Stay fit firms put non-core assets on the block

Rohit Joshi and Siddharth Tak/Zee Research Group

Amid the slowdown in the economy, India Inc appears to be focused on staying slim and fit. A section of corporate India has of late indulged in knocking off non-core assets at a diverse set of companies.

The sell-off includes big ticket deals by conglomerates to real estate majors in the country. While L&T sold its plastic machinery business to Japan’s Toshiba machine for an undisclosed amount, Suzlon, DLF, Bharti group, too have divested the non- core asset portfolio, with the ostensible purpose to embrace cash.

Non-core assets are those that are either not essential or simply no longer used in a company`s business operations but have a tangible valuation.

During this calendar (2012), besides L&T, Bharti group has exited the education business and sold training solution firm, Centum Learning to Everonn Education. Suzlon too sold its wholly owned China manufacturing subsidiary, Suzlon Energy Tianjin to China Power New Energy Development Company (CPNE) for approximately Rs. 340 crore.

Furthermore, DLF has divested subsidiary, Adone Hotels and Hospitality, to Kolkata-based consortium for around Rs. 567 crore.

Commenting on the trend, Ajay Bhatt, CFO, Monnet Ispat, opined “It’s a healthy move adopted by companies. However, firms who have problems in their cash flow or have excessive debt on books or require cash would sell its non- core assets.” Experts aver that the timing is critical. Due to current economic situation the value of non- core assets runs the risk of seeing significant erosion in value.

Bhatt’s thought got an endorsement from Sudip Bandopadhyay, president, Destimoney Securities, who reasoned, “It’s a positive development as it helps companies get rid of unrelated diversification and thereby reduce the debt on balance sheet.”

According to L&T, the move to sell their plastic machinery business was in line with company’s aim to divest non-core business to help focus on core business. The plastic machinery business generated revenues of Rs. 206 crore in 2011-12 and its contribution to the overall gross revenues of the conglomerate was a mere 0.3 percent. In the past also, L&T sold its non–core business such as petrol pump vending machines and cement business.

However, companies like DLF and Suzlon which is burdened with high debt of around Rs. 22,000 crore and Rs. 11,000 crore respectively have sold their non-core assets in order to reduce the debt.

Is, therefore, the non-core asset build up a case of bad business strategy; Bhatt at Monnet, explained, “Either companies think that they can grow this non-core business over a period of time and make it a principal business. Sometimes, they have surplus cash so they park their cash in avenues like real estate investments. It could also be possible that return on capital employed (ROCE) is much higher in non- core asset than the main asset which tempt them to invest in non-core assets.”

However, Bandopadhyay at Destimoney, advised, “When the global economy is under stress, it’s better for companies to focus on core competency rather than focusing on non related segments.”