Around 1990, when Vijay Mallya was already a billionaire, and on a spree to convert the UB Group into India's first multinational company, the Kanorias of Kolkata had just abandoned their flour mills and were struggling to set up an infrastructure equipment financing concern.
Today, both parties have experienced an ironic reversal of fortunes. Last month, Kanorias-owned Srei Infrastructure surprised many when a fund managed by them snapped up Rs 430 crore worth of debt in Mallya-owned Kingfisher Airlines, which is drowning in Rs 7,000 crore of it. The investment was routed through India Global Competitive Fund (IGCF), a debt fund managed by Srei Venture Capital, a 100 per cent subsidiary of Srei Infrastructure Finance, a non-banking finance company.
A curious buy
Why would Srei pick up something that most public sector banks have been trying hard to dump? Recently, Pratip Chaudhuri, chairman of State Bank of India, even went so far as to confess that a full recovery of loans given to Kingfisher Airlines was unlikely in the short run. That didn't seem to deter the Kanoria company from buying the airline's debt at a zero-discount, while most lenders have declared it a non-performing asset.
One of the reasons that prompted Srei to go for the deal was the collateral behind the debt. Even if the Kingfisher investment turns out to be a bad one, the fund would be in control of the shares of the UB group and the properties owned by Mallya. Unlike other lenders in the books of ICICI Bank, loans given to Kingfisher Airlines were still a standard asset, backed by full security of shares and assets. "The fund managers were aware of the problems that Kingfisher is facing currently, so detailed due diligence was conducted," says Srei Infra Finance CMD Hemant Kanoria.
Another savvy decision was to ensure that Srei Infrastructure's own investment in the fund be minimal. Sources say of Rs 430 crore, Srei's direct investment in the fund (which it also manages through Srei Venture Capital) was just close to Rs 100 crore. The rest of the money was from third- parties, a combination of HNIs and corporates. "Even if the entire Rs 100 crore is written off from Srei's books, the losses would not have much impact on the company's balance sheet. Much of it will be recovered by the collateral. On the positive side, if Kingfisher Airlines comes out of the red, the gains for Srei could be substantial," said an analyst tracking the sector.
Wings of hope
Yet, the foremost rationale behind the investment strategy is the hope that the government will open up the aviation sector for foreign investors, who in turn, would bring in the much-needed equity for Kingfisher. "Allowing FDI in the airlines industry will bring in capital and allow domestic airline companies to tie up with foreign companies. It will also make domestic airlines financially stronger," says Kanoria.
"In the short term, FDI may not be on the cards, but in the medium term, the government will definitely look into it. The government needs to bring in the FDI not only to bail out Kingfisher Airlines, which has a debt of about Rs 7,000 crore, but also for reviving the airline industry. This is a factor which probably led Srei to invest in Kingfisher's debt," says Sumit Chakraborty, manager, corporate rating, Care.
A bad year
Last year had not been particularly good for Srei, as high interest rates and a sharp depreciation of rupee had impacted the profit margin of the company. Srei Infrastructure Finance reported a 38-per-cent decline in consolidated net profit last financial year, even as it remained aggressive in expanding its loan book. While the disbursement of Srei expanded by 49 per cent, debt grew by 58 per cent. Analysts, however, believe that with a strong net worth of close to Rs 2738 crore, Srei's investment in Kingfisher's debt will not have a significant impact on its finances.
Srei's growth from a infrastructure finance to a business conglomerate, with interest areas as diverse as telecom, power and IT, is layered with several investment strategies that have worked well. For example, in 2009, Kanorias-promoted Quippo entered into a partnership with Tata Teleservices to form Viom Networks, which pioneered the telecom infrastructure sharing business in India. In 2011, Srei acquired the status of an infrastructure finance company (IFC), giving it the leeway to enter aggressively in the business of long-term infrastructure finance.
A controversial past
Yet, Srei has made a habit of appearing in the news for unusual reasons. In March 2012, it became the first company to obtain a high-court order to block rating agency Fitch from issuing an updated rating after it had revised Srei's outlook from stable to negative, with a rating of AA minus. Never before had a high court intervened to stop a rating agency from publishing an updated rating. Soon after, Srei terminated its agreement with Fitch.
Earlier, Subodh Bhargava, chairman of Viom Networks, had decided to quit, citing his "discomfort about the speed at which the business was growing". The company had first run into controversy over charges of financial irregularities and diversion of funds to private institutions. It had appointed KPMG to assess the extent of the graft and probe other charges of related-party transactions. KPMG found all allegations against them baseless.
This time around, Srei's decision to snap up a troubled airline's debt also appears to be an odd one, but the financial underpinnings of it seem more sound than it would otherwise.