Help us understand what prompts companies like yourself to take over stressed assets and how do you determine the value in a company?
There are two ways of determining the value of a company. One is considering the quality or the robustness of the business. Second is the asset valuation of the company. Primarily when we acquire assets, we look at the business value. We look at cases where the company has EBITA or EBITDA potential. So we look at the value because our theme is to revive these companies. These are companies which have temporary mismatch in cash flow. Our philosophy is to set this right and revive them. So, we look at the business valuation. Of course in the worst case scenario, we need to look at the asset valuation because there is a remote possibility that the company can go into liquidation. In that scenario, we would take care of it. That is one of our risk assessment measures. Actually, both are important business valuations as well as the asset valuation.
Generally a lot of skeletons have been found in such companies and you only hear it over a period of time as to what the deepest darkest details are emerging in terms of unexplained advances and other such irregularities as well. How is it that you deal with such unexpected surprises that spring out so often?
See when we acquire assets, we look into these aspects. If you really look at 8-9 lakh crore of NPAs, if you look at the fraud element, the fraud or any maleficent, these cases would not be more than 5% to 10% of the total NPAs. One has to be careful about that when you acquire because as I said, the underlying asset valuations is very important. What we recently saw, the case is that these are all basically trading companies. So when an asset reconstruction company acquires assets, we look at the underlying assets. In trading companies and EPC companies, normally there are not much assets. So one has to be careful about them. And again, the fraud element in the total NPA would not be more than 5% to 10% so one has to be careful about that. Normally, in ARCs, we look at the underlying value of the assets and we put a lot of emphasis to the business value.
So how is it that you find operational talent to run the company? Because I guess, in such cases that would be a very critical aspect.
True, in majority of the cases if I analyse them again, 70% to 80% of the cases – what's required is financial re-engineering or an appropriate financial restructuring, right-sizing the debt and conversion of part of the debt into equity to correct the debt-equity position. With a little financial engineering, I think 70-80% of the assets can be brought back to health. Additionally, you may need managerial bandwidth for another 5% to 10% of the companies. of course, the one good thing that is happening in India is that the teams are coming for operational capabilities. In fact, we have discussed with a few groups that are trying to come and operate the company physically. So we are planning to have operational tie ups with a few groups like that. We have set up an operational turnaround group as we want to build that capability within us. I think slowly that capability is being built and there are agencies available for that. We have a few agencies even in India. It is a slow process, but it is getting built up.