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The data published by Centre for Monitoring Indian Economy (CMIE) suggests that asset sales are slowly gaining traction. Go back three-four years and we would find that the prime object behind asset sales was to restructure operations through mergers and acquisition.
However, in recent years assets have been sold to pare the debt on the balance sheet. In technical terms it is called distressed asset sales. This is evident as the majority of asset sales has taken place in the electricity and steel sector in the preceding year. These sectors have faced maximum stress as the utilization levels have fallen to record lows.
The excess capacities built by China over the years have hurt their utilisation levels. This in turn led to dumping of goods at throwaway prices in India, thereby affecting domestic manufacturers. The heavy losses incurred by domestic manufacturers on account of poor demand have forced them to sell their assets in order to repay debt. The most recent example has been Tata Steel. The company has decided to sell its entire long product division operation in the United Kingdom (UK).
A combination of low profits and high interest costs has led to a substantial fall in the interest coverage ratios for many companies. This is one of the prime reasons behind companies either restructuring their debt or selling off non-core assets to pare the debt. Recently, Jaiprakash Associates sold its cement business to UltraTech Cement to reduce its debt levels.
Sale of non-core assets will not only help companies reduce debt but also concentrate on their core businesses. Further, the performance of the public sector banks (PSU) will also improve once companies start paying up from the sale of non-core assets.
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