiv Sampat, director, Parag Parikh Securities.
However, the market response does not have a bearing on the fact that the investors do feel good about Indian companies going global. “It is always good to have Indian companies going abroad, though the valuations at which they buy assets are reasonable,” he added.
Email Suprotip Ghosh: suprotip.ghosh @hindustantimes.com