3. The topic was given from the company guide to do a
study.
To understand the process of carrying out Strategic
Debt Restructuring.
4. SDR was introduced as a major to curb rising NPA’s of Indian
Banks.
Patel Engineering Ltd was classified as SMA-2 for the first time in
August 2014.
A JLF was convened on August 11, 2014 and on Sep 4, 2014.
Under CAP decision was taken for restructuring of company’s
account but restructuring was failed as a result decision to invoke
SDR on company was taken.
The SDR reference date was fixed as May 26, 2016. The lenders
agreed to approach their approving authorities for obtaining
approvals related to SDR, EY was appointed by the lenders to take
the SDR process forward.
5. To study and understand the process of Strategic Debt
restructuring.
To understand the reason that led to Strategic Debt
Restructuring through study of ratio analysis.
6. Patel Engineering Ltd. was founded in 1949. Mr. Pravin Patel and
Mr. Rupen Patel are promoters of PEL.
It is one of the most integrated infrastructure and construction
services conglomerates in India.
It has a breadth of experience encompassing all sectors of the
Infrastructure industry from dams, tunnels, micro-runnels,
hydroelectric projects, irrigation projects, highways, roads, bridges,
railways, refineries to real estates and townships.
7. The Patel group has business interests in the following segments:
EPC
Real estate
Power and transmission
Transportation and Urban Infrastructure
8. The assets of the banks which don’t perform (that is – don’t bring
any return) are called Non Performing Assets (NPA) or bad loans.
Bank’s assets are the loans and advances given to customers. If
customers don’t pay either interest or part of principal or both, the
loan turns into bad loan.
According to RBI, terms loans on which interest or installment of
principal remain overdue for a period of more than 90 days from
the end of a particular quarter is called a Non-performing Asset.
11. Introduction
The concept of Strategic Debt Restructuring ("SDR") has been introduced by the
Reserve Bank of India (the "RBI"), to help banks recover their loans by taking
control of the distressed listed companies.
The Scheme has been enacted with a view to revive stressed companies and provide
lending institutions with a way to initiate change of management in companies .
The Scheme is subsequent to CDR or any other restructuring exercise undertaken by
the companies.
Eligibility
Conversion of outstanding debts can be done by a consortium of lending
institutions.
Such a consortium is known as the Joint Lenders Forum("JLF").
The JLF may include banks and other financial institutions such as NBFCs.
The Scheme will not be applicable to a single lender.
12. At the time of initial restructuring, the JLF must incorporate an option in
the loan agreement to convert the entire or part of the loan including the
unpaid interest into equity shares if the company fails to achieve the
milestones and critical conditions stipulated in there structuring package.
This option must be corroborated with a special resolution since the debt-
equity swap will result in dilution of existing shareholders.
Such a mandate will result in the lenders acquiring a majority (51%)
ownership.
If the company fails to achieve the milestones stipulated in there
structuring package, the decision to invoke SDR by the JLF to convert the
debt onto shares must be complete within 210 days as per RBI guidelines.
13. On completion of conversion of debt to equity as approved under
the Scheme, the JLF shall hold the existing asset status of the loan
for another eighteen (18) months.
The JLF must divest their holdings in the equity of the Company. If
the JLF decide to divest their stake to another Promoter, the loan
will be upgraded to 'Standard'.
For the loan to be upgraded as 'Standard' atleast 26% stake must
be divested. The 'new promoter' should not be a person/entity from
the existing promoter/promoter group. However, the quantum of
provisions held by the bank as on the date of the divestment will
not be reversed.
14.
15. Company is facing severe cash crunch and challenges
in debt servicing due to following reasons:
Delay in realization of Government receivables(Claims)
Slowdown in infrastructure sector in last 2-3 years
Slowdown in bidding of new projects which depleted the
order book
Delay in execution of few projects majorly on account of
delay in handling over of land and relevant approvals
Non released of assessed/sanctioned limits under
Corrective Action Plan (CAP)
Delay in monetization of real estate assets
16. Special mention account (SMA-2) reporting
PEL was classified as SMA-2 for the first time in August 2014, as reported
by Standard Chartered Bank and Bank Of India.
A JLF was convened on August 11, 2014 and subsequently on September
4, 2014 and it was decided to bring company under CAP, fund long term
receivables (more than 180 days though WCTL of INR 1700Cr backed by
real estate assets as collateral.
Under CAP, following actions were to be taken:
Sanction and disbursement of Working Capital Term Loan (WCTL)
Management to undertake monetization of real estate assets in order to
generate cash flow which could be utilized to reduce higher cost debt
To continue the working capital support for running the operations for
bidding new projects
30% interchangeability from NFB to FB
17. Issues for failure of CAP:
Delay in sanction/release of limits assessed under CAP
In spite Company’s effort in monetization of real estate
assets, it is taking longer time due to adverse market
condition
Substantial delay in realization of claims due to Govt., policy
paralysis
Conclusions were made by the lenders during the meeting
Immediate requirement of fresh equity infusion in the
Company
Run a limited process for investor identification
18. There was investor interest in the Company and were
agreeable to invoke SDR in PEL
The lenders discussed and agreed to opt for SDR route in
order to preserve the value of the Company.
SDR reference date was fixed as May 26, 2016. The lenders
agreed to approach their approving authorities for obtaining
approvals related to SDR
EY was appointed by the lenders to take the SDR process
forward.
The decision of the majority of the lenders to implement SDR
was informed to the Promoter. The Promoter accepted the
decision taken by the majority of the lenders
19. Investors have been identified that have expressed interest in
acquiring certain parts of PEL. It is proposed that the business
would be carved out in these steps
New investor
for majority
stake
New investor
for majority
stake
New investor
for majority
stake
20.
21. The current ratio of the company from 2011 to 2013 has remained
almost the same over last 3 year but has declined in 2012 and 2013 . It
is relatively lower than what is the standard i.e. 2:1.
This is due to continuous rise in short term borrowing in the
organization. which is not a good sign for the company. Company need
to rely less on borrowings.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2011 2012 2013 2014 2015
22. The quick ratio of the company has been constantly under 1 which
is standard ratio, it has improved from 0.59 in 2011 to 0.72 in 2013
but since then it has been declining and has been just 0.31 in 2015.
This shows that the company is not very financially sound and may
default against current obligations.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2011 2012 2013 2014 2015
23. The debt ratio of the company is constantly increasing 0.58 times
from year 2011 to 0.69 times in the year 2015.
The company is relying more on funds from borrowing than its own
resources. Liability of the company is increasing, which may not be
appreciated by the creditors.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2011 2012 2013 2014 2015
24. The ideal acceptable debt equity ratio is 2: 1, i.e. the long term
liabilities of the business should ideally be two times of net worth.
The debt equity ratio of the company has increased from 1.37 in
the year 2011 to 2.20 in the year 2015, which shows that the
company is highly relying on loan funds for its operations.
0
0.5
1
1.5
2
2.5
2011 2012 2013 2014 2015
25. It reveals the number of times interest on long-term debt is
covered by the profits available for interest. A higher ratio ensures
safety of interest payment debt and it also indicates availability of
surplus for shareholders.
Ratio shows that the ability of the company to service its interest
on debt is decreasing year on year from 1.72 times to 1.13 times
since the year 2011 to year 2015.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2011 2012 2013 2014 2015
26. There has been continuous increase in the capital employed to net
worth, from 2.37 times in 2011 to 3.20 times in the year 2015.
It is due to continuous increase in dependence on borrowed funds.
0
0.5
1
1.5
2
2.5
3
3.5
2011 2012 2013 2014 2015
27. There is continuous decrease in the proprietary ratio, from 0.29
times in 2011 to 0.23 times in the year 2015.
Higher proportion of shareholders’ funds in financing the assets is a
positive feature as it provides security to creditors.
0
0.05
0.1
0.15
0.2
0.25
0.3
2011 2012 2013 2014 2015
28. Utilization of total assets of the company over the year has been
more or less constant.
In the year 2015 ability of company to utilize its assets has fallen
as compared to previous year.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2011 2012 2013 2014 2015
29. It is the frequency of conversion of stock of finished goods into
sales. It determines how many times stock is purchased or replaced
during a year.
It suggests that company has not been able to utilize the stock
efficiently and has been able to convert the stock into sales faster.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2011 2012 2013 2014 2015
30. The liquidity position of the firm depends upon the speed with
which debtors are realised. The debtors turnover ratio of the
company is increasing, from 3.43 times in 2012 to 6.13 times in the
year 2015.
Company’s collection of accounts receivable is efficient and there is
speedy collection from debtors.
0
1
2
3
4
5
6
7
2011 2012 2013 2014 2015
31. Except in 2014 the ratio of the company has been lower which tell
that the company’s repayment capacity is not good or company is
more reliable on long term debts.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2011 2012 2013 2014 2015
32. Rate of utilization of working capital during the year 2011, 2012
and 2013 mostly remained the same. Company has been able to
improve the utilization of working capital in 2014, which improved
from 2.56 times in 2013 to 4.63 times in 2014, again in 2015 it
declined to 3.47 times, but remained satisfactory as compared to
2011, 2012 and 2013.
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2011 2012 2013 2014 2015
33. It indicates the margin available to cover operating expenses, non-
operating expenses, etc. Change in gross profit ratio may result
from change in selling price or cost of sales or a combination of
both.
The gross profit margin of the company has been good. The
company has been able to improve the margin over the years. In
the year 2015 it has jumped to 25.32% from 19.20% in the year
2014.
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2011 2012 2013 2014 2015
34. It reflects the overall efficiency of the business, assumes great
significance from the point of view of investors.
The gross profit of the company has been increasing over the
years, on the contrary the net profit has declined. It is largely due
to heavy debt on the company and most of the profit is utilised to
pay the interest on the borrowings.
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
2011 2012 2013 2014 2015
35. It helps to analyse the performance of business and throws light on
the operational efficiency of the business.
Operating profit ratio of the company has almost been stable from
2011 to 2014 but in the year 2015, company was able to improve
operating profit which means that it has been able to reduce its
operational cost.
0
2
4
6
8
10
12
14
16
18
2011 2012 2013 2014 2015
36. It reveals the efficiency of the business in utilisation of funds
entrusted to it by shareholders, debenture-holders and long-term
liabilities.
The return on capital of the company has decreased in the year
2014 as compared to the year 2013 and a slightly improvement in
the year 2015 to the year 2014. There is increase in EBIT and
capital employed but EBIT has less improvement in comparison to
capital employed.
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
2011 2012 2013 2014 2015
37. Return on shareholders fund is decreasing tremendously from
7.661249 in the year 2011 to 0.699696 in the year 2015.
There is very less money with the company to pay out the dividend
to its shareholders. It may lead the shareholders to pullout their
investments.
0
1
2
3
4
5
6
7
8
2011 2012 2013 2014 2015
38. The EPS per share for the company is constantly decreasing from
14.64 Rs per share in 2011 to 1.55 Rs per share in 2015.
The ratio suggests that the dividends paying capacity of the
company is not good, which may not be liked by the shareholders.
0
2
4
6
8
10
12
14
16
2011 2012 2013 2014 2015
39. In the year 2015 the company’s turnover has decreased by Rs 231 crore
due to the ongoing slowdown in the infrastructure and delays in execution
of the projects.
The other income has been increased in 2015 by 49.11 crore due to the
increase in the interest income received from its subsidiaries, operating
expense has also declined by 289.02 crores but then also PAT has
decreased by 13.11 crores due to heavy interest burden on company.
The EBITDA has increased in 2015 due to arbitration award received for
“Parbhati HEP” Project amounting to Rs 125 crore in February 2015 which
includes Rs 60 crore award interest.
The EBITDA margin has improved by 6.13% as the company has taken up
cost cutting measures and also due to reduction in the steel cost.
However there was increase in interest cost which then off setted the
increased EBITDA.
40. The total debt has increased from Rs 3283 crore as on March 31, 2014 to
3731 crore as on March 31, 2015 primarily due to an increase in long term
debt.
The liquidity ratio of the company seems not to be in a good condition as
all the liquidity ratio is below standard and there is a problem of liquidity in
the company. Solvency ratio of the company seems to be deteriorating in
most of the case due to company’s reliance on the debt.
Most of the profitability ratio seems to be declining on account of heavy
interest which the company needs to pay to service its debt and delays in
the receivables. However there has been quite improvement in most of the
of activity ratios.
Many banks showed interest in appointed consultant EY’s model of SDR
and most of the lenders has given their approval
Therefore it can be concluded that company slipped into the SMA account
status due to heavy debt and the inability of the company to repay debt on
account of delay in receivables and decreased earnings due to slowdown in
the infrastructure sector.