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Outlook 2021: Eight Capital’s Chachra on stressed assets and silver linings ahead
Ravi Chachra

The coronavirus was the defining event of 2020 and will continue to dominate in 2021. 

However, comparisons of expected revenge consumption in a post-Covid world with the euphoria of the roaring 1920s in the aftermath of the Spanish flu pandemic may be understated due to the abundance of Fed-driven liquidity today. 

The trend of working from home will continue for most professionals with desk jobs, but expect business travel and entertainment to see a sharp uptick driven by pent-up demand to travel freely as well as the basic human need for social interaction.

On the other hand, the distressed market today has strong similarities with the distressed cycle from the early 2000s. That recession was triggered by a confluence of factors which also resulted in a collapse of demand. 

The Asian financial crisis of 1998, a severe draught and the effect of economic sanctions imposed by the United States caused the year-on-year GDP growth to drop by a whopping 57% to 3.8% in 2000. 

But soon after, the Indian economy rebounded sharply, led by the manufacturing, pharma and capital goods sectors. 

The availability of good quality distressed assets in a fast-growing economy started to attract the first wave of distressed and turnaround funds, including ours, to invest in India. 

Successful turnarounds from that cycle include SpiceJet by WL Ross, Jain Irrigation by TPG and Pennar Industries by Eight Capital.

Post-Covid, the economy will move from a K-shaped pattern in 2020 favouring a few sectors to a broad-based V-shaped recovery, which will provide the financial catalyst to create phoenixes by reinvigorating a slew of stressed companies. 

Covid has created distress in several sectors that were adversely affected by lockdowns during the pandemic. Many of these companies have good management teams and an established market for their products. 

However, they have become stressed as they were unable to service their debt due to a sudden fall in their cash flows. Some of the most exciting investment opportunities in the next 18-24 months will relate to infusing much-needed turnaround capital into these companies to ramp up their operations to pre-Covid levels. 

This will be a good opportunity for strategic and financial investors to invest in and own the equity of good companies at distressed prices.

The conditions post-Covid will also be conducive for the turnaround of the “old economy” sectors. 

The anaemic economic conditions of the last few years has meant that there has been a significant underinvestment in manufacturing capacity and, therefore, any uptick in industrial production will increase immediate demand for the available unutilised capacity of stressed companies. 

The global trade barriers being put up against China, coupled with the “Make in India” initiative, are tailwinds to create additional demand for the manufacturing sector. 

The current historically-low interest rates and benign commodity prices are the key economic ingredients to generate outsized returns from the turnaround of distressed companies.

I have listed four themes to watch out for in 2021:

  1. The Indian economy will bounce back to pre-Covid levels driven by autos, residential construction, leisure travel and entertainment. The commercial vehicle sector is like the canary in the coal mine and is a leading indicator for the economy. As remote working and telecommuting become the norm, there will be a boom in residential construction in the suburbs and satellite cities of large metros.
  2. Expect a version of the pre-packaged bankruptcy law to get passed – but it will be challenged and tested in courts. Therefore, it will not make a meaningful impact in clearing up the logjam in NCLT immediately. 
  3. Companies will prefer to dilute their equity but maintain a high credit rating, rather than participate in the RBI-sanctioned one-time restructuring and be labelled as a restructured company on their credit profile. Private equity funds will compete with distressed funds to provide equity capital to good companies that are facing Covid-related stress – look for more deals such as HCG, where CVC has recently acquired a controlling equity stake. 
  4. Litigation finance and infrastructure claims servicing will emerge as an important asset class, as there are more than $45 billion of outstanding claims against various Indian government entities growing at the rate of 10% annually. Transactions will be driven by infrastructure companies’ desire to monetise their claims to rebuild their balance sheets and focus on their core competency of construction. 

Ravi Chachra is chairman and CIO at Eight Capital.

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